10-K 1 form10-k20160103.htm 10-K 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 2016
Commission file number 1-3215
JOHNSON & JOHNSON
(Exact name of registrant as specified in its charter)
New Jersey
 
22-1024240
(State of incorporation)
 
(I.R.S. Employer Identification No.)
One Johnson & Johnson Plaza
New Brunswick, New Jersey
 
08933
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (732) 524-0400

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Title of each class
 
Name of each exchange on which registered
Common Stock, Par Value $1.00
4.75% Notes Due November 2019
5.50% Notes Due November 2024
 
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ     Accelerated filer  o     Non-accelerated filer  o     Smaller reporting company  o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
The aggregate market value of the Common Stock held by non-affiliates computed by reference to the price at which the Common Stock was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $276 billion.
On February 19, 2016, there were 2,759,359,192 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and III:
 
Portions of registrant’s proxy statement for its 2016 annual meeting of shareholders filed within 120 days after the close of the registrant’s fiscal year (the "Proxy Statement"), are incorporated by reference to this report on Form 10-K (this "Report").





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1B.
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PART I
Item 1.
BUSINESS
General
Johnson & Johnson and its subsidiaries (the "Company") have approximately 127,100 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. Johnson & Johnson is a holding company, which has more than 250 operating companies conducting business in virtually all countries of the world. The Company’s primary focus is products related to human health and well-being. Johnson & Johnson was incorporated in the State of New Jersey in 1887.
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 Company's three business segments: Consumer, Pharmaceutical and Medical Devices. Within the strategic parameters provided by the Committee, senior management groups at U.S. and international operating companies are each responsible for their own strategic plans and the day-to-day operations of those companies. Each subsidiary within the business segments is, with limited exceptions, managed by residents of the country where located.
Segments of Business
The Company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices. Additional information required by this item is incorporated herein by reference to the narrative and tabular descriptions of segments and operating results under: Item 7 “Management’s Discussion and Analysis of Results of Operations and Financial Condition” of this Report; and Note 18 “Segments of Business and Geographic Areas” of the Notes to Consolidated Financial Statements included in Item 8 of this Report.
Consumer
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. Baby Care includes the JOHNSON’S® line of products. Oral Care includes the LISTERINE® product line. Major brands in Skin Care include the AVEENO®; CLEAN & CLEAR®; DABAO; JOHNSON’S® Adult; LE PETITE MARSEILLAIS®; LUBRIDERM®; NEUTROGENA®; and RoC® product lines. Over-the-counter medicines include the broad family of TYLENOL® acetaminophen products; SUDAFED® cold, flu and allergy products; BENADRYL® and ZYRTEC® allergy products; MOTRIN® IB ibuprofen products; and the PEPCID® line of heartburn products. Major brands in Women’s Health outside of North America are STAYFREE® and CAREFREE® sanitary pads and o.b.® tampon brands. Wound Care brands include the BAND-AID® Brand Adhesive Bandages and NEOSPORIN® First Aid product lines. These products are marketed to the general public and sold both to retail outlets and distributors throughout the world.
Pharmaceutical
The Pharmaceutical segment is focused on five therapeutic areas: immunology (e.g., rheumatoid arthritis, inflammatory bowel disease and psoriasis), infectious diseases and vaccines (e.g., HIV, hepatitis, respiratory infections and tuberculosis), neuroscience (e.g., Alzheimer's disease, mood disorders and schizophrenia), oncology (e.g., prostate cancer, hematologic malignancies and lung cancer), and cardiovascular and metabolic diseases (e.g., thrombosis and diabetes). Products in this segment are distributed directly to retailers, wholesalers, hospitals and health care professionals for prescription use. Key products in the Pharmaceutical segment include: REMICADE® (infliximab), a treatment for a number of immune-mediated inflammatory diseases; SIMPONI® (golimumab), a subcutaneous treatment for adults with moderate to severe rheumatoid arthritis, active psoriatic arthritis, active ankylosing spondylitis and moderately active to severely active ulcerative colitis; SIMPONI ARIA® (golimumab), an intravenous treatment for adults with moderate to severe rheumatoid arthritis; STELARA® (ustekinumab), a treatment for adults with moderate to severe plaque psoriasis and active psoriatic arthritis, and for adolescents with moderate to severe psoriasis; OLYSIO®/SOVRIAD®(simeprevir), for combination treatment of chronic hepatitis C in adult patients; PREZISTA® (darunavir), EDURANT® (rilpivirine), and PREZCOBIX®/REZOLSTA® (darunavir/cobicistat), antiretroviral medicines for the treatment of human immunodeficiency virus (HIV-1) in combination with other antiretroviral products; SIRTURO® (bedaquiline), a diarylquinoline antimycobacterial drug indicated as part of combination therapy in adults (>18 years) with pulmonary multi-drug resistant tuberculosis (MDR-TB); CONCERTA® (methylphenidate HCl) extended-release tablets CII, a treatment for attention deficit hyperactivity disorder; INVEGA® (paliperidone) extended-release tablets, for the treatment of schizophrenia and schizoaffective disorder; INVEGA SUSTENNA®/XEPLION® (paliperidone palmitate), for the treatment of schizophrenia and schizoaffective disorder in adults; INVEGA TRINZA® (paliperidone palmitate), for the treatment of schizophrenia in patients after they have been adequately treated with INVEGA SUSTENNA® for at least four months; RISPERDAL CONSTA® (risperidone long-acting injection), for the treatment of

                
 
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schizophrenia and the maintenance treatment of Bipolar 1 Disorder in adults; VELCADE® (bortezomib), a treatment for multiple myeloma and for use in combination with rituximab, cyclophosphamide, doxorubicin and prednisone for the treatment of adult patients with previously untreated mantle cell lymphoma; ZYTIGA® (abiraterone acetate), used in combination with prednisone as a treatment for metastatic castration-resistant prostate cancer; IMBRUVICA® (ibrutinib), an oral, once-daily therapy approved for use in treating certain B-cell malignancies, or blood cancers, and Waldenström's Macroglobulinemia; DARZALEXTM (daratumumab), for the treatment of double refractory multiple myeloma; YONDELIS® (trabectedin), for the treatment of patients with unresectable or metastatic liposarcoma or leiomyosarcoma who received a prior anthracycline-containing regimen; PROCRIT® (epoetin alfa, sold outside the U.S. as EPREX®), to stimulate red blood cell production; XARELTO®  (rivaroxaban), an oral anticoagulant for the prevention of deep vein thrombosis (DVT), which may lead to pulmonary embolism (PE) in patients undergoing hip or knee replacement surgery, to reduce the risk of stroke and systemic embolism in patients with nonvalvular atrial fibrillation, for the treatment and reduction of risk of recurrence of DVT and PE; INVOKANA® (canagliflozin), for the treatment of adults with type 2 diabetes; and INVOKAMET®/VOKANAMET® (canagliflozin/metformin HCl), a combination therapy of fixed doses of canagliflozin and metformin hydrochloride for the treatment of adults with type 2 diabetes. Many of these medicines were developed in collaboration with strategic partners or are licensed from other companies and maintain active lifecycle development programs.
Medical Devices
The Medical Devices segment includes a broad range of products used in the orthopaedic, surgery, cardiovascular, diabetes care and vision care fields. These products are distributed to wholesalers, hospitals and retailers, and used principally in the professional fields by physicians, nurses, hospitals, eye care professionals and clinics. They include orthopaedic products; general surgery, biosurgical, endomechanical and energy products; electrophysiology products to treat cardiovascular disease; sterilization and disinfection products to reduce surgical infection; diabetes care products, such as blood glucose monitoring and insulin delivery products; and disposable contact lenses.
Geographic Areas
The business of Johnson & Johnson is conducted by more than 250 operating companies located in 60 countries, including the U.S., in virtually all countries throughout the world. The products made and sold in the international business include many of those described above under “– Segments of Business – Consumer,” “– Pharmaceutical” and “– Medical Devices.” However, the principal markets, products and methods of distribution in the international business vary with the country and the culture. The products sold in international business include those developed in the United States and by subsidiaries abroad.
Investments and activities in some countries outside the U.S. are subject to higher risks than comparable U.S. activities because the investment and commercial climate may be influenced by financial instability in international economies, restrictive economic policies and political and legal system uncertainties.
Raw Materials
Raw materials essential to the Company's business are generally readily available from multiple sources. Where there are exceptions, the temporary unavailability of those raw materials would not likely have a material adverse effect on the financial results of the Company.
Patents
The Company's subsidiaries have made a practice of obtaining patent protection on their products and processes where possible. They own or are licensed under a number of patents relating to their products and manufacturing processes, which in the aggregate are believed to be of material importance to the Company in the operation of its businesses. Sales of the Company’s largest product, REMICADE® (infliximab), accounted for approximately 9.4% of the Company's total revenues for fiscal 2015. Accordingly, the patents related to this product are believed to be material to the Company.

There are two sets of patents related specifically to REMICADE® (infliximab). The first set of patents is co-owned by Janssen Biotech, Inc., a wholly-owned subsidiary of Johnson & Johnson, and NYU Langone Medical Center (NYU). Janssen Biotech, Inc. has an exclusive license to NYU's interests in the patents. These patents have expired in all countries outside the United States. In the United States, the latest of these patents expires in September 2018 and this patent stands rejected and is subject to reexamination proceedings instituted by a third party in the United States Patent and Trademark Office. Those proceedings are on going.

The second set of patents specifically related to REMICADE® was granted to The Kennedy Institute of Rheumatology in Europe, Canada, Australia and the United States. Janssen Biotech, Inc. has licenses (exclusive for human anti-TNF antibodies and semi-exclusive for non-human anti-TNF antibodies) to these patents that expire in 2017 outside of the United

                
 
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States and 2018 in the United States. The validity of these patents has been challenged. Certain claims have been invalidated and others are under review in various patent offices around the world and are also subject to litigation in Canada.

The Company does not expect that any additional extensions will be available for the above described patents specifically related to REMICADE®. If any of the REMICADE® related patents discussed above is found to be invalid, any such patent could not be relied upon to prevent the introduction of biosimilar versions of REMICADE®. For a more extensive description of legal matters regarding the patents related to REMICADE®, see Note 21 “Legal Proceedings – Intellectual Property – Pharmaceutical – REMICADE® Related Cases” of the Notes to Consolidated Financial Statements included in Item 8 of this Report.

In addition to competing in the immunology market with REMICADE®, the Company is currently marketing STELARA® (ustekinumab), SIMPONI® (golimumab) and SIMPONI ARIA® (golimumab), next generation immunology products with remaining patent lives of up to eight years.
Trademarks
The Company’s subsidiaries have made a practice of selling their products under trademarks and of obtaining protection for these trademarks by all available means. These trademarks are protected by registration in the United States and other countries where such products are marketed. The Company considers these trademarks in the aggregate to be of material importance in the operation of its businesses.
Seasonality
Worldwide sales do not reflect any significant degree of seasonality; however, spending has been heavier in the fourth quarter of each year than in other quarters. This reflects increased spending decisions, principally for advertising and research and development activity.
Competition
In all of their product lines, the Company's subsidiaries compete with companies both locally and globally. Competition exists in all product lines without regard to the number and size of the competing companies involved. Competition in research, both internally and externally sourced, involving the development and the improvement of new and existing products and processes, is particularly significant. The development of new and innovative products, as well as protecting the underlying intellectual property of the Company’s product portfolio, is important to the Company's success in all areas of its business. The competitive environment requires substantial investments in continuing research. In addition, the development and maintenance of customer demand for the Company’s consumer products involve significant expenditures for advertising and promotion.
Research and Development
Research activities represent a significant part of the Company’s businesses. Research and development expenditures relate to the processes of discovering, testing and developing new products, improving existing products, as well as demonstrating 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. Worldwide costs of research and development activities amounted to $9.0 billion, $8.5 billion and $8.2 billion for fiscal years 2015, 2014 and 2013, respectively. Research facilities are located in the United States, Belgium, Brazil, Canada, China, France, Germany, India, Israel, Japan, the Netherlands, Singapore, Switzerland and the United Kingdom.
Environment
The Company is subject to a variety of U.S. and international environmental protection measures. The Company believes that its operations comply in all material respects with applicable environmental laws and regulations. The Company’s compliance with these requirements did not change during the past year, and is not expected to have a material effect upon its capital expenditures, cash flows, earnings or competitive position.
Regulation
The Company’s businesses are subject to varying degrees of governmental regulation in the countries in which operations are conducted, and the general trend is toward increasingly stringent regulation. In the U.S., the drug, device and cosmetic industries have long been subject to regulation by various federal and state agencies, primarily as to product safety, efficacy, manufacturing, advertising, labeling and safety reporting. The exercise of broad regulatory powers by the U.S. Food and Drug Administration (the "FDA") continues to result in increases in the amounts of testing and documentation required for

                
 
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FDA approval of new drugs and devices and a corresponding increase in the expense of product introduction. Similar trends are also evident in major markets outside of the U.S.
The costs of human health care have been and continue to be a subject of study, investigation and regulation by governmental agencies and legislative bodies around the world. In the U.S., attention has been focused on drug prices and profits and programs that encourage doctors to write prescriptions for particular drugs, or to recommend, use or purchase particular medical devices. Payers have become a more potent force in the market place and increased attention is being paid to drug and medical device pricing, appropriate drug and medical device utilization and the quality and costs of health care generally.
U.S. government agencies continue to implement the extensive requirements of the Patient Protection and Affordable Care Act (the "ACA"). These have both positive and negative impacts on the U.S. healthcare industry with much remaining uncertain as to how various provisions of the ACA will ultimately affect the industry.
The regulatory agencies under whose purview the Company operates have administrative powers that may subject it to actions such as product withdrawals, recalls, seizure of products and other civil and criminal sanctions. In some cases, the Company’s subsidiaries may deem it advisable to initiate product recalls.
In addition, business practices in the health care industry have come under increased scrutiny, particularly in the United States, by government agencies and state attorneys general, and resulting investigations and prosecutions carry the risk of significant civil and criminal penalties.
Further, the Company relies on global supply chains, and production and distribution processes, that are complex, are subject to increasing regulatory requirements that may affect sourcing, supply and pricing of materials used in the Company's products. These processes also are subject to lengthy regulatory approvals.
Available Information
The Company’s main corporate website address is www.jnj.com. Copies of the Company’s Quarterly Reports on Form 10-Q, Annual Report on Form 10-K and Current Reports on Form 8-K filed or furnished to the U.S. Securities and Exchange Commission (the "SEC"), and any amendments to the foregoing, will be provided without charge to any shareholder submitting a written request to the Secretary at the principal executive offices of the Company or by calling 1-800-950-5089. All of the Company’s SEC filings are also available on the Company’s website at www.investor.jnj.com/gov/sec-filings.cfm, as soon as reasonably practicable after having been electronically filed or furnished to the SEC. All SEC filings are also available at the SEC’s website at www.sec.gov. In addition, the written charters of the Audit Committee, the Compensation & Benefits Committee, the Nominating & Corporate Governance Committee, the Regulatory, Compliance & Government Affairs Committee and the Science, Technology & Sustainability Committee of the Board of Directors and the Company’s Principles of Corporate Governance, Code of Business Conduct (for employees), Code of Business Conduct & Ethics for Members of the Board of Directors and Executive Officers, and other corporate governance materials, are available at www.investor.jnj.com/gov/materials.cfm on the Company's website and will be provided without charge to any shareholder submitting a written request, as provided above. The information on the Company’s website is not, and will not be deemed, a part of this Report or incorporated into any other filings the Company makes with the SEC.
Item 1A.
RISK FACTORS
The Company faces a number of uncertainties and risks that are difficult to predict and many of which are outside of the Company's control. In addition to the other information in this Report and the Company’s other filings with the SEC, investors should consider carefully the factors set forth in Exhibit 99 to this Report. Investors should realize that if known or unknown risks or uncertainties materialize, the Company’s business, results of operations or financial condition could be adversely affected.
Item 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.


                
 
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Item 2.PROPERTIES
The Company's subsidiaries operate 121 manufacturing facilities occupying approximately 21.3 million square feet of floor space. The manufacturing facilities are used by the industry segments of the Company’s business approximately as follows:
Segment
 
Square Feet
(in thousands)
Consumer
 
6,942

Pharmaceutical
 
7,435

Medical Devices
 
6,919

Worldwide Total
 
21,296

Within the United States, eight facilities are used by the Consumer segment, eight by the Pharmaceutical segment and 20 by the Medical Devices segment. Outside of the United States, 30 facilities are used by the Consumer segment, 18 by the Pharmaceutical segment and 37 by the Medical Devices segment.
The locations of the manufacturing facilities by major geographic areas of the world are as follows:
Geographic Area
 
Number of Facilities
 
Square Feet
(in thousands)
United States
 
36

 
5,808

Europe
 
38

 
7,917

Western Hemisphere, excluding U.S. 
 
14

 
2,815

Africa, Asia and Pacific
 
33

 
4,756

Worldwide Total
 
121

 
21,296

In addition to the manufacturing facilities discussed above, the Company maintains numerous office and warehouse facilities throughout the world. Research facilities are also discussed in Item 1 of this Report under “Business – Research and Development.”
The Company's subsidiaries generally seek to own their manufacturing facilities, although some, principally in non-U.S. locations, are leased. Office and warehouse facilities are often leased. The Company also engages contract manufacturers.
The Company is committed to maintaining all of its properties in good operating condition and repair, and the facilities are well utilized.
McNEIL-PPC, Inc. (now Johnson & Johnson Consumer Inc.) (McNEIL-PPC) continues to operate under a consent decree, signed in 2011 with the FDA, which governs certain McNeil Consumer Healthcare manufacturing operations, and requires McNEIL-PPC to remediate the facilities it operates in Lancaster, Pennsylvania, Fort Washington, Pennsylvania, and Las Piedras, Puerto Rico (the "Consent Decree"). The Fort Washington facility was voluntarily shut down in April 2010, and subsequently many products were transferred to other manufacturing sites and successfully reintroduced to the market. After McNEIL-PPC successfully completed all requirements contained in the Consent Decree Workplans for the Lancaster and Las Piedras manufacturing sites and completed the steps required for third-party certification of the Fort Washington plant, a third-party cGMP expert submitted written certifications to the FDA for all three manufacturing sites. Following FDA inspections in 2015, McNEIL-PPC received notifications from the FDA that all three manufacturing facilities are in conformity with applicable laws and regulations. Commercial production in Fort Washington started as of September 2015.
Under the Consent Decree, after receiving notice from the FDA of being in compliance with applicable laws and regulations, each of the three facilities is subject to a five-year audit period by a third-party cGMP expert. Thus, a third-party expert will continue to reassess the sites at various times for at least five years. A discussion of legal proceedings related to this matter can be found in Note 21 “Legal Proceedings – Government Proceedings – McNeil Consumer Healthcare” of the Notes to Consolidated Financial Statements included in Item 8 of this Report.
For information regarding lease obligations, see Note 16 “Rental Expense and Lease Commitments” of the Notes to Consolidated Financial Statements included in Item 8 of this Report. Segment information on additions to property, plant and equipment is contained in Note 18 “Segments of Business and Geographic Areas” of the Notes to Consolidated Financial Statements included in Item 8 of this Report.

                
 
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Item 3.
LEGAL PROCEEDINGS
The information called for by this item is incorporated herein by reference to the information set forth in Note 21 “Legal Proceedings” of the Notes to Consolidated Financial Statements included in Item 8 of this Report.
In addition, Johnson & Johnson and its subsidiaries are from time to time party to government investigations, inspections or other proceedings relating to environmental matters, including their compliance with applicable environmental laws.

Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the executive officers of the Company as of February 23, 2016. There are no family relationships between any of the executive officers, and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected. At the annual meeting of the Board of Directors, the executive officers are elected by the Board to hold office for one year and until their respective successors are elected and qualified, or until earlier resignation or removal.
Information with regard to the Directors of the Company, including information for Alex Gorsky, is incorporated herein by reference to the material captioned “Item 1: Election of Directors” in the Proxy Statement.
Name
 
Age
 
Position
Dominic J. Caruso
 
58
 
Member, Executive Committee; Vice President, Finance; Chief Financial Officer(a)
Peter M. Fasolo
 
53
 
Member, Executive Committee; Vice President, Global Human Resources(b)
Alex Gorsky
 
55
 
Chairman, Board of Directors; Chairman, Executive Committee; Chief Executive Officer
Sandra E. Peterson
 
57
 
Member, Executive Committee; Group Worldwide Chairman(c)
Paulus Stoffels
 
54
 
Member, Executive Committee; Chief Scientific Officer; Worldwide Chairman, Pharmaceuticals(d)
Michael H. Ullmann
 
57
 
Member, Executive Committee; Vice President, General Counsel(e)
_______________________________________
(a)
Mr. D. J. Caruso joined the Company in 1999 when the Company acquired Centocor, Inc. At the time of that acquisition, he had been Senior Vice President, Finance of Centocor. Mr. Caruso was named Vice President, Finance of Ortho-McNeil Pharmaceutical, Inc., a subsidiary of the Company, in 2001 and Vice President, Group Finance of the Company’s Medical Devices and Diagnostics Group in 2003. In 2005, Mr. Caruso was named Vice President of the Company’s Group Finance organization. Mr. Caruso became a Member of the Executive Committee and Vice President, Finance and Chief Financial Officer in 2007.
(b)
Dr. P. M. Fasolo joined the Company in 2004 as Vice President, Worldwide Human Resources for Cordis Corporation, a subsidiary of the Company. He was then named Vice President, Global Talent Management for the Company. He left Johnson & Johnson in 2007 to join Kohlberg Kravis Roberts & Co. as Chief Talent Officer. Dr. Fasolo returned to the Company in 2010 as the Vice President, Global Human Resources, and in 2011, he became a Member of the Executive Committee.
(c)
Ms. S. E. Peterson joined the Company in 2012 as Group Worldwide Chairman and a Member of the Executive Committee, with responsibility for the Consumer Group of Companies, consumer medical device businesses in the Vision Care and Diabetes Care franchises, and functions such as Johnson & Johnson Supply Chain, Information Technology, Wellness and Prevention and Global Strategic Design. Prior to joining Johnson & Johnson, Ms. Peterson had an extensive global career in healthcare, consumer goods and consulting. Most recently, she was Chairman and Chief Executive Officer of Bayer CropScience AG in Germany, previously serving as President and Chief Executive Officer of Bayer Medical Care and President of Bayer HealthCare AG's Diabetes Care Division. Before joining Bayer in 2005, Ms. Peterson held a number of leadership roles at Medco Health Solutions (previously known as Merck-Medco). Among her responsibilities was the application of information technology to healthcare systems.

                
 
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(d)
Dr. P. Stoffels joined the Company in 2002 with the acquisition of Virco and Tibotec, where he was Chief Executive Officer of Virco and Chairman of Tibotec. In 2005, he was appointed Company Group Chairman, Global Virology where he led the development of PREZISTA® and INTELENCE®, leading products for the treatment of HIV. In 2006, he assumed the role of Company Group Chairman, Pharmaceuticals, with responsibility for worldwide research and development for the Central Nervous System and Internal Medicine Franchises. Dr. Stoffels was appointed Global Head, Research & Development, Pharmaceuticals, in 2009, and in 2011 became Worldwide Chairman, Pharmaceuticals, with responsibility for the Company's therapeutic pipeline through global research and development and strategic business development. In 2012, Dr. Stoffels was also appointed Chief Scientific Officer, with responsibility for enterprise-wide innovation and product safety, and a Member of the Executive Committee.
(e)
Mr. M. H. Ullmann joined the Company in 1989 as a corporate attorney in the Law Department.  He was appointed Corporate Secretary in 1999 and served in that role until 2006.  During that time, he also held various management positions in the Law Department.  In 2006, he was named General Counsel, Medical Devices and Diagnostics.  Mr. Ullmann was appointed Vice President, General Counsel and a Member of the Executive Committee in 2012.
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of February 19, 2016, there were 158,749 record holders of common stock of the Company. Additional information called for by this item is incorporated herein by reference to the following sections of this Report: Item 7 “Management’s Discussion and Analysis of Results of Operations and Financial Condition – Liquidity and Capital Resources – Dividends” and “— Other Information  Common Stock Market Prices”; Note 17 “Common Stock, Stock Option Plans and Stock Compensation Agreements” of the Notes to Consolidated Financial Statements included in Item 8; and Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters – Equity Compensation Plan Information”.
Issuer Purchases of Equity Securities
On October 13, 2015, the Company announced that its Board of Directors approved a share repurchase program, authorizing the Company to purchase up to $10.0 billion of the Company's Common Stock. Share repurchases 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.
The following table provides information with respect to common stock purchases by the Company during the fiscal fourth quarter of 2015. Common stock purchases on the open market are made as part of a systematic plan to meet the needs of the Company’s compensation programs. The repurchases below also include the stock-for-stock option exercises that settled in the fiscal fourth quarter.
Period
 
Total Number
of Shares Purchased(1)
 
Avg. Price
Paid Per Share
 
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(2)
 
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(3)
September 28, 2015 through October 25, 2015
 
1,134,367

 
$
96.45

 
-
 
-
October 26, 2015 through November 22, 2015
 
6,298,421

 
100.21

 
5,408,965
 
-
November 23, 2015 through January 3, 2016
 
11,330,068

 
102.30

 
4,462,352
 
-
Total
 
18,762,856

 
 
 
9,871,317
 
87,618,945
(1)
During the fiscal fourth quarter of 2015, the Company repurchased an aggregate of 18,762,856 shares of Johnson & Johnson Common Stock in open-market transactions, of which 9,871,317 shares were purchased pursuant to the repurchase program that was publicly announced on October 13, 2015, and of which 8,891,539 shares were purchased in open-market transactions as part of a systematic plan to meet the needs of the Company’s compensation programs.
(2)
As of January 3, 2016, an aggregate of 9,871,317 shares were purchased for a total of $1.0 billion since the inception of the repurchase program announced on October 13, 2015.
(3)
As of January 3, 2016, the maximum number of shares that may yet be purchased under the plan is 87,618,945 based on the closing price of Johnson & Johnson Common Stock on the New York Stock Exchange on December 31, 2015 of $102.72 per share.

                
 
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Item 6.
SELECTED FINANCIAL DATA
    
Summary of Operations and Statistical Data 2005-2015
(Dollars in Millions Except Per Share Amounts)
2015
 
2014
 
2013
 
2012
 
2011
 
2010
 
2009
 
2008
 
2007
 
2006
 
2005
Sales to customers — U.S. 
$35,687
 
34,782

 
31,910

 
29,830

 
28,908

 
29,450

 
30,889

 
32,309

 
32,444

 
29,775

 
28,377

Sales to customers — International
34,387
 
39,549

 
39,402

 
37,394

 
36,122

 
32,137

 
31,008

 
31,438

 
28,651

 
23,549

 
22,137

Total sales
70,074
 
74,331

 
71,312

 
67,224

 
65,030

 
61,587

 
61,897

 
63,747

 
61,095

 
53,324

 
50,514

Cost of products sold
21,536
 
22,746

 
22,342

 
21,658

 
20,360

 
18,792

 
18,447

 
18,511

 
17,751

 
15,057

 
14,010

Selling, marketing and administrative expenses
21,203
 
21,954

 
21,830

 
20,869

 
20,969

 
19,424

 
19,801

 
21,490

 
20,451

 
17,433

 
17,211

Research and development expense
9,046
 
8,494

 
8,183

 
7,665

 
7,548

 
6,844

 
6,986

 
7,577

 
7,680

 
7,125

 
6,462

In-process research and development
224
 
178

 
580

 
1,163

 

 

 

 
181

 
807

 
559

 
362

Interest income
(128)
 
(67
)
 
(74
)
 
(64
)
 
(91
)
 
(107
)
 
(90
)
 
(361
)
 
(452
)
 
(829
)
 
(487
)
Interest expense, net of portion capitalized
552
 
533

 
482

 
532

 
571

 
455

 
451

 
435

 
296

 
63

 
54

Other (income) expense, net
(2,064)
 
(70
)
 
2,498

 
1,626

 
2,743

 
(768
)
 
(526
)
 
(1,015
)
 
534

 
(671
)
 
(214
)
Restructuring
509
 

 

 

 
569

 

 
1,073

 

 
745

 

 

 
50,878
 
53,768

 
55,841

 
53,449

 
52,669

 
44,640

 
46,142

 
46,818

 
47,812

 
38,737

 
37,398

Earnings before provision for taxes on income
$19,196
 
20,563

 
15,471

 
13,775

 
12,361

 
16,947

 
15,755

 
16,929

 
13,283

 
14,587

 
13,116

Provision for taxes on income
3,787
 
4,240

 
1,640

 
3,261

 
2,689

 
3,613

 
3,489

 
3,980

 
2,707

 
3,534

 
3,056

Net earnings
15,409
 
16,323

 
13,831

 
10,514

 
9,672

 
13,334

 
12,266

 
12,949

 
10,576

 
11,053

 
10,060

Add: Net loss attributable to noncontrolling interest
 

 

 
339

 

 

 

 

 

 

 

Net earnings attributable to Johnson & Johnson
15,409
 
16,323

 
13,831

 
10,853

 
9,672

 
13,334

 
12,266

 
12,949

 
10,576

 
11,053

 
10,060

Percent of sales to customers
22.0%
 
22.0

 
19.4

 
16.1

 
14.9

 
21.7

 
19.8

 
20.3

 
17.3

 
20.7

 
19.9

Diluted net earnings per share of common stock (1)
$5.48
 
5.70

 
4.81

 
3.86

 
3.49

 
4.78

 
4.40

 
4.57

 
3.63

 
3.73

 
3.35

Percent return on average shareholders’ equity
21.9%
 
22.7

 
19.9

 
17.8

 
17.0

 
24.9

 
26.4

 
30.2

 
25.6

 
28.3

 
28.2

Percent increase (decrease) over previous year:
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Sales to customers
(5.7)%
 
4.2

 
6.1

 
3.4

 
5.6

 
(0.5
)
 
(2.9
)
 
4.3

 
14.6

 
5.6

 
6.7

Diluted net earnings per share
(3.9)%
 
18.5

 
24.6

 
10.6

 
(27.0
)
 
8.6

 
(3.7
)
 
25.9

 
(2.7
)
 
11.3

 
22.3

Supplementary balance sheet data:
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Property, plant and equipment, net
15,905
 
16,126

 
16,710

 
16,097

 
14,739

 
14,553

 
14,759

 
14,365

 
14,185

 
13,044

 
10,830

Additions to property, plant and equipment
3,463
 
3,714

 
3,595

 
2,934

 
2,893

 
2,384

 
2,365

 
3,066

 
2,942

 
2,666

 
2,632

Total assets(2)
133,411
 
130,358

 
131,754

 
121,347

 
113,644

 
102,908

 
94,682

 
84,912

 
80,954

 
70,556

 
58,864

Long-term debt
12,857
 
15,122

 
13,328

 
11,489

 
12,969

 
9,156

 
8,223

 
8,120

 
7,074

 
2,014

 
2,017

Operating cash flow
19,279
 
18,471

 
17,414

 
15,396

 
14,298

 
16,385

 
16,571

 
14,972

 
15,022

 
14,248

 
11,799

Common stock information
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Dividends paid per share
$2.95
 
2.76

 
2.59

 
2.40

 
2.25

 
2.11

 
1.93

 
1.795

 
1.62

 
1.455

 
1.275

Shareholders’ equity per share
25.82
 
25.06

 
26.25

 
23.33

 
20.95

 
20.66

 
18.37

 
15.35

 
15.25

 
13.59

 
13.01

Market price per share (year-end close)
$102.72
 
105.06

 
92.35

 
69.48

 
65.58

 
61.85

 
64.41

 
58.56

 
67.38

 
66.02

 
60.10

Average shares outstanding (millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 — basic
2,771.8
 
2,815.2

 
2,809.2

 
2,753.3

 
2,736.0

 
2,751.4

 
2,759.5

 
2,802.5

 
2,882.9

 
2,936.4

 
2,973.9

— diluted
2,812.9
 
2,863.9

 
2,877.0

 
2,812.6

 
2,775.3

 
2,788.8

 
2,789.1

 
2,835.6

 
2,910.7

 
2,961.0

 
3,002.8

Employees (thousands)
127.1
 
126.5

 
128.1

 
127.6

 
117.9

 
114.0

 
115.5

 
118.7

 
119.2

 
122.2

 
115.6

(1) Attributable to Johnson & Johnson. (2) Amounts have been reclassified to conform to current year presentation.
    

                
 
8
                                



Item 7.
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 127,100 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. 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, surgery, cardiovascular, diabetes care and vision care fields which are distributed to wholesalers, hospitals and retailers, and used principally in the professional fields by physicians, nurses, hospitals, eye care professionals and clinics.
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, as well as protecting the underlying intellectual property of the Company's product portfolio, is important to the Company’s success in all areas of its business. 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, having a decentralized management approach, and being committed to our people and values, are crucial to successfully meeting the demands of the rapidly evolving markets in which we compete. To this end, management is focused on our long-term strategic growth drivers: creating value through innovation, expanding our global reach with a local focus, excellence in execution and leading with purpose.
The Company is broadly based in human health care, and is committed to creating value by developing accessible, high quality, innovative products and services. New products introduced within the past five years accounted for approximately 25% of 2015 sales. In 2015, $9.0 billion, or 12.9% 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 250 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, positions the Company well to innovate, execute strategic plans and reach markets globally, as well as address 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 patients, consumers and health care professionals, employees, communities and shareholders. The Company believes that these foundational values, its strategic framework and long-term growth drivers, along with its overall mission of improving the quality of life for people around the world, will enable Johnson & Johnson to continue to be a leader in the health care industry.


                
 
9
                                



Results of Operations
Analysis of Consolidated Sales
In 2015, worldwide sales decreased 5.7% to $70.1 billion, compared to increases of 4.2% in 2014 and 6.1% in 2013. These sales changes consisted of the following:
Sales increase/(decrease) due to:
 
2015
 
2014
 
2013
Volume
 
1.2
 %
 
6.3

 
7.6

Price
 
0.6

 
(0.2
)
 
0.1

Currency
 
(7.5
)
 
(1.9
)
 
(1.6
)
Total
 
(5.7
)%
 
4.2

 
6.1


In 2015, the introduction of competitive products to the Company's Hepatitis C products, OLYSIO®/SOVRIAD® (simeprevir) and INCIVO® (telaprevir), had a negative impact of 2.7% on the worldwide operational sales growth. In 2015, the impact of acquisitions and divestitures on the worldwide operational sales growth was negative 2.0%.
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. In 2013, the acquisition of Synthes, Inc., net of the related divestiture, increased worldwide operational growth by 2.5%.
Sales by U.S. companies were $35.7 billion in 2015, $34.8 billion in 2014 and $31.9 billion in 2013. This represents increases of 2.6% in 2015, 9.0% in 2014 and 7.0% in 2013. Sales by international companies were $34.4 billion in 2015, $39.5 billion in 2014 and $39.4 billion in 2013. This represents a decrease of 13.1% in 2015, and increases of 0.4% in 2014 and 5.4% in 2013.
The five-year compound annual growth rates for worldwide, U.S. and international sales were 2.6%, 3.9% and 1.4%, respectively. The ten-year compound annual growth rates for worldwide, U.S. and international sales were 3.3%, 2.3% and 4.5%, respectively.
Sales by companies in Europe experienced a decline of 15.6% as compared to the prior year, including operational growth of 1.1%, offset by a negative currency impact of 16.7%. Sales by companies in the Western Hemisphere (excluding the U.S.) experienced a decline of 15.6% as compared to the prior year, including operational growth of 2.6% offset by a negative currency impact of 18.2%. Sales by companies in the Asia-Pacific, Africa region experienced a decline of 8.1% as compared to the prior year, including operational growth of 0.3% and a negative currency impact of 8.4%.
2015 results benefited from the inclusion of a 53rd week. (See Note 1 to the Consolidated Financial Statements for Annual Closing Date details). The Company estimated that the fiscal year 2015 growth rate was enhanced by approximately 1.0%. While the additional week added a few days to sales, it also added a full week's worth of operating costs; therefore, the net earnings impact was negligible.
In 2015 and 2014, the Company had one wholesaler distributing products for all three segments that represented approximately 12.5% and 11.0%, respectively, of the total consolidated revenues. In 2013, the Company did not have a customer that represented 10% or more of total consolidated revenues.
U.S. Health Care Reform
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 was paid, as scheduled, in 2015 and had no cash impact in 2014.


                
 
10
                                



Analysis of Sales by Business Segments
Consumer Segment
Consumer segment sales in 2015 were $13.5 billion, a decrease of 6.8% from 2014, which included 2.7% operational growth offset by a negative currency impact of 9.5%. U.S. Consumer segment sales were $5.2 billion, an increase of 2.5%. International sales were $8.3 billion, a decrease of 11.9%, which included 2.7% operational growth offset by a negative currency impact of 14.6%. In 2015, divestitures had a negative impact of 1.4% on the worldwide Consumer segment operational growth.
Major Consumer Franchise Sales:
 
 
 
 
 
 
 
 
% Change
(Dollars in Millions)
 
2015
 
2014
 
2013
 
’15 vs. ’14
 
’14 vs. ’13
OTC
 
$
3,975

 
4,106

 
4,028

 
(3.2
)%
 
1.9

Skin Care
 
3,531

 
3,758

 
3,704

 
(6.0
)
 
1.5

Baby Care
 
2,044

 
2,239

 
2,295

 
(8.7
)
 
(2.4
)
Oral Care
 
1,580

 
1,647

 
1,622

 
(4.1
)
 
1.5

Women’s Health
 
1,200

 
1,302

 
1,568

 
(7.8
)
 
(17.0
)
Wound Care/Other
 
1,177

 
1,444

 
1,480

 
(18.5
)
 
(2.4
)
Total Consumer Sales
 
$
13,507

 
14,496

 
14,697

 
(6.8
)%
 
(1.4
)

The Over-the-Counter (OTC) franchise sales of $4.0 billion decreased 3.2% as compared to the prior year, which included 8.1% operational growth and a negative currency impact of 11.3%. Operational growth was primarily driven by analgesics, upper respiratory, including ZYRTEC®, and digestive health products.
McNEIL-PPC, Inc. (now Johnson & Johnson Consumer Inc.) (McNEIL-PPC) 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 and requires McNEIL-PPC to remediate the facilities it operates in Lancaster, Pennsylvania; Fort Washington, Pennsylvania; and Las Piedras, Puerto Rico (the Consent Decree). In February 2015, a third-party expert submitted written certification to the FDA for all three manufacturing sites. Following FDA inspections in 2015, McNEIL-PPC received notifications from the FDA that all three manufacturing facilities are in conformity with applicable laws and regulations. Under the Consent Decree, after receiving notice from the FDA of being in compliance with applicable laws and regulations, each of the three facilities is subject to a five-year audit period by a third-party cGMP expert. Thus, a third-party expert will continue to reassess the sites at various times for at least five years. 
The Skin Care franchise sales of $3.5 billion decreased 6.0% as compared to the prior year, which included 1.3% operational growth and a negative currency impact of 7.3%. Operational growth was primarily due to sales growth of NEUTROGENA® and AVEENO® products partially offset by lower sales in China.
The Baby Care franchise sales were $2.0 billion in 2015, a decrease of 8.7% compared to the prior year, which included 1.2% operational growth and a negative currency impact of 9.9%. Operational growth was primarily due to new product launches partially offset by competition in China.
The Oral Care franchise sales were $1.6 billion in 2015, a decrease of 4.1% as compared to the prior year, which included 5.2% operational growth and a negative currency impact of 9.3%. Operational growth was driven by increased sales of LISTERINE® products, attributable to geographical expansion of new products and successful marketing campaigns.
The Women’s Health franchise sales were $1.2 billion in 2015, a decrease of 7.8% as compared to the prior year, which included 7.6% operational growth and a negative currency impact of 15.4%. Operational growth outside the U.S. was driven by new product launches and successful marketing campaigns.
The Wound Care/Other franchise sales were $1.2 billion in 2015, a decrease of 18.5% from 2014, primarily due to the SPLENDA® and BENECOL® divestitures.
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%.






                
 
11
                                



Pharmaceutical Segment
Pharmaceutical segment sales in 2015 were $31.4 billion, a decrease of 2.7% from 2014, which included operational growth of 4.2% offset by a negative currency impact of 6.9%. U.S. sales were $18.3 billion, an increase of 5.2%. International sales were $13.1 billion, a decrease of 12.0%, which included 3.0% operational growth offset by a negative currency impact of 15.0%. The Pharmaceutical segment operational growth was negatively impacted by 6.5% due to the introduction of competitive products to the Company's Hepatitis C products, OLYSIO®/SOVRIAD® (simeprevir) and INCIVO® (telaprevir), and positively impacted by 1.4% due to an adjustment to previous reserve estimates, including Managed Medicaid rebates primarily in the Cardiovascular/Metabolism/Other therapeutic area. In 2015, divestitures had a negative impact of 0.3% on the worldwide Pharmaceutical segment operational growth.

Major Pharmaceutical Therapeutic Area Sales:*
 
 
 
 
 
 
 
 
% Change
(Dollars in Millions)
 
2015
 
2014
 
2013
 
’15 vs. ’14
 
’14 vs. ’13
Total Immunology
 
$
10,402

 
10,193

 
9,190

 
2.1
 %
 
10.9

     REMICADE®
 
6,561

 
6,868

 
6,673

 
(4.5
)
 
2.9

     SIMPONI®/SIMPONI ARIA®
 
1,328

 
1,187

 
932

 
11.9

 
27.4

     STELARA®
 
2,474

 
2,072

 
1,504

 
19.4

 
37.8

     Other Immunology
 
39

 
66

 
81

 
(40.9
)
 
(18.5
)
Total Infectious Diseases
 
3,656

 
5,599

 
3,550

 
(34.7
)
 
57.7

     EDURANT®
 
410

 
365

 
236

 
12.3

 
54.7

     OLYSIO®/SOVRIAD®
 
621

 
2,302

 
23

 
(73.0
)
 
**

     PREZISTA®/ PREZCOBIX®/REZOLSTA®
 
1,810

 
1,831

 
1,673

 
(1.1
)
 
9.4

     Other Infectious Diseases
 
815

 
1,101

 
1,618

 
(26.0
)
 
(32.0
)
Total Neuroscience
 
6,259

 
6,487

 
6,667

 
(3.5
)
 
(2.7
)
     CONCERTA®/methylphenidate
 
821

 
599

 
782

 
37.1

 
(23.4
)
     INVEGA®/paliperidone
 
573

 
640

 
583

 
(10.5
)
 
9.8

     INVEGA SUSTENNA®/XEPLION®/INVEGA TRINZA®
 
1,830

 
1,588

 
1,248

 
15.2

 
27.2

     RISPERDAL® CONSTA®
 
970

 
1,190

 
1,318

 
(18.5
)
 
(9.7
)
     Other Neuroscience
 
2,065

 
2,470

 
2,736

 
(16.4
)
 
(9.7
)
Total Oncology
 
4,695

 
4,457

 
3,773

 
5.3

 
18.1

     IMBRUVICA®
 
689

 
200

 

 
**
 

     VELCADE®
 
1,333

 
1,618

 
1,660

 
(17.6
)
 
(2.5
)
     ZYTIGA®
 
2,231

 
2,237

 
1,698

 
(0.3
)
 
31.7

     Other Oncology
 
442

 
402

 
415

 
10.0

 
(3.1
)
Cardiovascular / Metabolism / Other***
 
6,418

 
5,577

 
4,945

 
15.1

 
12.8

     XARELTO®
 
1,868

 
1,522

 
864

 
22.7

 
76.2

     INVOKANA®/ INVOKAMET®
 
1,308

 
586

 
123

 
**
 
**

     PROCRIT®/EPREX®
 
1,068

 
1,238

 
1,364

 
(13.7
)
 
(9.2
)
     Other
 
2,174

 
2,231

 
2,594

 
(2.6
)
 
(14.0
)
Total Pharmaceutical Sales
 
$
31,430

 
32,313

 
28,125

 
(2.7
)%
 
14.9

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

Immunology products achieved sales of $10.4 billion in 2015, representing an increase of 2.1% as compared to the prior year. Immunology products growth of 2.1% included operational growth of 6.9% and a negative currency impact of 4.8%. The increased sales of STELARA® (ustekinumab) and SIMPONI®/SIMPONI ARIA® (golimumab) were due to market growth and increased penetration of SIMPONI ARIA®. Growth was partially offset by lower REMICADE® (infliximab) sales to the Company's distributor primarily due to the weakening of the euro and biosimilar competition in Europe. The patents for REMICADE® in certain countries in Europe expired in February 2015. Biosimilar versions of REMICADE® have been introduced in certain markets outside the United States, resulting in a reduction in sales of REMICADE® in those markets.

                
 
12
                                



Additional biosimilar competition will likely result in a further reduction in REMICADE® sales in markets outside the United States.  The timing of the possible introduction of a biosimilar version of REMICADE® in the United States is subject to enforcement of patent rights, approval by the FDA and compliance with the 180-day notice provisions of the Biologics Price Competition and Innovation Act (the BPCIA). On February 9, 2016, the Arthritis Advisory Committee of the FDA recommended by a vote of 21-3 to approve the first investigational biosimilar infliximab across all eligible indications in the United States. There is a risk that a competitor could launch a biosimilar version of REMICADE® following FDA approval (subject to compliance with the 180-day notice provisions of the BPCIA), even though one or more valid patents are in place. Introduction to the U.S. market of a biosimilar version of REMICADE® will result in a reduction in U.S. sales of REMICADE®.  In 2015, U.S. sales of REMICADE® were $4.5 billion. The launch of a biosimilar version of REMICADE® in the U.S. is not expected to have a material adverse effect on the Company’s results of operations and cash flows in 2016. See Note 21 to the Consolidated Financial Statements for legal matters regarding the REMICADE® patents.
Infectious disease products sales were $3.7 billion, a decline of 34.7% from 2014, which included an operational decrease of 27.6% and a negative currency impact of 7.1%. Competitive products to the Company's Hepatitis C products, OLYSIO®/SOVRIAD® (simeprevir) and INCIVO® (telaprevir), had a significant negative impact on U.S. sales and will continue to have a negative impact on future sales. The decline of Hepatitis C sales was partially offset by sales growth of EDURANT®(rilpivirine) and sales of PREZISTA®/ PREZCOBIX®/REZOLSTA® (darunavir/cobicistat).
Neuroscience products sales were $6.3 billion, a decrease of 3.5% from 2014, which included an operational growth of 5.0% and a negative currency impact of 8.5%. The U.S. sales growth of CONCERTA®/methylphenidate was primarily due to a therapeutic equivalence reclassification of generic competitors by the FDA in November 2014. Strong sales of INVEGA SUSTENNA®/XEPLION®/INVEGA TRINZA® (paliperidone palmitate) were primarily due to increased market share and the launch of INVEGA TRINZA®. Neuroscience products sales were negatively impacted by the U.S. divestiture of NUCYNTA® (tapentadol) and lower sales of RISPERDAL® CONSTA® (risperidone).
Oncology products achieved sales of $4.7 billion in 2015, representing an increase of 5.3% as compared to the prior year. Oncology products growth of 5.3% included operational growth of 17.7% and a negative currency impact of 12.4%. Contributors to the growth were strong sales of IMBRUVICA® (ibrutinib) due to the approval of new indications, additional country launches and strong patient uptake. Additionally, sales of ZYTIGA® (abiraterone acetate) grew in the U.S. due to market growth partially offset by share decline, and strong growth in Asia and Latin America was partially offset by lower sales in Europe due to competition.
Cardiovascular/Metabolism/Other products achieved sales of $6.4 billion in 2015, representing an increase of 15.1% as compared to the prior year due to strong sales of XARELTO®(rivaroxaban) and INVOKANA®/INVOKAMET® (canagliflozin). PROCRIT®/EPREX® (Epoetin alfa) sales were impacted by competition.


                
 
13
                                



During 2015, the Company advanced its pipeline with several regulatory submissions and approvals for new drugs and additional indications for existing drugs as follows:
Product Name (Chemical Name)
Indication
US Approv
EU Approv
US Filing
EU Filing
DARZALEX(daratumumab)
For the treatment of double refractory multiple myeloma
ü
 
 
ü
EDURANT® (rilpiravine)
For use in combination with other anti-retroviral agents, for the treatment-naïve adolescent patients aged 12 to 18 years with HIV-1 infection
ü
ü
 
 
IMBRUVICA®  (ibrutinib)
Treatment of Waldenström's Macroglobulinemia
ü
ü
 
 
 
Treatment for patients with relapsed or refractory chronic lymphocytic leukemia (CLL) or small lymphocytic lymphoma in combination with bendamustine and rituximab
 
 
ü
ü
 
For use in treatment-naïve patients with chronic lymphocytic leukemia
 
 
ü
ü
INVEGA TRINZA®  (paliperidone palmitate)
An atypical antipsychotic injection administered four times a year for the treatment of schizophrenia
ü
 
 
ü
INVOKAMET® XR (canagliflozin)
A once-daily therapy combining fixed doses of canagliflozin and metformin hydrochloride extended release for the treatment of adults with type 2 diabetes
 
 
ü
 
PREZCOBIX® (darunavir/cobicistat)
For use in combination with other antiretroviral medicinal products for the treatment of human immunodeficiency virus (HIV-1)
ü
 
 
 
SIMPONI®  (golimumab)
Treatment of non-radiographic axial spondyloarthritis
 
ü
 
 
STELARA® (ustekinumab)
For the treatment of adolescents with moderate-to-severe psoriasis
 
ü
 
 
 
For the treatment of adult patients with moderately to severely active Crohn's disease
 
 
ü
ü
VELCADE ® (bortezomib)
For use in combination with rituximab, cyclophosphamide, doxorubicin and prednisone for the treatment of adult patients with previously untreated mantle cell lymphoma
 
ü
 
 
YONDELIS® (trabectedin)
For the treatment of patients with unresectable or metastatic liposarcoma or leiomyosarcoma
ü
 
 
 

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.

                
 
14
                                




Medical Devices Segment
The Medical Devices segment sales in 2015 were $25.1 billion, a decrease of 8.7% from 2014, which included an operational decline of 1.4% and a negative currency impact of 7.3%. U.S. sales were $12.1 billion, a decrease of 1.0% as compared to the prior year. International sales were $13.0 billion, a decrease of 14.8% as compared to the prior year, with an operational decrease of 1.7% and a negative currency impact of 13.1%. The divestitures of the Ortho-Clinical Diagnostics and the Cordis Businesses had a negative impact of 3.2% and 0.6%, respectively, on the worldwide operational growth of the Medical Devices segment as compared to 2014.
Major Medical Devices Franchise Sales:*
 
 
 
 
 
 
 
 
% Change
(Dollars in Millions)
 
2015
 
2014
 
2013
 
’15 vs. ’14
 
’14 vs. ’13
Orthopaedics
 
$
9,262

 
9,675

 
9,509

 
(4.3
)%
 
1.7

     Hips
 
1,332

 
1,368

 
1,333

 
(2.6
)
 
2.6

     Knees
 
1,496

 
1,533

 
1,496

 
(2.4
)
 
2.5

     Trauma
 
2,528

 
2,640

 
2,555

 
(4.2
)
 
3.3

     Spine & Other
 
3,906

 
4,134

 
4,125

 
(5.5
)
 
0.2

Surgery
 
9,217

 
9,717

 
9,773

 
(5.1
)
 
(0.6
)
     Advanced
 
3,275

 
3,237

 
3,088

 
1.2

 
4.8

     General
 
4,482

 
4,970

 
5,136

 
(9.8
)
 
(3.2
)
     Specialty
 
1,460

 
1,510

 
1,549

 
(3.3
)
 
(2.5
)
Vision Care
 
2,608

 
2,818

 
2,937

 
(7.5
)
 
(4.1
)
Cardiovascular
 
2,036

 
2,208

 
2,077

 
(7.8
)
 
6.3

Diabetes Care
 
1,928

 
2,142

 
2,309

 
(10.0
)
 
(7.2
)
Diagnostics
 
86

 
962

 
1,885

 
(91.1
)
 
(49.0
)
Total Medical Devices Sales
 
$
25,137

 
27,522

 
28,490

 
(8.7
)%
 
(3.4
)
* Prior year amounts have been reclassified to conform to current year presentation.

The Orthopaedics franchise sales were $9.3 billion in 2015, a decrease of 4.3% from 2014, which included operational growth of 1.7% and a negative currency impact of 6.0%. Operational growth in the U.S. and Europe regions was primarily driven by sales of the hip primary stem platform, the ATTUNE® Knee System, trauma TFNA nailing system and sports medicine ORTHOVISC®/MONOVISC® products. Growth was negatively impacted by softer demand and a reduction in customer inventory levels primarily in China and continued pricing pressures.
The Surgery franchise sales were $9.2 billion in 2015, a decrease of 5.1% from 2014, which included operational growth of 2.7% and a negative currency impact of 7.8%. Operational growth in Advanced Surgery was driven by endocutter, biosurgical and energy products, primarily attributable to market growth, increased penetration in certain markets and new product launches. Operational growth in Specialty Surgery was primarily driven by Mentor products. Growth was partially offset by lower sales of women's health and urology products in General Surgery.
The Vision Care franchise sales were $2.6 billion in 2015, a decrease of 7.5% from 2014, which included operational growth of 1.7% and a negative currency impact of 9.2%. Operational growth in all the major regions was primarily driven by new product launches partially offset by lower price.
The Cardiovascular franchise sales were $2.0 billion, a decrease of 7.8% from 2014, which represented an operational decline of 0.1% and a negative currency impact of 7.7%. Strong operational growth in the electrophysiology business was driven by market growth and the success of the THERMOCOOL® SMARTTOUCH® Catheter and was offset by the impact of divesting the Cordis business. The Company completed the divestiture of the Cordis business to Cardinal Health on October 4, 2015. The Cordis business generated annual net revenues of approximately $535 million and $780 million in 2015 and 2014, respectively. For additional details see Note 20 to the Consolidated Financial Statements.
The Diabetes Care franchise sales were $1.9 billion, a decrease of 10.0% from 2014, which represented an operational decline of 0.7% and a negative currency impact of 9.3%. The operational decline was primarily due to lower price partially offset by the success of the ANIMAS® VIBE® products.
On June 30, 2014, the Company divested the Ortho-Clinical Diagnostics business (the Diagnostics Franchise) to The Carlyle Group. For additional details see Note 20 to the Consolidated Financial Statements.


                
 
15
                                



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 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.


Analysis of Consolidated Earnings Before Provision for Taxes on Income
Consolidated earnings before provision for taxes on income decreased to $19.2 billion as compared to $20.6 billion in 2014, a decrease of 6.6%. The decrease was primarily attributable to significantly lower sales of OLYSIO®/SOVRIAD® (simeprevir), negative currency impacts, a restructuring charge of $0.6 billion and higher intangible asset write-downs of $0.1 billion in 2015 as compared to 2014. The decrease was partially offset by lower net litigation expense of $1.1 billion, lower Synthes integration costs of $0.6 billion, a positive adjustment of $0.4 billion to previous reserve estimates including Managed Medicaid rebates, and higher gains of $0.3 billion from divestitures as compared to the prior year. The fiscal year 2015 included higher gains of $0.3 billion primarily from the divestitures of the Cordis business, the SPLENDA® brand and the U.S. divestiture of NUCYNTA® versus the gains recorded in 2014 from the divestitures of the Ortho-Clinical Diagnostics business and the K-Y® brand. Additionally, 2014 included an additional year of the Branded Prescription Drug Fee of $0.2 billion.
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. 
As a percent to sales, consolidated earnings before provision for taxes on income in 2015 was 27.4% versus 27.7% in 2014.
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
 
2015
 
2014
 
2013
Cost of products sold
 
30.7
%
 
30.6

 
31.3

Percent point increase/(decrease) over the prior year
 
0.1

 
(0.7
)
 
(0.9
)
Selling, marketing and administrative expenses
 
30.3
%
 
29.5

 
30.6

Percent point increase/(decrease) over the prior year
 
0.8

 
(1.1
)
 
(0.4
)

In 2015, cost of products sold as a percent to sales increased slightly as compared to the prior year. Favorable mix between the segments was offset by $81 million associated with the restructuring activity in the Medical Devices segment, negative transactional currency and lower sales of OLYSIO®/SOVRIAD® (simeprevir) in 2015. Intangible asset amortization expense included in cost of products sold for 2015 and 2014 was $1.2 billion and $1.4 billion, respectively. There was an increase in the percent to sales of selling, marketing and administrative expenses in 2015 compared to the prior year, primarily due to incremental investment spending in all the segments and the impact from lower sales of OLYSIO®/SOVRIAD® (simeprevir), partially offset by favorable mix and the inclusion of an additional year of the Branded Prescription Drug Fee of $0.2 billion in 2014.
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.
 

                
 
16
                                



Research and Development Expense: Research and development expense by segment of business was as follows:
 
 
2015
 
2014
 
2013
(Dollars in Millions)
 
Amount
 
% of Sales*
 
Amount
 
% of Sales*
 
Amount
 
% of Sales*
Consumer
 
$
625

 
4.6
%
 
629

 
4.3

 
590

 
4.0

Pharmaceutical
 
6,821

 
21.7

 
6,213

 
19.2

 
5,810

 
20.7

Medical Devices
 
1,600

 
6.4

 
1,652

 
6.0

 
1,783

 
6.3

Total research and development expense
 
$
9,046

 
12.9
%
 
8,494

 
11.4

 
8,183

 
11.5

Percent increase/(decrease) over the prior year
 
6.5
%
 
 

 
3.8

 
 

 
6.8

 
 

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, upfront payments and milestones, 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 2015, worldwide costs of research and development activities increased by 6.5% compared to 2014. The increase as a percent to sales was attributable to increased investment spending primarily in the Pharmaceutical segment, lower overall sales and business mix. 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-Process Research and Development (IPR&D): In 2015, the Company recorded an IPR&D charge of $0.2 billion primarily for the discontinuation of certain development projects related to Covagen. In 2014, the Company recorded an IPR&D charge 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 an IPR&D charge 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.

Other (Income) Expense, Net: Other (income) expense, net is the account where the Company records gains and losses related to the sale and write-down of certain investments in equity securities held by Johnson & Johnson Innovation - JJDC, Inc. (formerly Johnson & Johnson Development Corporation), gains and losses on divestitures, transactional currency gains and losses, acquisition-related costs, litigation accruals and settlements, as well as royalty income. The change in other (income) expense, net for the fiscal year 2015 was a favorable change of $2.0 billion as compared to the prior year primarily due to lower litigation expense of $1.1 billion, lower Synthes integration costs of $0.6 billion and higher JJDC portfolio gains of $0.2 billion as compared to the prior year. Additionally, the fiscal year 2015 included higher gains of $0.3 billion primarily from the divestitures of the Cordis business, the SPLENDA® brand and the U.S. divestiture of NUCYNTA® versus the gains recorded in 2014 from the divestitures of the Ortho-Clinical Diagnostics business and the K-Y® brand. This was partially offset by higher intangible asset write-downs of $0.1 billion in 2015.
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.
Interest (Income) Expense:  Interest income in 2015 increased by $61 million as compared to 2014 due to a higher average balance of cash, cash equivalents and marketable securities and higher interest rates. Cash, cash equivalents and marketable securities totaled $38.4 billion at the end of 2015, and averaged $35.7 billion as compared to the $31.1 billion average cash balance in 2014. The increase in the year-end cash balance was primarily due to cash generated from operating activities.
Interest expense in 2015 increased slightly as compared to 2014. The average debt balance was $19.3 billion in 2015 versus $18.5 billion in 2014. The total debt balance at the end of 2015 was $19.9 billion as compared to $18.8 billion at the end of 2014. The higher debt balance of approximately $1.1 billion was an increase in commercial paper for general corporate purposes, primarily the stock repurchase program.
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

                
 
17
                                



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 were used for general corporate purposes.

Income Before Tax by Segment
Income before tax by segment of business were as follows:
 
 
 
 
 
 
Percent of Segment Sales
(Dollars in Millions)
 
2015
 
2014
 
2015
 
2014
Consumer
 
$
1,787

 
1,941

 
13.2
%
 
13.4
Pharmaceutical
 
11,734

 
11,696

 
37.3

 
36.2
Medical Devices
 
6,826

 
7,953

 
27.2

 
28.9
Total (1)
 
20,347

 
21,590

 
29.0

 
29.0
Less: Expenses not allocated to segments (2)
 
1,151

 
1,027

 
 

 
 
Earnings before provision for taxes on income
 
$
19,196

 
20,563

 
27.4
%
 
27.7

(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 2015, the Consumer segment income before tax as a percent to sales was 13.2%, versus 13.4% in 2014, primarily due to lower divestiture gains in 2015 versus 2014. In 2015, the Consumer segment tax included a gain of $0.3 billion from divestitures, primarily the divestiture of the SPLENDA® brand. In 2014, the Consumer segment included a gain of $0.5 billion from divestitures, primarily the divestiture of the K-Y® brand. In 2014, the Consumer segment income before tax as a percent to sales was 13.4%, flat to the prior year.

Pharmaceutical Segment: In 2015, the Pharmaceutical segment income before tax as a percent to sales was 37.3% versus 36.2% in 2014. The favorable income before tax was primarily due to higher gains recognized in 2015 partially offset by a sales decline of OLYSIO®/SOVRIAD®(simeprevir), increased investment spending and negative currency impacts as compared to 2014. Included in 2015 was a gain of $1.0 billion on the U.S. divestiture of NUCYNTA®, as well as receipt of a contingent payment and a positive adjustment to previous reserve estimates, including Managed Medicaid rebates. Additionally, the Pharmaceutical segment income before tax in 2014 was negatively impacted by $0.2 billion for an additional year of the Branded Prescription Drug Fee and higher intangible asset amortization expense of $0.3 billion primarily related to the write-down of INCIVO® (telaprevir).
In 2014, the Pharmaceutical segment income before tax as a percent to sales was 36.2% versus 32.6% in 2013. The favorable income before tax 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.

Medical Devices Segment: In 2015, the Medical Devices segment income before tax as a percent to sales was 27.2% versus 28.9% in 2014 primarily due to a restructuring charge of $0.6 billion, an intangible asset write-down of $0.3 billion related to Acclarent, and lower gains of $0.5 billion on divestitures as compared to 2014. In 2015, the Medical Devices segment included gains of $1.4 billion, primarily for the divestiture of the Cordis business versus a gain of $1.9 billion recorded in 2014 for the divestiture of the Ortho-Clinical Diagnostics business. The 2015 income before tax was favorably impacted by lower net litigation expense of $0.9 billion, which included a gain from the litigation settlement agreement of $0.6 billion with Guidant, and lower Synthes integration costs of $0.6 billion in 2015 as compared to 2014.

                
 
18
                                



In 2014, Medical Devices segment income before tax as a percent to sales was 28.9% versus 18.5% in 2013. The favorable income before tax 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.

Restructuring: The Company announced restructuring actions in its Medical Devices segment that are expected to result in annualized pre-tax cost savings of $800 million to $1.0 billion, the majority of which is expected to be realized by the end of 2018, including approximately $200 million savings in 2016. The savings will provide the Company with added flexibility and resources to fund investment in new growth opportunities and innovative solutions for customers and patients. The Company estimates that, in connection with its plans, it will record pre-tax restructuring charges of approximately $2.0 billion to $2.4 billion, most of which are expected to be incurred by 2017. In the fiscal fourth quarter of 2015, the Company recorded a pre-tax charge of $0.6 billion, of which $81 million is included in cost of products sold. See Note 22 to the Consolidated Financial Statements for additional details related to the restructuring.

Provision for Taxes on Income:  The worldwide effective income tax rate was 19.7% in 2015, 20.6% in 2014 and 10.6% in 2013. The 2015 effective tax rate decrease of 0.9% as compared to 2014 was primarily attributable to the increases in taxable income in lower tax jurisdictions relative to higher tax jurisdictions and a tax benefit resulting from a restructuring of international affiliates. Additionally, the 2014 effective tax rate was affected by the items mentioned below.
The increase in the 2014 effective tax rate, as compared to 2013, was attributable to the following: the divestiture of the Ortho-Clinical Diagnostics business at an approximate 44% effective tax rate, litigation accruals at low tax rates, the mix of earnings into higher tax jurisdictions, primarily the U.S., the accrual of an additional year of the Branded Prescription Drug Fee, which is not tax deductible, and additional U.S. tax expense related to a planned increase in dividends from current year foreign earnings as compared to the prior year. These increases to the 2014 effective tax rate were partially offset by a tax benefit of $0.4 billion associated with the Conor Medsystems divestiture.
The 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.
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.

Liquidity and Capital Resources
Liquidity & Cash Flows
Cash and cash equivalents were $13.7 billion at the end of 2015 as compared to $14.5 billion at the end of 2014. The primary sources and uses of cash that contributed to the $0.8 billion decrease were approximately $19.3 billion of cash generated from operating activities offset by $7.7 billion net cash used by investing activities, and $10.8 billion net cash used by financing activities, and $1.5 billion due to the effect on exchange rate changes on cash and cash equivalents. In addition, the Company had $24.6 billion in marketable securities at the end of 2015 and $18.6 billion at the end of 2014. See Note 1 to the Consolidated Financial Statements for additional details on cash, cash equivalents and marketable securities.
Cash flow from operations of $19.3 billion was the result of $15.4 billion of net earnings and $5.4 billion of non-cash charges and other adjustments for depreciation and amortization, stock-based compensation and assets write-downs, primarily related to Acclarent and Venezuela write-downs, reduced by $2.6 billion from net gains on sale of assets/businesses, and $1.2 billion related to deferred taxes, accounts receivable and inventories. Additional sources of operating cash flow of $2.2 billion resulted from a decrease in other current and non-current assets and an increase in other current and non-current liabilities.
Investing activities use of $7.7 billion was primarily for net purchases of investments in marketable securities of $6.7 billion, additions to property, plant and equipment of $3.5 billion, and acquisitions, net of cash acquired of $1.0 billion, partially offset by $3.5 billion of proceeds from the disposal of assets/businesses.
Financing activities use of $10.8 billion was primarily for dividends to shareholders of $8.2 billion and $5.3 billion for the repurchase of common stock. Financing activities also included a source of $1.4 billion from net proceeds of short and long-term debt and $1.3 billion of net proceeds from stock options exercised and associated tax benefits.
On October 13, 2015, the Company announced that its Board of Directors approved a share repurchase program, authorizing the Company to purchase up to $10.0 billion of the Company's shares of common stock. As of January 3, 2016, $1.0 billion has been repurchased under the program. 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 and access to the capital markets. The previous share repurchase program approved on July 21, 2014, authorizing the Company to purchase up to $5.0 billion of the Company's shares of common stock, was completed on April 28, 2015.

                
 
19
                                



In 2015, the Company continued to have access to liquidity through the commercial paper market. The Company has a shelf registration with the U.S. Securities and Exchange Commission that enables the Company to issue debt securities and warrants to purchase debt securities on a timely basis. 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 capital markets will provide sufficient resources to fund operating needs in 2016.
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 $1.3 billion as of January 3, 2016 and $1.8 billion as of December 28, 2014. Approximately $0.8 billion as of January 3, 2016 and approximately $1.1 billion as of December 28, 2014 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 $0.5 billion at January 3, 2016 and $0.7 billion at December 28, 2014. The Company continues to receive payments from these customers and, in some cases, late payments with interest. 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 January 3, 2016 market rates would increase the unrealized value of the Company’s forward contracts by $15 million. Conversely, a 10% depreciation of the U.S. Dollar from the January 3, 2016 market rates would decrease the unrealized value of the Company’s forward contracts by $18 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 $115 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 investment grade 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 invests in both fixed rate and floating rate interest earning securities which carry a degree of interest rate risk. The fair market value of fixed rate securities may be adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall. A 1% (100 basis points) change in spread on the Company’s interest rate sensitive investments would either increase or decrease the unrealized value of cash equivalents and current marketable securities by approximately $314 million.
The Company has access to substantial sources of funds at numerous banks worldwide. In September 2015, the Company secured a new 364-day Credit Facility. Total credit available to the Company approximates $10 billion, which expires on September 15, 2016. 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 2015 and 2014 were $19.9 billion and $18.8 billion, respectively. The increase in borrowings between 2015 and 2014 was a result of financing for the Company's share repurchase program. In 2015, net cash

                
 
20
                                



(cash and current marketable securities, net of debt) was $18.5 billion compared to net cash of $14.3 billion in 2014. Total debt represented 21.8% of total capital (shareholders’ equity and total debt) in 2015 and 21.2% of total capital in 2014. Shareholders’ equity per share at the end of 2015 was $25.82 compared to $25.06 at year-end 2014, an increase of 3.0%.
A summary of borrowings can be found in Note 7 to the Consolidated Financial Statements.

Contractual Obligations and Commitments
The Company’s contractual obligations are primarily for leases, debt and unfunded retirement plans. 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 January 3, 2016 (see Notes 7, 10 and 16 to the Consolidated Financial Statements for further details):

(Dollars in Millions)
 
Debt Obligations
 
Interest on
Debt Obligations
 
Unfunded
Retirement Plans
 
Operating Leases
 
Total
2016
 
$
2,104

 
586

 
76

 
224

 
2,990

2017
 
1,790

 
554

 
77

 
194

 
2,615

2018
 
1,501

 
490

 
82

 
136

 
2,209

2019
 
1,587

 
446

 
88

 
90

 
2,211

2020
 
683

 
373

 
93

 
74

 
1,223

After 2020
 
7,296

 
4,303

 
559

 
109

 
12,267

Total
 
$
14,961

 
6,752

 
975

 
827

 
23,515


For tax matters, see Note 8 to the Consolidated Financial Statements.
Dividends
The Company increased its dividend in 2015 for the 53rd consecutive year. Cash dividends paid were $2.95 per share in 2015 compared with dividends of $2.76 per share in 2014, and $2.59 per share in 2013. The dividends were distributed as follows:
 
2015
 
2014
 
2013
First quarter
$
0.70

 
0.66

 
0.61

Second quarter
0.75

 
0.70

 
0.66

Third quarter
0.75

 
0.70

 
0.66

Fourth quarter
0.75

 
0.70

 
0.66

Total
$
2.95

 
2.76

 
2.59

On January 4, 2016, the Board of Directors declared a regular quarterly cash dividend of $0.75 per share, payable on March 8, 2016, to shareholders of record as of February 23, 2016. 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.

                
 
21
                                



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 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 2015, 2014 and 2013.
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 1% of total revenues and are included in sales to customers. These arrangements are evaluated to determine the appropriate amounts to be deferred or recorded as a reduction of revenue.
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.

                
 
22
                                




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 January 3, 2016 and December 28, 2014.

Consumer Segment
(Dollars in Millions)
 
Balance at
Beginning of Period
 
Accruals
 
Payments/Credits
 
Balance at
End of Period
2015
 
 

 
 

 
 

 
 

Accrued rebates (1)
 
$
122

 
581

 
(564
)
 
139

Accrued returns
 
77

 
84

 
(107
)
 
54

Accrued promotions
 
241

 
1,846

 
(1,675
)
 
412

Subtotal
 
$
440

 
2,511

 
(2,346
)
 
605

Reserve for doubtful accounts
 
18

 
5

 
(5
)
 
18

Reserve for cash discounts
 
22

 
206

 
(211
)
 
17

Total
 
$
480

 
2,722

 
(2,562
)
 
640

 
 
 
 
 
 
 
 
 
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

(1) 
Includes reserve for customer rebates of $31 million at January 3, 2016 and $37 million at December 28, 2014, recorded as a contra asset.
Pharmaceutical Segment
(Dollars in Millions)
 
Balance at
Beginning of Period
 
Accruals
 
Payments/Credits
 
Balance at
End of Period
2015
 
 

 
 

 
 

 
 

Accrued rebates (1)
 
$
2,717

 
10,449

 
(9,715
)
 
3,451

Accrued returns
 
422

 
52

 
(70
)
 
404

Accrued promotions
 
34

 
127

 
(150
)
 
11

Subtotal
 
$
3,173

 
10,628

 
(9,935
)
 
3,866

Reserve for doubtful accounts
 
41

 
30

 
(25
)
 
46

Reserve for cash discounts
 
51

 
625

 
(613
)
 
63

Total
 
$
3,265

 
11,283

 
(10,573
)
 
3,975

 
 
 
 
 
 
 
 
 
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

(1) 
Includes reserve for customer rebates of $64 million at January 3, 2016 and $70 million* at December 28, 2014, recorded as a contra asset. *Prior year amount has been reclassified to conform to current year presentation.

                
 
23
                                



Medical Devices Segment
(Dollars in Millions)
 
Balance at
Beginning of Period
 
Accruals
 
Payments/Credits
 
Balance at
End of Period
2015
 
 

 
 

 
 

 
 

Accrued rebates(1)
 
$
844

 
5,216

 
(4,871
)
 
1,189

Accrued returns
 
188

 
556

 
(505
)
 
239

Accrued promotions
 
53

 
95

 
(101
)
 
47

Subtotal
 
$
1,085

 
5,867

 
(5,477
)
 
1,475

Reserve for doubtful accounts
 
216

 
13

 
(25
)
 
204

Reserve for cash discounts
 
16

 
877

 
(873
)
 
20

Total
 
$
1,317

 
6,757

 
(6,375
)
 
1,699

 
 
 
 
 
 
 
 
 
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

(1) 
Includes reserve for customer rebates of $411 million at January 3, 2016 and $354 million at December 28, 2014, 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 January 3, 2016 and December 28, 2014, the cumulative amounts of undistributed international earnings were approximately $58.0 billion and $53.4 billion, respectively. At January 3, 2016 and December 28, 2014, the Company's foreign subsidiaries held balances of cash, cash equivalents and marketable securities in the amounts of $38.2 billion and $32.9 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