- Review the information provided for Johnson & Johnson in the Financial Statement Analysis Case located in the Using Your Judgement section in the Chapter 10 End of Chapter Material in your eText.
- Answer the four questions.
- Financial Statement Analysis Case
Johnson & Johnson
Johnson & Johnson, the world’s leading and most diversified healthcare corporation, serves its customers through specialized worldwide franchises. Each of its franchises consists of a number of companies throughout the world that focus on a particular healthcare market, such as surgical sutures, consumer pharmaceuticals, or contact lenses. Information related to its property, plant, and equipment in its 2014 annual report is shown in the notes to the financial statements below.
1. Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at cost. The Company utilizes the straight-line method of depreciation over the estimated useful lives of the assets:
Building and building equipment 20-40 years
Land and leasehold improvements 10-20 years
Machinery and equipment 2-13 years
4. Property, Plant and Equipment
At the end of 2014 and 2013, property, plant and equipment at cost and accumulated depreciation were:
(dollars in millions) 2014 2013
Land and land improvements $833 $885
Buildings and building equipment 10,046 10,423
Machinery and equipment 22,206 22,527
Construction in progress 3,600 3,298
Less accumulated depreciation 20,559 20,423
The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2014, 2013 and 2012 was $115 million, $105 million and $115 million, respectively. Depreciation expense, including the amortization of capitalized interest in 2014, 2013 and 2012, was $2.5 billion, $2.7 billion and $2.5 billion, respectively.
Johnson & Johnson provided the following selected information in its 2014 cash flow statement. Johnson & Johnson 2014 Annual Report
Consolidated Financial Statements (excerpts)
Net cash flows from operating activities $18,471
Cash flows from investing activities
Additions to property, plant and equipment (3,714)
Proceeds from the disposal of assets 4,631
Acquisitions, net of cash acquired (2,129)
Purchases of investments (34,913)
Sales of investments 24,119
Other (primarily intangibles) (299)
Net cash used by investing activities (12,305)
Cash flows from financing activities
Dividends to shareholders (7,768)
Repurchase of common stock (7,124)
Proceeds from short-term debt 1,863
Retirement of short-term debt (1,267)
Proceeds from long-term debt 2,098
Retirement of long-term debt (1,844)
Proceeds from the exercise of stock options/excess tax benefits 1,782
Net cash used by financing activities (12,260)
Effect of exchange rate changes on cash and cash equivalents (310)
Increase in cash and cash equivalents (6,404)
Cash and cash equivalents, beginning of year (Note 1) 20,927
Cash and cash equivalents, end of year (Note 1) $14,523
Supplemental cash flow data
Cash paid during the year for:
Income taxes 3,536
(a) What was the cost of buildings and building equipment at the end of 2014?
(b) Does Johnson & Johnson use a conservative or liberal method to depreciate its property, plant, and equipment?
(c) What was the actual interest paid by the company in 2014?
(d) What is Johnson & Johnson’s free cash flow? From the information provided, comment on Johnson & Johnson’s financial flexibility.