Exercises: K, L, and M
1. il j. Consider Johnson & Johnson's "Other benefits" plans, as detailed on page 62 of the company's on the company's balance sheet? annual report What is the total obligation for other benefits at December 20071 is the other benefits plan under funded or over funded? Compare the funded status of the other benefits plan to that of the pension plan Speculate on why the funded status of the two plans differs so dramatically Analysis Pension trees and future cosmanagement to make a number of estimates about investment returns Consider Johnson & Johnson's retirement plan assets. Estimate the actual rate of return in percentage terms that the plan assets camed in 2007. How does that return compare to the expected return? During 2007. Johnson & Johnson changed the discount rate used to calculate its domestic projected retirement benefit obligation from 6% to 65%. How does this rate change affect the company's retirement obligation? ill. Johnson & Johnson now projects compensation rate increases of 4% for international plans. How does this compare to prior years? How did the rate change the company's pension expense in 20072 Calculate the combined retirement and other benefits expense over the past three years. See page 61). What general trend do you notice? Do you consider this trend persistent? That is, do you expect it to continue? il. Retirement and other benefits expense includes un operating component and a nonoperating component. Calculate both components for each of the three years. What trends do you notice in the components? Do you consider these trends persistent? il on Johnson & Johnson-Retirement Obligations Under current US GAAP. Johnson & Johnson includes on its balance sheet the net funded status of its retirement plans. Consider the balance sheet effects of instead including the gross assets of both the retirement plans and the other benefit plans and their respective gross obligations Use the table below to show how total assets and total liabilities on the balance sheet would be affected Gross amount thar would be added Ner amount Currently included Net amount that would be added Retirement and other benefit plan assets Retirement and other benefit plan liabilities Determine the amounts and ratios below using Johnson & Johnson's reported numbers. Then, recompute the amounts and ratios on a pro forma basis taking into account the restated assets and liabilities you calculated in part i above. For purposes of these calculations, use year-end balance sheet numbers and assume that the company's marginal tax rate, as approximated by the combined federal and state statutory rates is 35%. As reported Pro forma Total assets Total liabilities Liabilities to equity ratio Return on assets Return on equity it. in your opinion, which set of ratios better reflects the economic reality, the as reported or the pro forma ratios? Explain. Johnson & Johnson-Retirement Obligations Consolidated Balance Sheets Sandi 2007 Assets Current assets Cash and cash equivalents (Notes 1 and 14) Marketable securities Notes 1 and 14) Accounts receivable trade, less allowances for doubtful counts 5193 2006.5150) Inventories (Notes 1 and 2) Deferred taxes on income (Note B) Prepaid expenses and other receivables Total current assets $7,770 1.545 4,083 5.110 8,712 4889 2,094 3.196 2.609 3.467 29,945 22,975 Marketable securities, non-current (Notes and 14) Property, plant and equipment, net (Notes 1 and 3) Intangible assets, net (Notes 1 and 7) Goodwill net (Notes and 7) Deferred taxes on income (Note B) Other assets (Note 5) Total assets 2 14.105 14,640 14,123 4,889 3170 16 13.044 15.348 13.340 3,210 2.623 $80,954 70,556 Liabilities and Shareholders' Equity Current liabilities Loans and notes payable (Note 6) Accounts payable Accrued abilities Accrued rebates. returns and promotions Accrued salaries, wages and commissions Accrued taxes on income Total current liabilities 52.463 6.909 6,412 2,318 1,512 223 19,837 4.579 5.691 4,587 2.189 1391 724 19,161 Long-term debt (Note 6) Deferred taxes on income (Note 8) Employee related obligations (Notes 5 and 13) Other liabilities Total liabilities 7.074 1.493 5.402 3,829 2,014 1319 5,584 2.160 31,238 37,635 - Shareholders' equity Preferred stock - without par value Cauthorized and unissued 2,000,000 shares) Common stock - par value $1.00 per share (Note 20) Cauthorised 4,320,000,000 shares: Issued 3.119.843.000 shares) Accumulated other comprehensive income (Note 12) Retained earnings 3,120 (693) 55,280 57,707 3,120 02.118 49.290 50,292 Les common stock held in treasury, at cost (Note 20) (279.620,000 shares and 226,612,000 shares) Total shareholders' equity Tatal llabilities and shareholders' equity 14,388 43.319 10,974 39,318 $80.954 70,556 10XSON TOSION 2007 ANNUAL REPORT 214. Consolidated Statements of Earnings Johnson & Johnson and Subsidiaries Das Eiger Share te 2007 2006 2005 Sales to customers $61.095 53,324 50514 Cost of products sold 17,751 15.057 14,010 38,267 Gross profit Selling, marketing and administrative expenses Research expense Purchased in-process research and development (Note 17) Restructuring (Note 22) Interest income Interest expense, net of portion capitalized (Note 3) Other (income) expense, net 17,433 7,125 559 36,504 17,211 6,462 362 43,344 20,451 7,680 807 745 (452) 296 534 30,061 13,283 2,707 (829) 63 (671) 23,680 14,587 3,534 (487) 54 0214 23 388 13.116 3,056 $10,576 Earnings before provision for taxes on income Provision for taxes on income (Note 8) Net earnings Basic net earnings per share (Notes 1 and 19) Diluted net earnings per share (Notes 1 and 19) 11,053 10.060 $ 3.67 3.76 338 $ 3.63 3.73 3.35 Consolidated Statements of Equity 215 Johnson & Johnson and Subsidiaries Com SY Sel A (11) $32.535 10.060 0.793) (515) 3.120 (6.004 10,000 35,945 10.060 3.7991 1,485 369 (1,719 27 0323 203 1458 501 (1.920) (415) (415) 06) 26 165 (16) (415 (16) 26 165 26 165 (15) 9.805 Balance, January 2, 2005 Niet earning Cash dividends paid Employee stock compensation and stock option plans Conversion of subordinated debentures Repurchase of common stock Other comprehensive income, net of tax Currency translation adjustment Unrealized losses on securities Employee benefit plans Gains on derivatives & hedges Reclassification adjustment Total comprehensive income Note receivable from ESOP Balance, January 1, 2006 Net earnings Cash dividends paid Employee compensation and stock option plans Conversion of subordinated debentures Repurchase of common stock Other Other comprehensive income, net ofta Currency translation adjustment Unrealized losses on securities Employee benefit plans Losses on derivatives & hedges Reclassification adjustment Total comprehensive income 11 11 $38,710 11.053 (4267) (755) 3.120 (5.965) 11,053 42,310 11.053 14,267) 1.858 26 (6.722) 23 181 (10) 1,677 36 (6,7221 23 362 7109 (6) 362 (9) 34) CO 199 11.357 362 (9) 01.7100 (6) (2.118 3.120 (10.9740 $39,318 10,576 (4.6700 10,576 49,290 10,576 (4.6700 131 (4 Balance, December 31, 2006 Net earning Cashdvidends paid Employee compensation and stock option plans Conversion of subordinated debentures Repurchase of common stock Adoption of FIN 48 Other Other comprehensive income.net of tax Currency translation adjustment Unrealized gain on securities Employee benefit plans Losses on derivatives & hedges Reclassification adjustment Total comprehensive income 2,311 9 (5,607) 019) (24) 2,180 13 (5,607 (19) (24) 756 23 670 (50 786 23 670 654 786 23 670 154) 11.996 $43,319 55,280 3.120 (14.38) Balance, December 30, 2007 SON JONSSON TO ANNUAL PORT Johnson & Johnson and Subsidiaries Consolidated Statements of Cash Flows 2007 2006 2005 DEJO $ 10,576 2,777 698 807 678 (1,762) 22 11.053 2,177 659 559 10.060 2.093 540 362 (1,168) (14) (235) 30 (416) 14 2,642 (1351) 564 (699) (210) 1,750 (269) 410 (568) (396) (911) 542 343 15,249 14,248 11,799 (2,666) 522 (2.942) 230 (1388) 19,659) 7,988 368 (18,023) (467) (2632) 154 (987) (5.660) 9.187 341) (22) (6.139) (20,291) (279) Cash flows from operating activities Net earnings Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles Stock based compensation Purchased in process research and development Intangible asset write-down (NATRECOR) Deferred tax provision Accounts receivable allowances Changes in assets and liabilities, net of effects from acquisitions Increase in accounts receivable Decrease/Cincrease in inventories Increase/(decrease) In accounts payable and accrued abilities (increase)/decrease in other current and non-current assets Increase in other current and non-current liabilities Net cash flows from operating activities Cash flows from investing activities Additions to property, plant and equipment Proceeds from the disposal of assets Acquisitions, net of cash acquired (Note 17) Purchases of investments Sales of investments Other (primarily intangibles) Net cash used by investing activities Cash flows from financing activities Dividends to shareholders Repurchase of common stock Proceeds from short-term debt Retirement of short-term debt Proceeds from long-term debt Retirement of long-term debt Proceeds from the exercise of stock options/excess tax benefits Net cash used by financing act les Effect of exchange rate changes on cash and cash equivalents (Decrease]/increase in cash and cash equivalents Cash and cash equivalents, beginning of year (Note 1) Cash and cash equivalents, end of year (Note 1) Supplemental cash flow data Cash paid during the year for Interest Income taxes Supplemental schedule of noncash investing and financing activities Treasury stock isted for employee compensation and stock option plans, net of cash proceeds Conversion of debt Acquisitions Fair value of assets acquired Fair value of liabilities assumed Net cash paid for acquisitions Set Com (4.670) (5,607) 19,626 (21,691) 5,100 (18) 1.562 (5.698) (4,267) (6,722) 6,385 (2,633) 6 (13) 1.135 3.793) (1.717 1.215 (732) 6 (196) 774 (6,109) (4,443) 275 3,687 4.083 180 (11.972) 16.055 4,083 (225) 6.852 9.203 5 7,770 16,055 $ 314 4.099 143 4.250 151 3 429 5 738 9 622 26 818 369 $ 1620 (232) 19,306 (1.289) 1. 128 (140 $ 1.388 18,023 987 CONSOLIDATED TRACTAS STATEMENT -- 12. Accumulated Other Comprehensive Income The tax effect on the unrealized gin/Closses) on the equity Components of other comprehensive income/loss) consist of securities balance is an expense of $46 million, 533 million and the following $38 million in 2007, 2006 and 2005, respectively. The tax effect related to employee benefit plans was $349 million $891 milion To th All and $160 million in 2007 2006 and 2005, respectively. The tax (Tamil O effect on the gains/Closses) on derivatives and hedges are als Curry Epe De Car De Mon Saman Seri Panel of $24 million in 2007, and losses of $4 million and 511 milion Lar2.2005 50105 36 346) (150) (515) In 2006 and 2005, respectively. See Note 15 for additional 2005 changes Information relating to derivatives and hedging The currency translation adjustments are not currently Net dong due to hedong transactions adjusted for income taxes as they relate to permanent 112 investments in international subsidiaries Net amount reclassed tonering 53 Net 2005 changes (415) (16) 26 165 (240) 13. Pensions and Other Benefit Plans lan 2006 $520) 70 (320) 15 (755) The Company sponsors various retirement and pension plans, 2006 charges including defined benefit defined contribution and termination Net change due to indemnity plans, which cover most employees worldwide. The hedging transactions 12 Company also provides postretirement benefits, primarily health Net amount classed care, to all U.S. retired employees and their dependents 1 HP AS Many international employees are covered by government Net 2006 charge 362 (9) 0.7100 (6) 01 3631 sponsored programs and the cost to the Company is not significant Dec 31, 2005 50158) 61 02.030) 9 02.118) Retirement plan benefits are primarily based on the 2007 dages employee's compensation during the last three to five years Net change date before retirement and the number of years of service, Interna hedong bansactions (78) tional subsidiaries have plans under which funds are deposited Net amount recessed with trustees, annuities are purchased under group contracts toneaning 24 or reserves are provided Net 2007 changes 786 23 670 1425 The Company does not fund retiree health care benefits in Dec 30, 2007 5628 84 (1.360) (450 advance and has the right to modify these plans in the future The Company uses the date of its consolidated financial Total comprehensive income for 2007 includes reclassification statements (December 30, 2007 and December 31, 2006 adjustment gains of $7 million realized from the sale of equity respectively as the measurement date for all U.S. and interna securities and the associated tax expense of $2 million tional retirement and other benefit plans In September 2006 Statement of Financial Accounting Total other comprehensive income for 2006 includes reclassifi. Standards (SFAS)No 158, Employers Accounting for Defined cation adjustment gains of $13 million realized from the sale of Benefit Pension and Other Postretirement Plans was issued and equity Securities and the associated tax expense of $4 million amends further the disclosure requirements for pensions and other postretirement benefits. This statement was an amend- Total other comprehensive income for 2005 includes reclassifi- ment of FA58 Statements No. 87, 88, 106 and 132(R). The cation adjustment gains of $23 million realised from the sale of incremental effect of applying FASB No 158 was a $1.7 bilion equity securities and the associated tax expense of 58 million reduction in Shareholder's Equity, net of deferred taxes (23) - (54 (693) TORTORA TOHNSON 2007 ANNUAL READY - Net periodic benefit costs for the Company's defined benefit retirement plans and other benefit plans for 2007 2006 and 2005 include the following components 2008 56 87 3) 2007 $ 597 656 (809) 10 1 186 5 $ 646 Service cast Interest cost Expected to turn on planets Amortization of prior service cost Amortization of net transition Recognized actuarial losses Curtainments and settlements Net period bereitost Others 2007 2004 $140 122 149 136 (2) (3) 7) 077 2006 552 570 (701) 10 (3) 251 4 685 2005 462 488 (579) 12 (2) 219 2 602 66 74 25 $346 322 158 The net periodic benefit cost attributable to US retirement plans was $379 million in 2007, $423 million in 2006 and $370 million in 2005 Amounts expected to be recognized in net periodic benefit cost Diars Maari in the coming year for the Company's defined benefit retirement Amortization of red transition obligation $ 2 plans and other postretirement plans Amortization of retactral losses 132 Amortization of prior service cost The weighted-average assumptions in the following table represent the rates used to develop the actuarial present value of projected benefit obligation for the year listed and also the net periodic benefit cost for the following year. Other Benet 200 2006 2007 2005 2006 6.50% 6.00 5.75 6.50 6.00 5.75 Dalae US. Benefit Plans Discountate Expected long term rate of return on plants Rate of increase in compensation levels International Benefit Plans Discountate Expected long-term rate of sem on plan assets Rate of increase in compensation levels 9.00 4.50 9.00 4.50 9.00 4.50 9.00 4:50 9.00 4.50 9.00 4.50 5.50% 5.00 4.75 6.50% 6.00 500 8.25 4.00 8.00 3.75 8.25 3.75 4.50 4.50 4.25 The Company's discount rates are determined by considering current yield curves representing high quality, long-term fed income instru- ments. The resulting discount rates are consistent with the duration of plan liabilities The expected long-term rate of return on plan assets assumption is determined using a building block approach.com sidering historical averages and real returns of each asset class In certain countries, where historical returns are not meaningful consideration is given to local market expectations at long-term returns The following table displays the assumed health care cost trend rates for all individuals Health Care 2002 2006 Health care cost trend rate med for next year 9.009 9.00 Rate to which the cost trend rate issued to decise Cultimate trend 5.00N 4.50 Year the teaches the ultimate brendate 2014 2012 A one-percentage point change in assumed health care cost trend rates would have the following effect: Dieta OP Health Care Plans Total interest and service cost Postribendblation $ 35 320 5 (2) (259) WOTES 1 CONSOLIDARNANCEAL STATEMY -210 140 743 The following table sets forth information related to the benefit obligation and the fair value of plan assets at year end 2007 and 2006 for the Company's defined benefit retirement plans and other postretirement plans Other it Dutes. Mi 2004 2002 2008 Change in Benefit Obligation Projeded benefit obligation-beginning of year $11.660 10,171 3 2.668 2,325 Service cost 597 552 122 Interest cost 656 570 149 136 Plan participant contributions 62 47 Amendments 14 7 Actuarial losses (876) () 130 Divestitures & acquisitions 79 B 101 Curtaimentssettlements (46) C) Benefits paid from plan (481) (402) (255) (147 Effect of exchange rates 337 378 12 1 Projected benefit obligation -- end of year $12,002 11,660 $ 2,721 2,668 Change in Plan Assets Pats at fake value-beginning of year 59,538 8,103 30 34 Actual retum on plan assets 966 2 Company contributions 317 259 250 141 Plan participant contributions 62 47 Settlements (38) (7) Divestitures & acquisitions 55 300 Bereits paid from plan assets (481) (402) (255) (147) Effect of exchange rates 273 267 Passets at far value -- end of year $10,469 9.538 $ 29 30 Finded statist-end of year 5 (1.533) (2.122) S(2.692) (2,638) Amounts Recognized in the Company's Balance Sheet consist of the following Non current assets $ 481 Limetables (43) (26) (262) (81) Non currentlisbilities (1.970 (2.355) (2430) (2,557) Tocopied in the consolidated balance sheet -- end of your $ (1,533) (2.122) 512.692) (2,638) Amounts Recognized in Accumulated Other Comprehensive Income consist of the following Nossain $ 1.022 1,996 $1,013 1.046 Prior vice cost credit) 51 44 (36) (42) Urcoga ne transition asset 7 7 Total before taxefects $ 1,085 2,047 S 977 1,004 Accumulated Benefit Obligations - end of year $10,282 9,804 Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income $ el periodic benefit cost 646 5 346 (555) 11 Net aaral loss (pin) (435) (13) Amortion of net actual loss (9) 34) Prior services 14 8 Amortization of prior service cost 3 Effect of exchange rates $ (962) $ (27) Total recognized in other comprehensive income before tax $ (316) $319 Total recognized inne periodic bene cost and other comprehensive income 259 Plans with accumulated benefit obligations in excess of plan assets consist of the following Acument obligation Thojsted bedt obligation 200 $14.914) is 233) 3,735 2008 3,085) 03.561) 1,650 -220 Strategic asset allocations are determined by country, based on allocations are consistent with these types of plans. Emphasis is the nature of the liabilities and considering the demographic placed on diversifying equities on a broad basis combined with composition of the plan participants (average age, years of ser currency matching of the fixed income assets. vice and active versus retiree status). The Company's plans are considered non-mature plans and the long-term strategic asset The following table displays the projected future benefit payments from the Company's retirement and other benefit plans Dan Mo 2008 2004 2010 201 2002 200200 Projected future benefit payments Retirement plans $457 472 507 542 564 3,467 Other benefit plans-gross $274 180 184 188 192 1,080 Medicare rebites (9) (11) (12) (13) (14) (94) Other benefit plant-net $265 $169 $172 $175 $178 $986 The Company was not required to fund its US retirement plans appropriate to meet the long-term obligations of the plans in in 2007 and is not required, nor does it anticipate funding in certain countries other than the United States, the funding of 2008 to meet minimum statutory funding requirements. Inter pension plans is not a common practice as funding provides no national plans are funded in accordance with local regulations economic benefit. Consequently the Company has several pen- Additional discretionary contributions are made when deemed sion plans which are not funded The following table displays the projected future minimum contributions to the Company's U.S. and international untunded retirement plans. These amounts do not include any discretionary contributions that the Company may elect to make in the future. Colin 2008 2008 2010 2011 2012 2002 Projected future contributions Unfunded US. retirement plans $28 30 33 35 38 238 Unfunded international retirement plans 523 25 28 29 31 178 Tag 2008 The Company's retirement plan asset allocation at the end of 2007 and 2006 and target allocations for 2008 are as follows: Percet of Mantels 2007 2006 U.S. Retirement Plans Equity securities 7996 78% Debt securities 21 22 Totalplan assets 100% 100% International Retirement Plans Equity securities 67% 679 Det securities 32 32 Real estate and other 1 1 Total plaassets 100% 100% 75% 25 100% 67% 33 100% The Company's other benefit plans are unfunded except for U.S. life insurance contract assets of $29 million and 30 million at December 30, 2007 and December 31, 2006, respectively The fair value of Johnson & Johnson common stock directly held in plan assets was $462 million (4.4% of total plan assets) at December 30, 2007 and $452 million (4.9% of total plan assets) at December 31, 2006, 1. il j. Consider Johnson & Johnson's "Other benefits" plans, as detailed on page 62 of the company's on the company's balance sheet? annual report What is the total obligation for other benefits at December 20071 is the other benefits plan under funded or over funded? Compare the funded status of the other benefits plan to that of the pension plan Speculate on why the funded status of the two plans differs so dramatically Analysis Pension trees and future cosmanagement to make a number of estimates about investment returns Consider Johnson & Johnson's retirement plan assets. Estimate the actual rate of return in percentage terms that the plan assets camed in 2007. How does that return compare to the expected return? During 2007. Johnson & Johnson changed the discount rate used to calculate its domestic projected retirement benefit obligation from 6% to 65%. How does this rate change affect the company's retirement obligation? ill. Johnson & Johnson now projects compensation rate increases of 4% for international plans. How does this compare to prior years? How did the rate change the company's pension expense in 20072 Calculate the combined retirement and other benefits expense over the past three years. See page 61). What general trend do you notice? Do you consider this trend persistent? That is, do you expect it to continue? il. Retirement and other benefits expense includes un operating component and a nonoperating component. Calculate both components for each of the three years. What trends do you notice in the components? Do you consider these trends persistent? il on Johnson & Johnson-Retirement Obligations Under current US GAAP. Johnson & Johnson includes on its balance sheet the net funded status of its retirement plans. Consider the balance sheet effects of instead including the gross assets of both the retirement plans and the other benefit plans and their respective gross obligations Use the table below to show how total assets and total liabilities on the balance sheet would be affected Gross amount thar would be added Ner amount Currently included Net amount that would be added Retirement and other benefit plan assets Retirement and other benefit plan liabilities Determine the amounts and ratios below using Johnson & Johnson's reported numbers. Then, recompute the amounts and ratios on a pro forma basis taking into account the restated assets and liabilities you calculated in part i above. For purposes of these calculations, use year-end balance sheet numbers and assume that the company's marginal tax rate, as approximated by the combined federal and state statutory rates is 35%. As reported Pro forma Total assets Total liabilities Liabilities to equity ratio Return on assets Return on equity it. in your opinion, which set of ratios better reflects the economic reality, the as reported or the pro forma ratios? Explain. Johnson & Johnson-Retirement Obligations Consolidated Balance Sheets Sandi 2007 Assets Current assets Cash and cash equivalents (Notes 1 and 14) Marketable securities Notes 1 and 14) Accounts receivable trade, less allowances for doubtful counts 5193 2006.5150) Inventories (Notes 1 and 2) Deferred taxes on income (Note B) Prepaid expenses and other receivables Total current assets $7,770 1.545 4,083 5.110 8,712 4889 2,094 3.196 2.609 3.467 29,945 22,975 Marketable securities, non-current (Notes and 14) Property, plant and equipment, net (Notes 1 and 3) Intangible assets, net (Notes 1 and 7) Goodwill net (Notes and 7) Deferred taxes on income (Note B) Other assets (Note 5) Total assets 2 14.105 14,640 14,123 4,889 3170 16 13.044 15.348 13.340 3,210 2.623 $80,954 70,556 Liabilities and Shareholders' Equity Current liabilities Loans and notes payable (Note 6) Accounts payable Accrued abilities Accrued rebates. returns and promotions Accrued salaries, wages and commissions Accrued taxes on income Total current liabilities 52.463 6.909 6,412 2,318 1,512 223 19,837 4.579 5.691 4,587 2.189 1391 724 19,161 Long-term debt (Note 6) Deferred taxes on income (Note 8) Employee related obligations (Notes 5 and 13) Other liabilities Total liabilities 7.074 1.493 5.402 3,829 2,014 1319 5,584 2.160 31,238 37,635 - Shareholders' equity Preferred stock - without par value Cauthorized and unissued 2,000,000 shares) Common stock - par value $1.00 per share (Note 20) Cauthorised 4,320,000,000 shares: Issued 3.119.843.000 shares) Accumulated other comprehensive income (Note 12) Retained earnings 3,120 (693) 55,280 57,707 3,120 02.118 49.290 50,292 Les common stock held in treasury, at cost (Note 20) (279.620,000 shares and 226,612,000 shares) Total shareholders' equity Tatal llabilities and shareholders' equity 14,388 43.319 10,974 39,318 $80.954 70,556 10XSON TOSION 2007 ANNUAL REPORT 214. Consolidated Statements of Earnings Johnson & Johnson and Subsidiaries Das Eiger Share te 2007 2006 2005 Sales to customers $61.095 53,324 50514 Cost of products sold 17,751 15.057 14,010 38,267 Gross profit Selling, marketing and administrative expenses Research expense Purchased in-process research and development (Note 17) Restructuring (Note 22) Interest income Interest expense, net of portion capitalized (Note 3) Other (income) expense, net 17,433 7,125 559 36,504 17,211 6,462 362 43,344 20,451 7,680 807 745 (452) 296 534 30,061 13,283 2,707 (829) 63 (671) 23,680 14,587 3,534 (487) 54 0214 23 388 13.116 3,056 $10,576 Earnings before provision for taxes on income Provision for taxes on income (Note 8) Net earnings Basic net earnings per share (Notes 1 and 19) Diluted net earnings per share (Notes 1 and 19) 11,053 10.060 $ 3.67 3.76 338 $ 3.63 3.73 3.35 Consolidated Statements of Equity 215 Johnson & Johnson and Subsidiaries Com SY Sel A (11) $32.535 10.060 0.793) (515) 3.120 (6.004 10,000 35,945 10.060 3.7991 1,485 369 (1,719 27 0323 203 1458 501 (1.920) (415) (415) 06) 26 165 (16) (415 (16) 26 165 26 165 (15) 9.805 Balance, January 2, 2005 Niet earning Cash dividends paid Employee stock compensation and stock option plans Conversion of subordinated debentures Repurchase of common stock Other comprehensive income, net of tax Currency translation adjustment Unrealized losses on securities Employee benefit plans Gains on derivatives & hedges Reclassification adjustment Total comprehensive income Note receivable from ESOP Balance, January 1, 2006 Net earnings Cash dividends paid Employee compensation and stock option plans Conversion of subordinated debentures Repurchase of common stock Other Other comprehensive income, net ofta Currency translation adjustment Unrealized losses on securities Employee benefit plans Losses on derivatives & hedges Reclassification adjustment Total comprehensive income 11 11 $38,710 11.053 (4267) (755) 3.120 (5.965) 11,053 42,310 11.053 14,267) 1.858 26 (6.722) 23 181 (10) 1,677 36 (6,7221 23 362 7109 (6) 362 (9) 34) CO 199 11.357 362 (9) 01.7100 (6) (2.118 3.120 (10.9740 $39,318 10,576 (4.6700 10,576 49,290 10,576 (4.6700 131 (4 Balance, December 31, 2006 Net earning Cashdvidends paid Employee compensation and stock option plans Conversion of subordinated debentures Repurchase of common stock Adoption of FIN 48 Other Other comprehensive income.net of tax Currency translation adjustment Unrealized gain on securities Employee benefit plans Losses on derivatives & hedges Reclassification adjustment Total comprehensive income 2,311 9 (5,607) 019) (24) 2,180 13 (5,607 (19) (24) 756 23 670 (50 786 23 670 654 786 23 670 154) 11.996 $43,319 55,280 3.120 (14.38) Balance, December 30, 2007 SON JONSSON TO ANNUAL PORT Johnson & Johnson and Subsidiaries Consolidated Statements of Cash Flows 2007 2006 2005 DEJO $ 10,576 2,777 698 807 678 (1,762) 22 11.053 2,177 659 559 10.060 2.093 540 362 (1,168) (14) (235) 30 (416) 14 2,642 (1351) 564 (699) (210) 1,750 (269) 410 (568) (396) (911) 542 343 15,249 14,248 11,799 (2,666) 522 (2.942) 230 (1388) 19,659) 7,988 368 (18,023) (467) (2632) 154 (987) (5.660) 9.187 341) (22) (6.139) (20,291) (279) Cash flows from operating activities Net earnings Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles Stock based compensation Purchased in process research and development Intangible asset write-down (NATRECOR) Deferred tax provision Accounts receivable allowances Changes in assets and liabilities, net of effects from acquisitions Increase in accounts receivable Decrease/Cincrease in inventories Increase/(decrease) In accounts payable and accrued abilities (increase)/decrease in other current and non-current assets Increase in other current and non-current liabilities Net cash flows from operating activities Cash flows from investing activities Additions to property, plant and equipment Proceeds from the disposal of assets Acquisitions, net of cash acquired (Note 17) Purchases of investments Sales of investments Other (primarily intangibles) Net cash used by investing activities Cash flows from financing activities Dividends to shareholders Repurchase of common stock Proceeds from short-term debt Retirement of short-term debt Proceeds from long-term debt Retirement of long-term debt Proceeds from the exercise of stock options/excess tax benefits Net cash used by financing act les Effect of exchange rate changes on cash and cash equivalents (Decrease]/increase in cash and cash equivalents Cash and cash equivalents, beginning of year (Note 1) Cash and cash equivalents, end of year (Note 1) Supplemental cash flow data Cash paid during the year for Interest Income taxes Supplemental schedule of noncash investing and financing activities Treasury stock isted for employee compensation and stock option plans, net of cash proceeds Conversion of debt Acquisitions Fair value of assets acquired Fair value of liabilities assumed Net cash paid for acquisitions Set Com (4.670) (5,607) 19,626 (21,691) 5,100 (18) 1.562 (5.698) (4,267) (6,722) 6,385 (2,633) 6 (13) 1.135 3.793) (1.717 1.215 (732) 6 (196) 774 (6,109) (4,443) 275 3,687 4.083 180 (11.972) 16.055 4,083 (225) 6.852 9.203 5 7,770 16,055 $ 314 4.099 143 4.250 151 3 429 5 738 9 622 26 818 369 $ 1620 (232) 19,306 (1.289) 1. 128 (140 $ 1.388 18,023 987 CONSOLIDATED TRACTAS STATEMENT -- 12. Accumulated Other Comprehensive Income The tax effect on the unrealized gin/Closses) on the equity Components of other comprehensive income/loss) consist of securities balance is an expense of $46 million, 533 million and the following $38 million in 2007, 2006 and 2005, respectively. The tax effect related to employee benefit plans was $349 million $891 milion To th All and $160 million in 2007 2006 and 2005, respectively. The tax (Tamil O effect on the gains/Closses) on derivatives and hedges are als Curry Epe De Car De Mon Saman Seri Panel of $24 million in 2007, and losses of $4 million and 511 milion Lar2.2005 50105 36 346) (150) (515) In 2006 and 2005, respectively. See Note 15 for additional 2005 changes Information relating to derivatives and hedging The currency translation adjustments are not currently Net dong due to hedong transactions adjusted for income taxes as they relate to permanent 112 investments in international subsidiaries Net amount reclassed tonering 53 Net 2005 changes (415) (16) 26 165 (240) 13. Pensions and Other Benefit Plans lan 2006 $520) 70 (320) 15 (755) The Company sponsors various retirement and pension plans, 2006 charges including defined benefit defined contribution and termination Net change due to indemnity plans, which cover most employees worldwide. The hedging transactions 12 Company also provides postretirement benefits, primarily health Net amount classed care, to all U.S. retired employees and their dependents 1 HP AS Many international employees are covered by government Net 2006 charge 362 (9) 0.7100 (6) 01 3631 sponsored programs and the cost to the Company is not significant Dec 31, 2005 50158) 61 02.030) 9 02.118) Retirement plan benefits are primarily based on the 2007 dages employee's compensation during the last three to five years Net change date before retirement and the number of years of service, Interna hedong bansactions (78) tional subsidiaries have plans under which funds are deposited Net amount recessed with trustees, annuities are purchased under group contracts toneaning 24 or reserves are provided Net 2007 changes 786 23 670 1425 The Company does not fund retiree health care benefits in Dec 30, 2007 5628 84 (1.360) (450 advance and has the right to modify these plans in the future The Company uses the date of its consolidated financial Total comprehensive income for 2007 includes reclassification statements (December 30, 2007 and December 31, 2006 adjustment gains of $7 million realized from the sale of equity respectively as the measurement date for all U.S. and interna securities and the associated tax expense of $2 million tional retirement and other benefit plans In September 2006 Statement of Financial Accounting Total other comprehensive income for 2006 includes reclassifi. Standards (SFAS)No 158, Employers Accounting for Defined cation adjustment gains of $13 million realized from the sale of Benefit Pension and Other Postretirement Plans was issued and equity Securities and the associated tax expense of $4 million amends further the disclosure requirements for pensions and other postretirement benefits. This statement was an amend- Total other comprehensive income for 2005 includes reclassifi- ment of FA58 Statements No. 87, 88, 106 and 132(R). The cation adjustment gains of $23 million realised from the sale of incremental effect of applying FASB No 158 was a $1.7 bilion equity securities and the associated tax expense of 58 million reduction in Shareholder's Equity, net of deferred taxes (23) - (54 (693) TORTORA TOHNSON 2007 ANNUAL READY - Net periodic benefit costs for the Company's defined benefit retirement plans and other benefit plans for 2007 2006 and 2005 include the following components 2008 56 87 3) 2007 $ 597 656 (809) 10 1 186 5 $ 646 Service cast Interest cost Expected to turn on planets Amortization of prior service cost Amortization of net transition Recognized actuarial losses Curtainments and settlements Net period bereitost Others 2007 2004 $140 122 149 136 (2) (3) 7) 077 2006 552 570 (701) 10 (3) 251 4 685 2005 462 488 (579) 12 (2) 219 2 602 66 74 25 $346 322 158 The net periodic benefit cost attributable to US retirement plans was $379 million in 2007, $423 million in 2006 and $370 million in 2005 Amounts expected to be recognized in net periodic benefit cost Diars Maari in the coming year for the Company's defined benefit retirement Amortization of red transition obligation $ 2 plans and other postretirement plans Amortization of retactral losses 132 Amortization of prior service cost The weighted-average assumptions in the following table represent the rates used to develop the actuarial present value of projected benefit obligation for the year listed and also the net periodic benefit cost for the following year. Other Benet 200 2006 2007 2005 2006 6.50% 6.00 5.75 6.50 6.00 5.75 Dalae US. Benefit Plans Discountate Expected long term rate of return on plants Rate of increase in compensation levels International Benefit Plans Discountate Expected long-term rate of sem on plan assets Rate of increase in compensation levels 9.00 4.50 9.00 4.50 9.00 4.50 9.00 4:50 9.00 4.50 9.00 4.50 5.50% 5.00 4.75 6.50% 6.00 500 8.25 4.00 8.00 3.75 8.25 3.75 4.50 4.50 4.25 The Company's discount rates are determined by considering current yield curves representing high quality, long-term fed income instru- ments. The resulting discount rates are consistent with the duration of plan liabilities The expected long-term rate of return on plan assets assumption is determined using a building block approach.com sidering historical averages and real returns of each asset class In certain countries, where historical returns are not meaningful consideration is given to local market expectations at long-term returns The following table displays the assumed health care cost trend rates for all individuals Health Care 2002 2006 Health care cost trend rate med for next year 9.009 9.00 Rate to which the cost trend rate issued to decise Cultimate trend 5.00N 4.50 Year the teaches the ultimate brendate 2014 2012 A one-percentage point change in assumed health care cost trend rates would have the following effect: Dieta OP Health Care Plans Total interest and service cost Postribendblation $ 35 320 5 (2) (259) WOTES 1 CONSOLIDARNANCEAL STATEMY -210 140 743 The following table sets forth information related to the benefit obligation and the fair value of plan assets at year end 2007 and 2006 for the Company's defined benefit retirement plans and other postretirement plans Other it Dutes. Mi 2004 2002 2008 Change in Benefit Obligation Projeded benefit obligation-beginning of year $11.660 10,171 3 2.668 2,325 Service cost 597 552 122 Interest cost 656 570 149 136 Plan participant contributions 62 47 Amendments 14 7 Actuarial losses (876) () 130 Divestitures & acquisitions 79 B 101 Curtaimentssettlements (46) C) Benefits paid from plan (481) (402) (255) (147 Effect of exchange rates 337 378 12 1 Projected benefit obligation -- end of year $12,002 11,660 $ 2,721 2,668 Change in Plan Assets Pats at fake value-beginning of year 59,538 8,103 30 34 Actual retum on plan assets 966 2 Company contributions 317 259 250 141 Plan participant contributions 62 47 Settlements (38) (7) Divestitures & acquisitions 55 300 Bereits paid from plan assets (481) (402) (255) (147) Effect of exchange rates 273 267 Passets at far value -- end of year $10,469 9.538 $ 29 30 Finded statist-end of year 5 (1.533) (2.122) S(2.692) (2,638) Amounts Recognized in the Company's Balance Sheet consist of the following Non current assets $ 481 Limetables (43) (26) (262) (81) Non currentlisbilities (1.970 (2.355) (2430) (2,557) Tocopied in the consolidated balance sheet -- end of your $ (1,533) (2.122) 512.692) (2,638) Amounts Recognized in Accumulated Other Comprehensive Income consist of the following Nossain $ 1.022 1,996 $1,013 1.046 Prior vice cost credit) 51 44 (36) (42) Urcoga ne transition asset 7 7 Total before taxefects $ 1,085 2,047 S 977 1,004 Accumulated Benefit Obligations - end of year $10,282 9,804 Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income $ el periodic benefit cost 646 5 346 (555) 11 Net aaral loss (pin) (435) (13) Amortion of net actual loss (9) 34) Prior services 14 8 Amortization of prior service cost 3 Effect of exchange rates $ (962) $ (27) Total recognized in other comprehensive income before tax $ (316) $319 Total recognized inne periodic bene cost and other comprehensive income 259 Plans with accumulated benefit obligations in excess of plan assets consist of the following Acument obligation Thojsted bedt obligation 200 $14.914) is 233) 3,735 2008 3,085) 03.561) 1,650 -220 Strategic asset allocations are determined by country, based on allocations are consistent with these types of plans. Emphasis is the nature of the liabilities and considering the demographic placed on diversifying equities on a broad basis combined with composition of the plan participants (average age, years of ser currency matching of the fixed income assets. vice and active versus retiree status). The Company's plans are considered non-mature plans and the long-term strategic asset The following table displays the projected future benefit payments from the Company's retirement and other benefit plans Dan Mo 2008 2004 2010 201 2002 200200 Projected future benefit payments Retirement plans $457 472 507 542 564 3,467 Other benefit plans-gross $274 180 184 188 192 1,080 Medicare rebites (9) (11) (12) (13) (14) (94) Other benefit plant-net $265 $169 $172 $175 $178 $986 The Company was not required to fund its US retirement plans appropriate to meet the long-term obligations of the plans in in 2007 and is not required, nor does it anticipate funding in certain countries other than the United States, the funding of 2008 to meet minimum statutory funding requirements. Inter pension plans is not a common practice as funding provides no national plans are funded in accordance with local regulations economic benefit. Consequently the Company has several pen- Additional discretionary contributions are made when deemed sion plans which are not funded The following table displays the projected future minimum contributions to the Company's U.S. and international untunded retirement plans. These amounts do not include any discretionary contributions that the Company may elect to make in the future. Colin 2008 2008 2010 2011 2012 2002 Projected future contributions Unfunded US. retirement plans $28 30 33 35 38 238 Unfunded international retirement plans 523 25 28 29 31 178 Tag 2008 The Company's retirement plan asset allocation at the end of 2007 and 2006 and target allocations for 2008 are as follows: Percet of Mantels 2007 2006 U.S. Retirement Plans Equity securities 7996 78% Debt securities 21 22 Totalplan assets 100% 100% International Retirement Plans Equity securities 67% 679 Det securities 32 32 Real estate and other 1 1 Total plaassets 100% 100% 75% 25 100% 67% 33 100% The Company's other benefit plans are unfunded except for U.S. life insurance contract assets of $29 million and 30 million at December 30, 2007 and December 31, 2006, respectively The fair value of Johnson & Johnson common stock directly held in plan assets was $462 million (4.4% of total plan assets) at December 30, 2007 and $452 million (4.9% of total plan assets) at December 31, 2006
