Exercises K, L, M

j. Consider Johnson & Johnson's "Other benefits" plans, as detailed on page 62 of the company's annual report. i. What is the total obligation for other benefits at December 2007? Is the other benefits plan under funded or over funded? ii. 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 accounting requires management to make a number of estimates about investment returns, discount rates, and future costs. Consider Johnson & Johnson's retirement plan assets. Estimate the actual rate of return (in percentage terms) that the plan assets earned in 2007. How does that retum compare to the expected return? ii. During 2007, Johnson & Johnson changed the discount rate used to calculate its domestic projected retirement benefit obligation from 6% to 6% %. How does this rate change affect the company's retirement obligation? 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 2007? 1.) Calculate the combined retirement and other benefits expense over the past three years. (See page 61). 1. What general trend do you notice? Do you consider this trend persistent? That is, do you expect it to continue? ii. Retirement and other benefits expense includes an 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? Johnson & Johnson-Retirement Obligations 2 -212 Under current U.S. 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. Grass amount that would be added Net amount Currently included Net amount that would be added Retirement and other benefit plan assets Retirement and other benefit plan liabilities 11. 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 cquity ratio Return on assets Return on equity 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 Johnson & Johnson and Subsidiaries Consolidated Balance Sheets 2007 2006 Naatkar c hear allurite Haseenafari 4.088 Assets Current assets Cash and cash equivalents (Notes and 14) Marketable securities (Notes 1 and 14) Accounts receivable trade, less allowances for doubtful accounts $193 (2006, 5160) Inventories (Notes and 2) Deferred taxes on income (Note 8) Prepaid expenses and other receivables Total current assets $ 7.770 1.545 9.444 5.110 2609 3,467 29,945 1 8,712 4,899 2,094 3.196 22.975 Marketable securities,non current (Notesland 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 8) Other assets (Note 5) 2 14,185 14,640 14,123 4,889 3,170 $80,954 16 13,044 15.348 13,340 3,210 2.623 70,556 Total assets 4,579 5,691 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 $ 2.463 6,909 6,412 2.318 1,512 223 4.587 2.189 1.391 724 19,837 19,161 Long-term debt (Note 6) Deferred taxes on income (Note 8) Employee related obligations (Notes and 13) Other Babilities Total liabilities 7,074 1,493 5,402 3.829 37.635 2014 1,319 5,584 3.160 31,238 - Shareholders' equity Preferred stock without par value Cauthorized and unissued 2,000,000 shares) Common stock - par value $1.00 per share (Note 20) Cauthorized 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 (2,118) 49.290 50,292 14.389 Les common stock held in treasury at cost (Note 20) (279,620,000 shares and 226,612,000 shares) Total shareholders' equity Total liabilities and shareholders' equity 10.974 39,318 43,319 $80,954 70,556 ter Cardoted Financial State TOMNISONONON 100 ANNUAL REPORT -214- Johnson & Johnson and Subsidiaries Consolidated Statements of Earnings 2007 2006 2005 (Dolars in Millions Except Per Share Figured (Note 1 $61,095 53,324 50,514 17,751 15,057 14,010 43,344 38,267 36,504 Sales to customers Cost of products sold 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 17,211 6,462 362 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 (214) 23,388 13,116 3,056 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) $10,576 11,053 10,060 $ 3.67 3.76 3.38 $ 3.63 3.73 3.35 -215- Consolidated Statements of Equity Johnson & Johnson and Subsidiaries Rolle from Trey Red Dance Com tulis (11) (515) 3,120 (6.004) $32.535 10,060 3.793) 10.060 35,945 10.060 0.7930 22 (132) 203 1,458 S01 (1.920) 1.485 369 01.717) (415) 016) 26 165 (4159 (26 26 165 (15) 9.805 (4159 (16) 26 165 Balance, January 2, 2005 Nelearnings Cash dividends pald Employee stock compensation sad stock option plans Conversion of subordinated debentures Repurchase of common stock Other comprehensive income, net of tax Currency translation adjustment Und losses on securities Employee benefit plans Gains onderivatives & hedens Reclassification adjustment Total comprehensive income No receivable from ESOP Balance, January 1, 2006 Netais Cash dividends pald Employee compensation and stock option plans Conversion of subordinated debentures Repurchase of common stock Other Other comprehensive income, net of the Currency translation adjustment Und losses on securities Employee benefit plans Losses on derivatives & hedges Declassification adjustment Total comprehensive income 11 $38.710 11.053 (4.267 (755) 3.120 (5.965) 11.053 42.310 11.053 (4.267) 1,858 26 (6.722) 23 181 (LO) 1,677 36 (6.7223 23 362 (9) (1.710) (6) 362 (9) 362 (9) (34) (6) (9) 11,357 01.710) (6) (2,118) 3.120 $39,318 10,576 (4.670) (10.974) 10,576 49,290 10,576 (4,670) 131 (4) Balance, December 31, 2006 Net Garnings Cash dividends paid Employer 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 gains on securities Employee benefit plans Losses an derivatives & hedges Reclassification adjustment Total comprehensive income 2,311 9 15,607) (19) (24) 2.180 13 (5,607) (19) 786 23 670 (54) 786 23 670 (50) (5) 11.996 786 23 670 (54) Balance, December 30, 2007 $43,319 55.280 (693) 3.120 (14,388) Johnson & Johnson and Subsidiaries 26 2005 Consolidated Statements of Cash Flows 2006 2007 11.053 10,060 2,093 540 362 $ 10,576 2,777 698 807 678 0,762) 22 2.177 659 559 (1.168 (14) (235) (31) (568) Cash flows from operating activities Net earnings Adjustments to reconcile net earnings to cash flows Derection and amortization of property and intangibles Stock based compensation Purchased in process research and development intang ble asset write-down (NATRECOR) Deferred tax provision Accounts receivable allowances Changes in assets and abilities, net of effects from acquisitions Increase in accounts receivable Decrease/Cincrease in inventories Increase/(decrease) in accounts payable and accrued abilities Cincrease/decrease in the current and non-current assets Increase in other current and non-current abilities Net cash flows from operating activities (416) 14 2,642 (1.351) 564 (699) (210) 1.750 (269) 410 (396) (911) 542 343 11,799 15.249 14,248 12,942) 230 01.388) (9,659) 7,988 (3680 (2666) 511 (18,023) (467) 426 072) (20,291) (2.632) 154 (987) (5,660) 9,187 (341) (6.139) (279) (4,670) (5,607 19,626 (21,691) 5.100 (18) 1,562 (4.267) (6,722) 6,385 (2.633) 6 (13) 1,135 (3,793) (1.717) 1.215 (732) 6 (196) 774 (5,698) (6,109) (4,443) 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 option/excess tax benefits Net cash used by financing activities Efect 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 issued for employee compensation and stock option plans.net of cash proceeds Conversion af debt Acquisitions Fair value of assets acquired Fair value of abilities assumed 275 3,687 4,083 180 (11.972) 16,055 (225) 6,852 9,203 $ 7,770 4,083 16,055 $ 314 4,099 143 4.250 152 3,429 $ 738 9 622 26 818 369 $ 1.620 (232) Net cash paid for acquisitions 19,306 (1,283) 1.128 (141) $ 1.388 18,023 987 CONSOLIDATED THE STATEMENTS 12. Accumulated Other Comprehensive Income Components of other comprehensive income/Closs) consist of the following And Forg Gain Other piya Darieties Timo Series and com $(105) 85 (346) (150) (515) The tax effect on the unrealed gains/Glosses) on the equity Securities balance is an expense of $46 milion $33 million and 538 million in 2007, 2006 and 2005. respectively. The tax effect related to employee benefit plans was $349 million, 5891 million and 5160 million in 2007 2006 and 2005, respectively. The tax effect on the gains/Closies) on derivatives and hedges are gains of $24 million in 2007, and losses of $4 million and 511 million in 2006 and 2005, respectively. See Note 15 for additional information relating to derivatives and hedging The currency translation adjustments are not currently adjusted for income taxes as they relate to permanent Investments in international subsidiaries 112 | aalaanaal lar. 2.2005 2005 charges Net change due to helging transactions Neamt recessed te nel camino Net 2005 charge Lin. 1.2006 2006 curges Net changed to (415) $(520) (16) 70 26 320) 53 165 15 (240) 0755 17 362 S(158) (9) (1,710) 61 (2,030) 230 (6) 9 (1.363) (2,1180 Nel nou reclassed toneering Nel 2006 charges Dec 31 2005 2007 durges Ne curge due to Hedging transactions Netnounce toteaming Net200 charges Dec. 2002 - 24 13. Pensions and Other Benefit Plans The Company sponsors various retirement and pension plans, including defined benefit defined contribution and termination indemnity plans, which cover most employees worldwide. The Company also provides postretirement benefits, primarily health care, to al U.S. retired employees and their dependents Many international employees are covered by government sponsored programs and the cost to the Company is not significant Retirement plan benefits are primarily based on the employee's compensation during the last three to five years before retirement and the number of years of service. Interna tional subsidiaries have plans under which funds are deposited with trustees annuities are purchased under group contracts or reserves are provided The Company does not fund retiree health care benefits in advance and has the right to modify these plans in the future. The Company uses the date of its consolidated financial statements (December 30, 2007 and December 31, 2006, respectively as the measurement date for all U.S. and interna- tional retirement and other benefit plans In September 2006. Statement of Financial Accounting Standards (SFAS)No. 158. Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans was issued and amends further the disclosure requirements for pensions and other postretirement benefits. This statement was an amend ment of FASB Statements No 87, 88, 106 and 132(R). The incremental effect of applying FASB No 158 was a $17 billion reduction in Shareholder's Equity, net of deferred taxes. (54) 786 $628 23 670 84 (360) 1.425 (693) (45) Total comprehensive income for 2007 includes reclassification adjustment gains of $7 million realized from the sale of equity securities and the associated tax expense of $2 million Total other comprehensive income for 2006 includes reclassifi- cation adjustment gains of $13 milion realized from the sale of equity Securities and the associated tax expense of $4 million Total other comprehensive income for 2005 includes reclassi cation adjustment gains of $23 million realized from the sale of equity securities and the associated tax expense of $8 milion ONSOR 2001 2002 AWAL FOR 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 8139 Ritam Olem paarai 2007 2006 2005 2007 2004 2005 Service cost $597 552 462 $140 122 56 Interest cost 656 570 488 149 136 87 Expected retur on plan assets (809) (701) (579) ) (3) (3) Amortization of prior service cost 10 10 12 (7) 07 Amortization of net transition asset 1 (1) (2) Recogedactar a losses 186 251 219 66 74 25 Curtaiments and settlements 5 4 2 Net periodic bereito $ 646 685 602 $346 322 158 The net periodic benefit cost attributable to US retirement plans was $379 milion in 2007 5423 million in 2006 and $370 milion in 2005, Amounts expected to be recognized in not periodic benefit cost Dollar M in the coming year for the Company's defined benefit retirement Amortization of net transition obligation $ 2 plans and other postretirement plane Amortization of net actuarial losses 132 Amortuation 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. Batam 2006 2005 Other Beam 2007 2005 2005 6.5095 6.00 5.75 6.50% 6,00 5.75 Das M US. Benefit Plans Discount este Expected long-term rate of retum on plasses Rate of increase in compensation levels International Benefit Plam Discount Expected long-term cate of retum onplan 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 6.5096 6.00 5.00 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 fixed 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, con 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 of long-term returns The following table displays the assumed health care cost trend rates, for all individuals: Health Care Plans 2007 2006 Health care cost trend rate assumed for next year 9.0096 9.00 Rate to which the cost trend tate issued to decline ultimate trend 5.00% 4,50 Year the rate reaches the ultimate trend rate 2014 2012 A one-percentage-point change in assumed health care cost trend rates would have the following effect One Percent were Dailure Pitcase Health Care Plans Total interest and service cost $35 $ (27) Postretirement benet obligation 320 (259) WOTE TO CONTATO CINCIAL STATEMENTS 21: 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 Ratlan 2000 2006 2007 2004 $11,660 597 2.325 122 136 656 62 14 (876) 79 (46) (481) 337 $12,002 10.171 $2,668 552 140 570 149 47 7 (99) (1) 443 8 130 101 (402) (255) 378 12 11,660 $ 2,721 (147) 1 2.668 $9,538 743 34 2 141 317 62 (38) 55 (481 273 $10,469 5 (1,533) Change in Benefit Obligation Projected benefit obligation -- beginning of your Service cost Interest cost Plan participant contributions Amendments Actuarial gains) losses Divestitures acquisitions Curtments & settlements Benefits paid from plan Efecto exchange rates Projected benefit obligation - end of you Change in Plan Assets Plan assets at fair value-beginning of year Actual return onplanassets Company contributions Plan participant contributions Settlements Divestites acquisitions Benefits paid hom plants Elle leccange rates Planets atbar value-end of your Funded statt-end of year Amounts Recognised in the Company's Balance Sheet consist of the following Non current assets Curretibilis Non current Total recognized in the consolidated balance sheet -- end of year Amounts Recognized in Accumulated Other Compethensive Income consist of the following Net actual loss (gain) Prior service cost (credit) Unrecogid ret transitions Total before an efects Accumulated Benefit Obligations- end of year Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income Nel periodic benefit cost Net actual fossain) Amortization of net act loss Prior service cost Anortation of prior service cost Effect of exchange rates Total recognized in other comprehensive cone before tax Total recognized in het periodic bene cost and other comprehensive income 8,100 30 966 4 259 250 47 (7) 300 (402 267 9.538 $ 29 (2.122) 512,692) (255 (147) 30 (2,638) (81) $ 481 259 (43) (26) (262) (1.971) (2,355) (2,430) $ (1.533) (2.122) S(2,692) (2.557) (2.638) $ 1,027 51 1.046 (42) 1.996 51,013 44 7 2,047 $ 977 9,804 1,004 $ 1,085 $10.282 $ 646 (555) (435) (9) 14 23 $ (962) $316) $ 346 11 (13) (34) 6 3 $ (27) $ 319 Plans with accumulated benefit obligations in excess of plan assets consist of the following Desi Accumulated benecliation Projected benefit obligation Panatlar 2000 $(4.914) 6,233) 3,735 2006 (3,085) (3,561) 1,650 allocations are consistent with these types of plans. Emphasis is Strategic asset allocations are determined by country, based on the nature of the abilities 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 2009 Boland Me 2011 2010 200 2010 Projected future benefit payments Retirement plans 5457 472 507 542 564 3,467 Other beneplan- $274 180 184 188 192 1,080 Medicare bates (9) (11) (12) (13) (14) (94) Other beneplanet $265 $169 $172 $175 $178 $986 2008 The Company was not required to fund its U.S. 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 folowing table displays the projected future minimum contributions to the Company's U.S. and international unfunded retirement plans. These amounts do not include any discretionary contributions that the Company may elect to make in the future. 2006 2009 2010 2011 2002 200-2017 Projected future contributions Ulanded U.S. retirement plans $28 30 33 35 38 238 Ustunded interrution retenert plass $23 25 28 29 31 178 The Company's retirement plan asset allocation at the end of 2007 and 2006 and target allocations for 2008 are as follows: Percent of Pas Assets Allocation 2002 2006 2008 U.S. Retirement Plans Equity Securities Debt Securities Total plaats International Retirement Plants Equity Securities Debt cubes Real estate and other 7996 21 10096 78% 22 100% 7596 25 100% 67% 32 1 100% 67% 32 1 100% 67% 33 100% The Company's other benefit plans are unfunded except for US 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 milion (44% of total plan assets) at December 30, 2007 and $452 million (4.9% of total plan assets) at December 31, 2006 j. Consider Johnson & Johnson's "Other benefits" plans, as detailed on page 62 of the company's annual report. i. What is the total obligation for other benefits at December 2007? Is the other benefits plan under funded or over funded? ii. 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 accounting requires management to make a number of estimates about investment returns, discount rates, and future costs. Consider Johnson & Johnson's retirement plan assets. Estimate the actual rate of return (in percentage terms) that the plan assets earned in 2007. How does that retum compare to the expected return? ii. During 2007, Johnson & Johnson changed the discount rate used to calculate its domestic projected retirement benefit obligation from 6% to 6% %. How does this rate change affect the company's retirement obligation? 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 2007? 1.) Calculate the combined retirement and other benefits expense over the past three years. (See page 61). 1. What general trend do you notice? Do you consider this trend persistent? That is, do you expect it to continue? ii. Retirement and other benefits expense includes an 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? Johnson & Johnson-Retirement Obligations 2 -212 Under current U.S. 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. Grass amount that would be added Net amount Currently included Net amount that would be added Retirement and other benefit plan assets Retirement and other benefit plan liabilities 11. 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 cquity ratio Return on assets Return on equity 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 Johnson & Johnson and Subsidiaries Consolidated Balance Sheets 2007 2006 Naatkar c hear allurite Haseenafari 4.088 Assets Current assets Cash and cash equivalents (Notes and 14) Marketable securities (Notes 1 and 14) Accounts receivable trade, less allowances for doubtful accounts $193 (2006, 5160) Inventories (Notes and 2) Deferred taxes on income (Note 8) Prepaid expenses and other receivables Total current assets $ 7.770 1.545 9.444 5.110 2609 3,467 29,945 1 8,712 4,899 2,094 3.196 22.975 Marketable securities,non current (Notesland 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 8) Other assets (Note 5) 2 14,185 14,640 14,123 4,889 3,170 $80,954 16 13,044 15.348 13,340 3,210 2.623 70,556 Total assets 4,579 5,691 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 $ 2.463 6,909 6,412 2.318 1,512 223 4.587 2.189 1.391 724 19,837 19,161 Long-term debt (Note 6) Deferred taxes on income (Note 8) Employee related obligations (Notes and 13) Other Babilities Total liabilities 7,074 1,493 5,402 3.829 37.635 2014 1,319 5,584 3.160 31,238 - Shareholders' equity Preferred stock without par value Cauthorized and unissued 2,000,000 shares) Common stock - par value $1.00 per share (Note 20) Cauthorized 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 (2,118) 49.290 50,292 14.389 Les common stock held in treasury at cost (Note 20) (279,620,000 shares and 226,612,000 shares) Total shareholders' equity Total liabilities and shareholders' equity 10.974 39,318 43,319 $80,954 70,556 ter Cardoted Financial State TOMNISONONON 100 ANNUAL REPORT -214- Johnson & Johnson and Subsidiaries Consolidated Statements of Earnings 2007 2006 2005 (Dolars in Millions Except Per Share Figured (Note 1 $61,095 53,324 50,514 17,751 15,057 14,010 43,344 38,267 36,504 Sales to customers Cost of products sold 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 17,211 6,462 362 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 (214) 23,388 13,116 3,056 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) $10,576 11,053 10,060 $ 3.67 3.76 3.38 $ 3.63 3.73 3.35 -215- Consolidated Statements of Equity Johnson & Johnson and Subsidiaries Rolle from Trey Red Dance Com tulis (11) (515) 3,120 (6.004) $32.535 10,060 3.793) 10.060 35,945 10.060 0.7930 22 (132) 203 1,458 S01 (1.920) 1.485 369 01.717) (415) 016) 26 165 (4159 (26 26 165 (15) 9.805 (4159 (16) 26 165 Balance, January 2, 2005 Nelearnings Cash dividends pald Employee stock compensation sad stock option plans Conversion of subordinated debentures Repurchase of common stock Other comprehensive income, net of tax Currency translation adjustment Und losses on securities Employee benefit plans Gains onderivatives & hedens Reclassification adjustment Total comprehensive income No receivable from ESOP Balance, January 1, 2006 Netais Cash dividends pald Employee compensation and stock option plans Conversion of subordinated debentures Repurchase of common stock Other Other comprehensive income, net of the Currency translation adjustment Und losses on securities Employee benefit plans Losses on derivatives & hedges Declassification adjustment Total comprehensive income 11 $38.710 11.053 (4.267 (755) 3.120 (5.965) 11.053 42.310 11.053 (4.267) 1,858 26 (6.722) 23 181 (LO) 1,677 36 (6.7223 23 362 (9) (1.710) (6) 362 (9) 362 (9) (34) (6) (9) 11,357 01.710) (6) (2,118) 3.120 $39,318 10,576 (4.670) (10.974) 10,576 49,290 10,576 (4,670) 131 (4) Balance, December 31, 2006 Net Garnings Cash dividends paid Employer 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 gains on securities Employee benefit plans Losses an derivatives & hedges Reclassification adjustment Total comprehensive income 2,311 9 15,607) (19) (24) 2.180 13 (5,607) (19) 786 23 670 (54) 786 23 670 (50) (5) 11.996 786 23 670 (54) Balance, December 30, 2007 $43,319 55.280 (693) 3.120 (14,388) Johnson & Johnson and Subsidiaries 26 2005 Consolidated Statements of Cash Flows 2006 2007 11.053 10,060 2,093 540 362 $ 10,576 2,777 698 807 678 0,762) 22 2.177 659 559 (1.168 (14) (235) (31) (568) Cash flows from operating activities Net earnings Adjustments to reconcile net earnings to cash flows Derection and amortization of property and intangibles Stock based compensation Purchased in process research and development intang ble asset write-down (NATRECOR) Deferred tax provision Accounts receivable allowances Changes in assets and abilities, net of effects from acquisitions Increase in accounts receivable Decrease/Cincrease in inventories Increase/(decrease) in accounts payable and accrued abilities Cincrease/decrease in the current and non-current assets Increase in other current and non-current abilities Net cash flows from operating activities (416) 14 2,642 (1.351) 564 (699) (210) 1.750 (269) 410 (396) (911) 542 343 11,799 15.249 14,248 12,942) 230 01.388) (9,659) 7,988 (3680 (2666) 511 (18,023) (467) 426 072) (20,291) (2.632) 154 (987) (5,660) 9,187 (341) (6.139) (279) (4,670) (5,607 19,626 (21,691) 5.100 (18) 1,562 (4.267) (6,722) 6,385 (2.633) 6 (13) 1,135 (3,793) (1.717) 1.215 (732) 6 (196) 774 (5,698) (6,109) (4,443) 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 option/excess tax benefits Net cash used by financing activities Efect 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 issued for employee compensation and stock option plans.net of cash proceeds Conversion af debt Acquisitions Fair value of assets acquired Fair value of abilities assumed 275 3,687 4,083 180 (11.972) 16,055 (225) 6,852 9,203 $ 7,770 4,083 16,055 $ 314 4,099 143 4.250 152 3,429 $ 738 9 622 26 818 369 $ 1.620 (232) Net cash paid for acquisitions 19,306 (1,283) 1.128 (141) $ 1.388 18,023 987 CONSOLIDATED THE STATEMENTS 12. Accumulated Other Comprehensive Income Components of other comprehensive income/Closs) consist of the following And Forg Gain Other piya Darieties Timo Series and com $(105) 85 (346) (150) (515) The tax effect on the unrealed gains/Glosses) on the equity Securities balance is an expense of $46 milion $33 million and 538 million in 2007, 2006 and 2005. respectively. The tax effect related to employee benefit plans was $349 million, 5891 million and 5160 million in 2007 2006 and 2005, respectively. The tax effect on the gains/Closies) on derivatives and hedges are gains of $24 million in 2007, and losses of $4 million and 511 million in 2006 and 2005, respectively. See Note 15 for additional information relating to derivatives and hedging The currency translation adjustments are not currently adjusted for income taxes as they relate to permanent Investments in international subsidiaries 112 | aalaanaal lar. 2.2005 2005 charges Net change due to helging transactions Neamt recessed te nel camino Net 2005 charge Lin. 1.2006 2006 curges Net changed to (415) $(520) (16) 70 26 320) 53 165 15 (240) 0755 17 362 S(158) (9) (1,710) 61 (2,030) 230 (6) 9 (1.363) (2,1180 Nel nou reclassed toneering Nel 2006 charges Dec 31 2005 2007 durges Ne curge due to Hedging transactions Netnounce toteaming Net200 charges Dec. 2002 - 24 13. Pensions and Other Benefit Plans The Company sponsors various retirement and pension plans, including defined benefit defined contribution and termination indemnity plans, which cover most employees worldwide. The Company also provides postretirement benefits, primarily health care, to al U.S. retired employees and their dependents Many international employees are covered by government sponsored programs and the cost to the Company is not significant Retirement plan benefits are primarily based on the employee's compensation during the last three to five years before retirement and the number of years of service. Interna tional subsidiaries have plans under which funds are deposited with trustees annuities are purchased under group contracts or reserves are provided The Company does not fund retiree health care benefits in advance and has the right to modify these plans in the future. The Company uses the date of its consolidated financial statements (December 30, 2007 and December 31, 2006, respectively as the measurement date for all U.S. and interna- tional retirement and other benefit plans In September 2006. Statement of Financial Accounting Standards (SFAS)No. 158. Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans was issued and amends further the disclosure requirements for pensions and other postretirement benefits. This statement was an amend ment of FASB Statements No 87, 88, 106 and 132(R). The incremental effect of applying FASB No 158 was a $17 billion reduction in Shareholder's Equity, net of deferred taxes. (54) 786 $628 23 670 84 (360) 1.425 (693) (45) Total comprehensive income for 2007 includes reclassification adjustment gains of $7 million realized from the sale of equity securities and the associated tax expense of $2 million Total other comprehensive income for 2006 includes reclassifi- cation adjustment gains of $13 milion realized from the sale of equity Securities and the associated tax expense of $4 million Total other comprehensive income for 2005 includes reclassi cation adjustment gains of $23 million realized from the sale of equity securities and the associated tax expense of $8 milion ONSOR 2001 2002 AWAL FOR 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 8139 Ritam Olem paarai 2007 2006 2005 2007 2004 2005 Service cost $597 552 462 $140 122 56 Interest cost 656 570 488 149 136 87 Expected retur on plan assets (809) (701) (579) ) (3) (3) Amortization of prior service cost 10 10 12 (7) 07 Amortization of net transition asset 1 (1) (2) Recogedactar a losses 186 251 219 66 74 25 Curtaiments and settlements 5 4 2 Net periodic bereito $ 646 685 602 $346 322 158 The net periodic benefit cost attributable to US retirement plans was $379 milion in 2007 5423 million in 2006 and $370 milion in 2005, Amounts expected to be recognized in not periodic benefit cost Dollar M in the coming year for the Company's defined benefit retirement Amortization of net transition obligation $ 2 plans and other postretirement plane Amortization of net actuarial losses 132 Amortuation 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. Batam 2006 2005 Other Beam 2007 2005 2005 6.5095 6.00 5.75 6.50% 6,00 5.75 Das M US. Benefit Plans Discount este Expected long-term rate of retum on plasses Rate of increase in compensation levels International Benefit Plam Discount Expected long-term cate of retum onplan 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 6.5096 6.00 5.00 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 fixed 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, con 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 of long-term returns The following table displays the assumed health care cost trend rates, for all individuals: Health Care Plans 2007 2006 Health care cost trend rate assumed for next year 9.0096 9.00 Rate to which the cost trend tate issued to decline ultimate trend 5.00% 4,50 Year the rate reaches the ultimate trend rate 2014 2012 A one-percentage-point change in assumed health care cost trend rates would have the following effect One Percent were Dailure Pitcase Health Care Plans Total interest and service cost $35 $ (27) Postretirement benet obligation 320 (259) WOTE TO CONTATO CINCIAL STATEMENTS 21: 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 Ratlan 2000 2006 2007 2004 $11,660 597 2.325 122 136 656 62 14 (876) 79 (46) (481) 337 $12,002 10.171 $2,668 552 140 570 149 47 7 (99) (1) 443 8 130 101 (402) (255) 378 12 11,660 $ 2,721 (147) 1 2.668 $9,538 743 34 2 141 317 62 (38) 55 (481 273 $10,469 5 (1,533) Change in Benefit Obligation Projected benefit obligation -- beginning of your Service cost Interest cost Plan participant contributions Amendments Actuarial gains) losses Divestitures acquisitions Curtments & settlements Benefits paid from plan Efecto exchange rates Projected benefit obligation - end of you Change in Plan Assets Plan assets at fair value-beginning of year Actual return onplanassets Company contributions Plan participant contributions Settlements Divestites acquisitions Benefits paid hom plants Elle leccange rates Planets atbar value-end of your Funded statt-end of year Amounts Recognised in the Company's Balance Sheet consist of the following Non current assets Curretibilis Non current Total recognized in the consolidated balance sheet -- end of year Amounts Recognized in Accumulated Other Compethensive Income consist of the following Net actual loss (gain) Prior service cost (credit) Unrecogid ret transitions Total before an efects Accumulated Benefit Obligations- end of year Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income Nel periodic benefit cost Net actual fossain) Amortization of net act loss Prior service cost Anortation of prior service cost Effect of exchange rates Total recognized in other comprehensive cone before tax Total recognized in het periodic bene cost and other comprehensive income 8,100 30 966 4 259 250 47 (7) 300 (402 267 9.538 $ 29 (2.122) 512,692) (255 (147) 30 (2,638) (81) $ 481 259 (43) (26) (262) (1.971) (2,355) (2,430) $ (1.533) (2.122) S(2,692) (2.557) (2.638) $ 1,027 51 1.046 (42) 1.996 51,013 44 7 2,047 $ 977 9,804 1,004 $ 1,085 $10.282 $ 646 (555) (435) (9) 14 23 $ (962) $316) $ 346 11 (13) (34) 6 3 $ (27) $ 319 Plans with accumulated benefit obligations in excess of plan assets consist of the following Desi Accumulated benecliation Projected benefit obligation Panatlar 2000 $(4.914) 6,233) 3,735 2006 (3,085) (3,561) 1,650 allocations are consistent with these types of plans. Emphasis is Strategic asset allocations are determined by country, based on the nature of the abilities 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 2009 Boland Me 2011 2010 200 2010 Projected future benefit payments Retirement plans 5457 472 507 542 564 3,467 Other beneplan- $274 180 184 188 192 1,080 Medicare bates (9) (11) (12) (13) (14) (94) Other beneplanet $265 $169 $172 $175 $178 $986 2008 The Company was not required to fund its U.S. 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 folowing table displays the projected future minimum contributions to the Company's U.S. and international unfunded retirement plans. These amounts do not include any discretionary contributions that the Company may elect to make in the future. 2006 2009 2010 2011 2002 200-2017 Projected future contributions Ulanded U.S. retirement plans $28 30 33 35 38 238 Ustunded interrution retenert plass $23 25 28 29 31 178 The Company's retirement plan asset allocation at the end of 2007 and 2006 and target allocations for 2008 are as follows: Percent of Pas Assets Allocation 2002 2006 2008 U.S. Retirement Plans Equity Securities Debt Securities Total plaats International Retirement Plants Equity Securities Debt cubes Real estate and other 7996 21 10096 78% 22 100% 7596 25 100% 67% 32 1 100% 67% 32 1 100% 67% 33 100% The Company's other benefit plans are unfunded except for US 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 milion (44% of total plan assets) at December 30, 2007 and $452 million (4.9% of total plan assets) at December 31, 2006