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. i. Use the table below to show how total assets and total liabilities on the balance sheet would be affected.
| | Gross 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 | | | |
ii. Determine the amounts and ratios below using Johnson & Johnsons 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 companys 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 | | |
iii. In your opinion, which set of ratios better reflects the economic reality, the as reported or the pro forma ratios? Explain.
Consolidated Balance Sheets Johnson & Johnson and Subsidiaries 2007 2006 $ 7,770 1,545 9,444 5,110 2,609 3,467 4,083 1 8,712 4,889 2,094 3,196 29,945 22,975 2 14,185 14,640 14,123 4,889 3,170 16 13,044 15,348 13,340 3,210 2,623 $80,954 70,556 At December 30, 2007 and December 31, 2006 (Dollars in Millions Except Share and Per Share Data) (Note 1) Assets Current assets Cash and cash equivalents (Notes 1 and 14) Marketable securities (Notes 1 and 14) Accounts receivable trade, less allowances for doubtful accounts $193 (2006, $160) Inventories (Notes 1 and 2) Deferred taxes on income (Note 8) Prepaid expenses and other receivables Total current assets Marketable securities, non-current (Notes 1 and 14) Property, plant and equipment, net (Notes 1 and 3) Intangible assets, net (Notes 1 and 7) Goodwill, net (Notes 1 and 7) Deferred taxes on income (Note 8) Other assets (Note 5) Total assets Liabilities and Shareholders' Equity Current liabilities Loans and notes payable (Note 6) Accounts payable Accrued liabilities Accrued rebates, returns and promotions Accrued salaries, wages and commissions Accrued taxes on income Total current liabilities Long-term debt (Note 6) Deferred taxes on income (Note 8) Employee related obligations (Notes 5 and 13) Other liabilities Total liabilities Shareholders' equity Preferred stock - without par value (authorized and unissued 2,000,000 shares) Common stock - par value $1.00 per share (Note 20) (authorized 4,320,000,000 shares; issued 3,119,843,000 shares) Accumulated other comprehensive income (Note 12) Retained earnings $2,463 6,909 6,412 2,318 1,512 223 4,579 5,691 4,587 2,189 1,391 724 19,837 19,161 7,074 1,493 5,402 3,829 2,014 1,319 5,584 3,160 37,635 31,238 - 3,120 (693) 55,280 57,707 3,120 (2,118) 49,290 50,292 14,388 10,974 Less: 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 43,319 39,318 $80,954 70,556 Consolidated Statements of Earnings Johnson & Johnson and Subsidiaries 2007 2006 2005 $61,095 53,324 50,514 14,010 17,751 15,057 43,344 38,267 36,504 (Dollars in Millions Except Per Share Figure:) (Note 1) 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 (829) 63 (671) 23,680 14,587 3,534 (487) 54 (214) 23,388 13,116 3,056 30,061 13,283 2,707 $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 3.38 $ 3.63 3.73 3.35 Consolidated Statements of Cash Flows Johnson & Johnson and Subsidiaries (Dollars in Milions) (Note 10 2007 2006 2005 $ 10,576 11,053 10,060 2,777 698 807 678 (1,762) 2,177 659 559 2,093 540 362 (1,168) (14) (235) (31) 22 (416) 14 2,642 (1,351) 564 (699) (210) 1,750 (269) 410 (568) (396) (911) 542 343 15,249 14,248 11,799 (2,942) 230 (1,388) (9,659) 7,988 (368) (6,139) (2,666) 511 (18,023) (467) 426 (72) (2,632) 154 (987) (5,660) 9,187 (341) (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 liabilities (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 activities 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 issued 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 (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 (6,109) (3,793) (1,717) 1,215 (732) 6 (196) 774 (4,443) 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 4,250 151 3,429 $ 738 9 622 26 818 369 $ 1,620 (232) 19,306 (1,283) 1,128 (141) $ 1,388 18,023 987 - - - - 12. Accumulated Other Comprehensive Income The tax effect on the unrealized gains/Closses) on the equity Components of other comprehensive income/Closs) consist of securities balance is an expense of $46 million, $33 million and the following $38 million in 2007, 2006 and 2005, respectively. The tax effect Total related to employee benefit plans was $349 million, $891 million Unrealized Gains/ Accumulated and $160 million in 2007, 2006 and 2005, respectively. The tax Foreign Gains/ (Losses) on Other effect on the gains/Closses) on derivatives and hedges are gains Currency (Losses) om Employee Derivatives Comprehensive of $24 million in 2007, and losses of $4 million and $11 million (Dollars in Millions) Translation Securities Benefit Plans & Hedges Income/(Less) Jan. 2, 2005 $(105) 86 (346) (150) in 2006 and 2005, respectively. See Note 15 for additional (515) 2005 changes information relating to derivatives and hedging. Net change due to The currency translation adjustments are not currently hedging transactions adjusted for income taxes as they relate to permanent 112 investments in international subsidiaries. Net amount reclassed to net earnings 53 Net 2005 changes (415) (16) 26 165 (240) 13. Pensions and Other Benefit Plans Jan. 1.2006 $(520) 70 (320) 15 (755) The Company sponsors various retirement and pension plans, 2006 changes including defined benefit, defined contribution and termination Net change due to indemnity plans, which cover most employees worldwide. The hedging transactions 17 Company also provides postretirement benefits, primarily health Net amount reclassed care, to all U.S. retired employees and their dependents. to net earnings (23) Many international employees are covered by government- Net 2006 changes 362 (9) (1,710) (6) (1,363) sponsored programs and the cost to the Company is not significant Dec 31, 2006 $(158) 61 (2,030) 9 (2,118) Retirement plan benefits are primarily based on the 2007 changes employee's compensation during the last three to five years Net change due to before retirement and the number of years of service. Interna- hedging transactions (78) tional subsidiaries have plans under which funds are deposited Net amount reclassed with trustees, annuities are purchased under group contracts, to net earnings 24 or reserves are provided. Net 2007 changes 786 23 670 (54) 1,425 The Company does not fund retiree health care benefits in Dec 30, 2007 $628 84 (1,360) (45) (693) 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 FASB Statements No. 87, 88, 106 and 132(R). The cation adjustment gains of $23 million realized from the sale of incremental effect of applying FASB No. 158 was a $1.7 billion equity securities and the associated tax expense of $8 million. reduction in Shareholder's Equity, net of deferred taxes. - 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: 2005 Retirement Plans Other Benefit Plans (Dollars in Millions) 2007 2006 2005 2007 2006 Service cost $ 597 552 462 $140 122 56 Interest cost 656 570 488 149 136 87 Expected return on plan assets (809) (701) (579) (2) (3) (3) Amortization of prior service cost 10 10 12 (7) Amortization of net transition asset 1 (1) (2) Recognized actuarial losses 186 251 219 66 74 25 Curtailments and settlements 5 4 2 Net periodic benefit cost $ 646 685 602 $346 322 158 The net periodic benefit cost attributable to U.S. 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 (Dollars in Millions) in the coming year for the Company's defined benefit retirement Amortization of net transition obligation $ 2 plans and other postretirement plans: Amortization of net actuarial losses 132 Amortization of prior service cast 5 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. Retirement Plans 2006 Other Benefit Plans 2007 2006 2007 2005 2005 6.50% 6.00 5.75 6.50% 6.00 5.75 (Dollars in Milions) U.S. Benefit Plans Discount rate Expected long-term rate of return on plan assets Rate of increase in compensation levels International Benefit Plans Discount rate Expected long-term rate of return 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 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 9.00% 9.00 Rate to which the cost trend rate is assumed 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 Percentare- One Percentare- (Dollars in Millioms) Point Increase Point Decrease Health Care Plans Total interest and service cost $ 35 $(27) Postretirement benefit obligation 320 (259) 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: Retirement Plans Other Benefit Plans (Dollars in Millions) 2007 2006 2007 2006 Change in Benefit Obligation Projected benefit obligation beginning of year $11,660 10,171 $ 2,668 2,325 Service cost 597 552 140 122 Interest cost 656 570 149 136 Plan participant contributions 62 47 Amendments 14 7 Actuarial (gains) losses (876) (99) (1) 130 Divestitures & acquisitions 79 443 101 Curtailments & settlements (46) 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 Plan assets at fair value -- beginning of year $9,538 8,108 30 34 Actual return on plan assets 743 966 4 2 Company contributions 317 259 250 141 Plan participant contributions 62 47 Settlements (38) (7) Divestitures & acquisitions 55 300 Benefits paid from plan assets (481) (402) (255) (147) Effect of exchange rates 273 267 Plan assets at fair value -- end of year $10,469 9,538 $ 29 30 Funded status at - end of year $ (1,533) (2,122) $(2,692) (2,638) Amounts Recognized in the Company's Balance Sheet consist of the following: Non-current assets $ 481 259 Current liabilities (43) (26) (262) Non-current liabilities (1,971) (2,355) (2,430) (2,557) Total recognized in the consolidated balance sheet -- end of year $ (1,533) (2,122) $(2,692) (2,638) Amounts Recognized in Accumulated Other Comprehensive Income consist of the following: Net actuarial loss (gain) $ 1,027 1,996 $ 1,013 1,046 Prior service cost (credit) 51 44 (36) (42) Unrecognized net transition asset 7 7 Total before tax effects $ 1,085 2,047 $ 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 Net periodic benefit cost $ 646 $ 346 Net actuarial loss (gain) (555) 11 Amortization of net actuarial loss (435) (13) Prior service cost (34) Amortization of prior service cost 14 6 Effect of exchange rates 23 3 Total recognized in other comprehensive income, before tax $ (962) $ (27) Total recognized in net periodic benefit cost and other comprehensive income $ (316) $ 319 Plans with accumulated benefit obligations in excess of plan assets consist of the following: Retirement Plans (Dollars in Millions) 2007 2006 Accumulated benefit obligation $(4,914) (3,085) Projected benefit obligation (5,233) (3,561) Plan assets at fair value 3,735 1,650 ** 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: (Dallars in Millions) 2008 2010 2011 2013-2017 Projected future benefit payments Retirement plans $457 472 507 542 564 3,467 Other benefit plans - gross $274 180 188 192 1,080 Medicare rebates (11) (12) (13) (14) (94) Other benefit plans - net $265 $169 $172 $175 $178 $986 2009 200 184 2008 2009 2010 2012 2013-2017 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 following 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. (Dollars in Milions) 2011 Projected future contributions Unfunded U.S. retirement plans $28 30 33 35 38 238 Unfunded International retirement plans $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 Target Allocation U.S. Retirement Plans Equity Securities 79% 78% 75% Debt securities 25 Total plan assets 100% 100% 100% International Retirement Plans Equity securities 67% 67% 67% Debt securities 32 32 33 Real estate and other Total plan assets 100% 100% 100% Plan Assets 2001 2006 2008 21 22 1 1 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. Consolidated Balance Sheets Johnson & Johnson and Subsidiaries 2007 2006 $ 7,770 1,545 9,444 5,110 2,609 3,467 4,083 1 8,712 4,889 2,094 3,196 29,945 22,975 2 14,185 14,640 14,123 4,889 3,170 16 13,044 15,348 13,340 3,210 2,623 $80,954 70,556 At December 30, 2007 and December 31, 2006 (Dollars in Millions Except Share and Per Share Data) (Note 1) Assets Current assets Cash and cash equivalents (Notes 1 and 14) Marketable securities (Notes 1 and 14) Accounts receivable trade, less allowances for doubtful accounts $193 (2006, $160) Inventories (Notes 1 and 2) Deferred taxes on income (Note 8) Prepaid expenses and other receivables Total current assets Marketable securities, non-current (Notes 1 and 14) Property, plant and equipment, net (Notes 1 and 3) Intangible assets, net (Notes 1 and 7) Goodwill, net (Notes 1 and 7) Deferred taxes on income (Note 8) Other assets (Note 5) Total assets Liabilities and Shareholders' Equity Current liabilities Loans and notes payable (Note 6) Accounts payable Accrued liabilities Accrued rebates, returns and promotions Accrued salaries, wages and commissions Accrued taxes on income Total current liabilities Long-term debt (Note 6) Deferred taxes on income (Note 8) Employee related obligations (Notes 5 and 13) Other liabilities Total liabilities Shareholders' equity Preferred stock - without par value (authorized and unissued 2,000,000 shares) Common stock - par value $1.00 per share (Note 20) (authorized 4,320,000,000 shares; issued 3,119,843,000 shares) Accumulated other comprehensive income (Note 12) Retained earnings $2,463 6,909 6,412 2,318 1,512 223 4,579 5,691 4,587 2,189 1,391 724 19,837 19,161 7,074 1,493 5,402 3,829 2,014 1,319 5,584 3,160 37,635 31,238 - 3,120 (693) 55,280 57,707 3,120 (2,118) 49,290 50,292 14,388 10,974 Less: 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 43,319 39,318 $80,954 70,556 Consolidated Statements of Earnings Johnson & Johnson and Subsidiaries 2007 2006 2005 $61,095 53,324 50,514 14,010 17,751 15,057 43,344 38,267 36,504 (Dollars in Millions Except Per Share Figure:) (Note 1) 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 (829) 63 (671) 23,680 14,587 3,534 (487) 54 (214) 23,388 13,116 3,056 30,061 13,283 2,707 $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 3.38 $ 3.63 3.73 3.35 Consolidated Statements of Cash Flows Johnson & Johnson and Subsidiaries (Dollars in Milions) (Note 10 2007 2006 2005 $ 10,576 11,053 10,060 2,777 698 807 678 (1,762) 2,177 659 559 2,093 540 362 (1,168) (14) (235) (31) 22 (416) 14 2,642 (1,351) 564 (699) (210) 1,750 (269) 410 (568) (396) (911) 542 343 15,249 14,248 11,799 (2,942) 230 (1,388) (9,659) 7,988 (368) (6,139) (2,666) 511 (18,023) (467) 426 (72) (2,632) 154 (987) (5,660) 9,187 (341) (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 liabilities (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 activities 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 issued 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 (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 (6,109) (3,793) (1,717) 1,215 (732) 6 (196) 774 (4,443) 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 4,250 151 3,429 $ 738 9 622 26 818 369 $ 1,620 (232) 19,306 (1,283) 1,128 (141) $ 1,388 18,023 987 - - - - 12. Accumulated Other Comprehensive Income The tax effect on the unrealized gains/Closses) on the equity Components of other comprehensive income/Closs) consist of securities balance is an expense of $46 million, $33 million and the following $38 million in 2007, 2006 and 2005, respectively. The tax effect Total related to employee benefit plans was $349 million, $891 million Unrealized Gains/ Accumulated and $160 million in 2007, 2006 and 2005, respectively. The tax Foreign Gains/ (Losses) on Other effect on the gains/Closses) on derivatives and hedges are gains Currency (Losses) om Employee Derivatives Comprehensive of $24 million in 2007, and losses of $4 million and $11 million (Dollars in Millions) Translation Securities Benefit Plans & Hedges Income/(Less) Jan. 2, 2005 $(105) 86 (346) (150) in 2006 and 2005, respectively. See Note 15 for additional (515) 2005 changes information relating to derivatives and hedging. Net change due to The currency translation adjustments are not currently hedging transactions adjusted for income taxes as they relate to permanent 112 investments in international subsidiaries. Net amount reclassed to net earnings 53 Net 2005 changes (415) (16) 26 165 (240) 13. Pensions and Other Benefit Plans Jan. 1.2006 $(520) 70 (320) 15 (755) The Company sponsors various retirement and pension plans, 2006 changes including defined benefit, defined contribution and termination Net change due to indemnity plans, which cover most employees worldwide. The hedging transactions 17 Company also provides postretirement benefits, primarily health Net amount reclassed care, to all U.S. retired employees and their dependents. to net earnings (23) Many international employees are covered by government- Net 2006 changes 362 (9) (1,710) (6) (1,363) sponsored programs and the cost to the Company is not significant Dec 31, 2006 $(158) 61 (2,030) 9 (2,118) Retirement plan benefits are primarily based on the 2007 changes employee's compensation during the last three to five years Net change due to before retirement and the number of years of service. Interna- hedging transactions (78) tional subsidiaries have plans under which funds are deposited Net amount reclassed with trustees, annuities are purchased under group contracts, to net earnings 24 or reserves are provided. Net 2007 changes 786 23 670 (54) 1,425 The Company does not fund retiree health care benefits in Dec 30, 2007 $628 84 (1,360) (45) (693) 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 FASB Statements No. 87, 88, 106 and 132(R). The cation adjustment gains of $23 million realized from the sale of incremental effect of applying FASB No. 158 was a $1.7 billion equity securities and the associated tax expense of $8 million. reduction in Shareholder's Equity, net of deferred taxes. - 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: 2005 Retirement Plans Other Benefit Plans (Dollars in Millions) 2007 2006 2005 2007 2006 Service cost $ 597 552 462 $140 122 56 Interest cost 656 570 488 149 136 87 Expected return on plan assets (809) (701) (579) (2) (3) (3) Amortization of prior service cost 10 10 12 (7) Amortization of net transition asset 1 (1) (2) Recognized actuarial losses 186 251 219 66 74 25 Curtailments and settlements 5 4 2 Net periodic benefit cost $ 646 685 602 $346 322 158 The net periodic benefit cost attributable to U.S. 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 (Dollars in Millions) in the coming year for the Company's defined benefit retirement Amortization of net transition obligation $ 2 plans and other postretirement plans: Amortization of net actuarial losses 132 Amortization of prior service cast 5 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. Retirement Plans 2006 Other Benefit Plans 2007 2006 2007 2005 2005 6.50% 6.00 5.75 6.50% 6.00 5.75 (Dollars in Milions) U.S. Benefit Plans Discount rate Expected long-term rate of return on plan assets Rate of increase in compensation levels International Benefit Plans Discount rate Expected long-term rate of return 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 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 9.00% 9.00 Rate to which the cost trend rate is assumed 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 Percentare- One Percentare- (Dollars in Millioms) Point Increase Point Decrease Health Care Plans Total interest and service cost $ 35 $(27) Postretirement benefit obligation 320 (259) 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: Retirement Plans Other Benefit Plans (Dollars in Millions) 2007 2006 2007 2006 Change in Benefit Obligation Projected benefit obligation beginning of year $11,660 10,171 $ 2,668 2,325 Service cost 597 552 140 122 Interest cost 656 570 149 136 Plan participant contributions 62 47 Amendments 14 7 Actuarial (gains) losses (876) (99) (1) 130 Divestitures & acquisitions 79 443 101 Curtailments & settlements (46) 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 Plan assets at fair value -- beginning of year $9,538 8,108 30 34 Actual return on plan assets 743 966 4 2 Company contributions 317 259 250 141 Plan participant contributions 62 47 Settlements (38) (7) Divestitures & acquisitions 55 300 Benefits paid from plan assets (481) (402) (255) (147) Effect of exchange rates 273 267 Plan assets at fair value -- end of year $10,469 9,538 $ 29 30 Funded status at - end of year $ (1,533) (2,122) $(2,692) (2,638) Amounts Recognized in the Company's Balance Sheet consist of the following: Non-current assets $ 481 259 Current liabilities (43) (26) (262) Non-current liabilities (1,971) (2,355) (2,430) (2,557) Total recognized in the consolidated balance sheet -- end of year $ (1,533) (2,122) $(2,692) (2,638) Amounts Recognized in Accumulated Other Comprehensive Income consist of the following: Net actuarial loss (gain) $ 1,027 1,996 $ 1,013 1,046 Prior service cost (credit) 51 44 (36) (42) Unrecognized net transition asset 7 7 Total before tax effects $ 1,085 2,047 $ 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 Net periodic benefit cost $ 646 $ 346 Net actuarial loss (gain) (555) 11 Amortization of net actuarial loss (435) (13) Prior service cost (34) Amortization of prior service cost 14 6 Effect of exchange rates 23 3 Total recognized in other comprehensive income, before tax $ (962) $ (27) Total recognized in net periodic benefit cost and other comprehensive income $ (316) $ 319 Plans with accumulated benefit obligations in excess of plan assets consist of the following: Retirement Plans (Dollars in Millions) 2007 2006 Accumulated benefit obligation $(4,914) (3,085) Projected benefit obligation (5,233) (3,561) Plan assets at fair value 3,735 1,650 ** 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: (Dallars in Millions) 2008 2010 2011 2013-2017 Projected future benefit payments Retirement plans $457 472 507 542 564 3,467 Other benefit plans - gross $274 180 188 192 1,080 Medicare rebates (11) (12) (13) (14) (94) Other benefit plans - net $265 $169 $172 $175 $178 $986 2009 200 184 2008 2009 2010 2012 2013-2017 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 following 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. (Dollars in Milions) 2011 Projected future contributions Unfunded U.S. retirement plans $28 30 33 35 38 238 Unfunded International retirement plans $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 Target Allocation U.S. Retirement Plans Equity Securities 79% 78% 75% Debt securities 25 Total plan assets 100% 100% 100% International Retirement Plans Equity securities 67% 67% 67% Debt securities 32 32 33 Real estate and other Total plan assets 100% 100% 100% Plan Assets 2001 2006 2008 21 22 1 1 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
