Johnson and Johnson 2009 Annual Report Download - page 34

32 J O H N S O N & J O H N S O N 2 0 0 9 A N N U A L R E P O R T
2007 tax rate benefited from a one-time gain of $267 million related
to a business restructuring of certain international subsidiaries.
Liquidity and Capital Resources
LI Q UID I TY & CAS H FLOWS
Cash and cash equivalents were $15.8 billion at the end of 2009
as compared with $10.8 billion at the end of 2008. The primary
sources of cash that contributed to the $5.0 billion increase versus
prior year were $16.6 billion of cash generated from operating activi-
ties and $2.5 billion net proceeds from long and short-term debt. The
major uses of cash were capital spending of $2.4 billion, acquisitions
of $2.5 billion, net investment purchases of $2.8 billion, dividends to
shareholders of $5.3 billion and the repurchase of common stock, net
of proceeds from the exercise of options, of $1.2 billion.
Cash Flows from operations were $16.6 billion in 2009. The
major sources of cash flow were net income of $12.3 billion, adjusted
for non-cash charges for depreciation, amortization and stock based
compensation of $3.4 billion, restructuring reserves of $1.1 billion and
accounts receivable and inventories of $0.5 billion. The remaining
changes to operating cash flow were a use of funds of $0.7 billion
related to pension plan contributions and decreases in accounts
payable partially offset by decreases in other receivables, prepaid
expenses and deferred taxes.
In 2009, the Company continued to have access to liquidity
through the commercial paper market. For additional details on
borrowings, see Note 7 to the Consolidated Financial Statements.
The Company anticipates that operating cash flows, existing
credit facilities and access to the commercial paper markets will
provide sufficient resources to fund operating needs in 2010.
FINANCING AND MARKET RISK
The Company uses financial instruments to manage the impact of
foreign exchange rate changes on cash flows. Accordingly, the Company
enters into forward foreign exchange contracts to protect the value of
certain foreign currency assets and liabilities and to hedge future foreign
currency transactions primarily related to product costs. Gains or losses
on these contracts are offset by the gains or losses on the underlying
transactions. A 10% appreciation of the U.S. Dollar from the January 3,
2010 market rates would increase the unrealized value of the Company’s
forward contracts by $296 million. Conversely, a 10% depreciation of
the U.S. Dollar from the January 3, 2010 market rates would decrease
the unrealized value of the Company’s forward contracts by $361 million.
In either scenario, the gain or loss on the forward contract would be off-
set by the gain or loss on the underlying transaction and, therefore,
would have no impact on future anticipated earnings and cash flows.
The Company hedges the exposure to fluctuations in currency
exchange rates, and the effect on certain assets and liabilities in
foreign currency, by entering into currency swap contracts. A 1%
change in the spread between U.S. and foreign interest rates on the
Company’s interest rate sensitive financial instruments would
either increase or decrease the unrealized value of the Company’s
swap contracts by approximately $185 million. In either scenario,
at maturity, the gain or loss on the swap contract would be offset by
the gain or loss on the underlying transaction and therefore would
have no impact on future anticipated cash flows.
The Company does not enter into financial instruments for
trading or speculative purposes. Further, the Company has a policy
of only entering into contracts with parties that have at least an “A”
(or equivalent) credit rating. The counterparties to these contracts
are major financial institutions and there is no significant concentra-
tion of exposure with any one counterparty. Management believes
the risk of loss is remote.
The Company has access to substantial sources of funds at
numerous banks worldwide. In September 2009, the Company
secured a new 364-day Credit Facility. Total credit available to the
Company approximates $10 billion, which expires September 23,
2010. Interest charged on borrowings under the credit line agree-
ments is based on either bids provided by banks, the prime rate or
London Interbank Offered Rates (LIBOR), plus applicable margins.
Commitment fees under the agreement are not material.
Total borrowings at the end of 2009 and 2008 were $14.5 bil-
lion and $11.9 billion, respectively. The increase in borrowings
between 2009 and 2008 was a result of financing general corporate
purposes and the continuation of the Common Stock repurchase
program announced in 2007. In 2009, net cash (cash and current
marketable securities, net of debt) was $4.9 billion compared to net
cash of $1.0 billion in 2008. Total debt represented 22.3% of total
capital (shareholders’ equity and total debt) in 2009 and 21.8% of
total capital in 2008. Shareholders’ equity per share at the end of
2009 was $18.37 compared with $15.35 at year-end 2008, an
increase of 19.7%.
Johnson & Johnson continues to be one of a few industrial
companies with a Triple A credit rating. A summary of borrowings
can be found in Note 7 to the Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has contractual obligations, primarily lease, debt and
unfunded retirement plans, with no other significant obligations.
To satisfy these obligations, the Company will use cash from opera-
tions. The following table summarizes the Company’s contractual
obligations and their aggregate maturities as of January 3, 2010
(see Notes 7, 10 and 16 to the Consolidated Financial Statements for
further details):
Long-term Interest on Unfunded
Debt Debt Retirement Operating
(Dollars in Millions) Obligations Obligations Plans Leases Total
2010 $ 34 469 66 178 747
2011 35 465 65 150 715
2012 615 442 69 128 1,254
2013 507 410 73 103 1,093
2014 9 402 76 87 574
After 2014 7,057 4,525 474 94 12,150
Total $8,257 6,713 823 740 16,533
For tax matters, see Note 8 to the Consolidated Financial Statements.
SHARE REPURCHASE AND DIVIDENDS
On July 9, 2007, the Company announced that its Board of Directors
approved a stock repurchase program, authorizing the Company to
buy back up to $10.0 billion of the Company’s Common Stock. The
repurchase program has no time limit and may be suspended for
periods or discontinued at any time. Any shares acquired will be
available for general corporate purposes. The Company funds the
share repurchase program through a combination of available cash
and debt. As of January 3, 2010, the Company repurchased an