Johnson and Johnson 2005 Annual Report Download - page 37

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 existing foreign currency assets and
liabilities and to hedge future foreign currency 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 1, 2006 market rates would
increase the unrealized value of the Company’s forward
contracts by $267 million. Conversely, a 10% depreciation of
the U.S. Dollar from the January 1, 2006 market rates would
decrease the unrealized value of the Company’s forward
contracts by $326 million. In either scenario, the gain or loss
on the forward contract would be offset by the change in
value of the forecasted transaction, and therefore, would
have no impact on future 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 $60
million. In either scenario, at maturity, the gain or loss on the
swap contract would be offset by the gain or loss on the under-
lying transaction and therefore would have no impact on future
earnings or cash flows.
The Company does not use 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 signi-
ficant concentration of exposure with any one counterparty.
Management believes the risk of loss is remote.
Total unused credit available to the Company approximates
$3.6 billion, including $1.5 billion of credit commitments,
of which $0.75 billion expire September 28, 2006 and $0.75
billion expire September 29, 2010. Also included are $0.8
billion of uncommitted lines with various banks worldwide
that expire during 2006.
Total borrowings at the end of 2005 and 2004 were $2.7 bil-
lion and $2.8 billion, respectively. In 2005, net cash (cash and
current marketable securities, net of debt) was $13.5 billion
compared to net cash of $10.0 billion in 2004. Total debt repre-
sented 6.6% of total capital (shareholders’ equity and total
debt) in 2005 and 8.2% of total capital in 2004. Shareholders’
equity per share at the end of 2005 was $12.73 compared with
$10.71 at year-end 2004, an increase of 18.9%.
On August 19, 2005, Scios Inc. exercised its right to redeem
all of its outstanding $150 million original principal amount of
5.50% Convertible Subordinated Notes due in 2009. The
redemption price was 103.143% of the principal amount
or $1,031.43 per $1,000 principal amount of Debentures, with
accrued interest to, but excluding, the date of redemption.
For the period ended January 1, 2006, there were no mater-
ial cash commitments. 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 6.
Long-Term Contractual Obligations and Commitments
The Company has long-term contractual obligations, primarily
lease, debt obligations and unfunded retirement plans, with no
other significant obligations. To satisfy these obligations, the
Company will use cash from operations. The following table
summarizes the Company’s contractual obligations and their
aggregate maturities as of January 1, 2006 (see Notes 4, 6 and
13 for further details):
Long-TermUnfunded
Operating Debt Retirement
(Millions of Dollars) Leases Obligations(1) Plans Total
2006 $162 12 37 211
2007 142 17 40 199
2008 119 841 168
2009 103 208 44 355
2010 88 946 143
After 2010 151 1,776 267 2,194
Total $765 2,030 475 3,270
(1) Amounts do not include interest expense.
Dividends
The Company increased its dividend in 2005 for the 43rd con-
secutive year. Cash dividends paid were $1.275 per share in
2005, compared with dividends of $1.095 per share in 2004
and $0.925 per share in 2003. The dividends were distributed
as follows:
2005 2004 2003
First quarter $0.285 0.240 0.205
Second quarter 0.330 0.285 0.240
Third quarter 0.330 0.285 0.240
Fourth quarter 0.330 0.285 0.240
Total $1.275 1.095 0.925
On January 4, 2006, the Board of Directors declared a regular
cash dividend of $0.33 per share, payable on March 14, 2006, to
shareholders of record as of February 28, 2006. The Company
expects to continue the practice of paying regular cash dividends.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION PAGE 35
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9
6
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Capital Expenditures
Operating Cash Flow
Operating
Cash Flow and
Capital Expenditures
(in billions ofdollars)
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