Johnson and Johnson 2006 Annual Report Download - page 47

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 products 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 December 31, 2006 market rates would increase the
unrealized value of the Company’s forward contracts by
$262 million. Conversely, a 10% depreciation of the U.S. Dollar
from the December 31, 2006 market rates would decrease
the unrealized value of the Company’s forward contracts by
$320 million. In either scenario, the gain or loss on the forward
contract would be offset by the gain or loss on the underlying
transaction and, therefore, would have no impact on future
earnings and cash flows.
The Company hedges the exposure to fluctuations in cur-
rency exchange rates, and the effect on certain assets and liabili-
ties 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 instru-
ments would either increase or decrease the unrealized value of
the Company’s swap contracts by approximately $127 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 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 concentration of exposure with any one counter-
party. Management believes the risk of loss is remote.
Total unused credit available to the Company approximates
$10.8 billion, including $9 billion of credit commitments,
of which $3.75 billion expire September 27, 2007, $4 billion
expire October 30, 2007 and $1.25 billion expire September 28,
2011. Also included are $0.75 billion of uncommitted lines with
various banks worldwide that expire during 2007.
Total borrowings at the end of 2006 and 2005 were $6.6
billion and $2.7 billion, respectively. The increase in borrowings
between 2005 and 2006 was a result of financing the acquisition
of the Consumer Healthcare business of Pfizer Inc. in December
2006. In 2006, net debt (cash and current marketable securities
Oper
ppe re
(in billions of dollars
a i al ndi r s
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15
1
5
net of debt) was $2.5 billion compared to net cash of $13.5 billion
in 2005. Total debt represented 14.4% of total capital (share-
holders’ equity and total debt) in 2006 and 6.5% of total capital
in 2005. Shareholders’ equity per share at the end of 2006
was $13.59 compared with $13.01 at year-end 2005, an increase
of 4.5%.
For the period ended December 31, 2006, there were no
material 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 December 31, 2006 (see Notes 4, 6
and 13 for further details):
Long-Term Unfunded
Operating Debt Retirement
(Dollars in Millions) Leases Obligations(1)Plans Total
2007 $187 9 41 237
2008 162 9 42 213
2009 137 240 44 421
2010 115 9 45 169
2011 98 6 47 151
After 2011 150 1,750 260 2,160
Total $849 2,023 479 3,351
(1)Amounts do not include interest expense.
SHARE REPURCHASE AND DIVIDENDS
On March 8, 2006, the Company announced that its Board of
Directors approved a stock repurchase program, authorizing the
Company to buy back up to $5.0 billion of the Company’s com-
mon stock. This program was completed early in the fiscal fourth
quarter of 2006 with 81.3 million shares repurchased. In addition
the Company has an annual program to repurchase shares for
use in employee stock and incentive plans.
The Company increased its dividend in 2006 for the 44th
consecutive year. Cash dividends paid were $1.455 per share in
2006, compared with dividends of $1.275 per share in 2005
and $1.095 per share in 2004. The dividends were distributed
as follows:
2006 2005 2004
First quarter $0.330 0.285 0.240
Second quarter 0.375 0.330 0.285
Third quarter 0.375 0.330 0.285
Fourth quarter 0.375 0.330 0.285
Total $1.455 1.275 1.095
On January 2, 2007, the Board of Directors declared a regular cash
dividend of $0.375 per share, payable on March 13, 2007, to share-
holders of record as of February 27, 2007. The Company expects to
continue the practice of paying regular cash dividends.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 45