Johnson and Johnson 2009 Annual Report Download - page 55

14. International Currency Translation
For translation of its subsidiaries operating in non-U.S. Dollar cur-
rencies, the Company has determined that the local currencies of
its international subsidiaries are the functional currencies except
those in highly inflationary economies, which are defined as those
which have had compound cumulative rates of inflation of 100%
or more during the past three years, or where a substantial portion
of its cash flows are not in the local currency.
In consolidating international subsidiaries, balance sheet cur-
rency effects are recorded as a component of accumulated other
comprehensive income. This equity account includes the results
of translating all balance sheet assets and liabilities at current
exchange rates, except for those located in highly inflationary
economies. The translation of balance sheet accounts for highly
inflationary economies are reflected in the operating results.
An analysis of the changes during 2009, 2008 and 2007 for
foreign currency translation adjustments is included in Note 13.
Net currency transaction and translation gains and losses
included in other (income) expense were losses of $210 million,
$31 million and $23 million in 2009, 2008 and 2007, respectively.
15. Earnings Per Share
The following is a reconciliation of basic net earnings per share to
diluted net earnings per share for the fiscal years ended January 3,
2010, December 28, 2008 and December 30, 2007:
(Shares in Millions Except Per Share Data) 2009 2008 2007
Basic net earnings per share $ 4.45 4.62 3.67
Average shares
outstanding — basic 2,759.5 2,802.5 2,882.9
Potential shares exercisable
under stock option plans 118.0 179.0 178.6
Less: shares repurchased
under treasury stock method (92.0) (149.6) (154.5)
Convertible debt shares 3.6 3.7 3.7
Adjusted average shares
outstanding — diluted 2,789.1 2,835.6 2,910.7
Diluted net earnings per share $ 4.40 4.57 3.63
The diluted net earnings per share calculation includes the dilutive
effect of convertible debt that is offset by the related reduction
in interest expense of $4 million after-tax for years 2009, 2008
and 2007.
Diluted net earnings per share excludes 121 million, 59 million
and 64 million shares underlying stock options for 2009, 2008 and
2007, respectively, as the exercise price of these options was
greater than their average market value, which would result in an
anti-dilutive effect on diluted earnings per share.
16. Rental Expense and Lease Commitments
Rentals of space, vehicles, manufacturing equipment and office and
data processing equipment under operating leases were approxi-
mately $322 million in 2009, $309 million in 2008 and $302 million
in 2007.
The approximate minimum rental payments required under
operating leases that have initial or remaining non-cancelable lease
terms in excess of one year at January 3, 2010 are:
(Dollars in Millions) After
2010 2011 2012 2013 2014 2014 Total
$178 150 128 103 87 94 740
Commitments under capital leases are not significant.
17. Common Stock, Stock Option Plans and Stock
Compensation Agreements
STOCK OPTIONS
At January 3, 2010, the Company had 11 stock-based compen-
sation plans. The shares outstanding are for contracts under the
Company’s 1995 and 2000 Stock Option Plans, the 2005 Long-
Term Incentive Plan, the 1997 Non-Employee Director’s Plan and
the ALZA, Inverness, and Scios Stock Option Plans. During 2009,
no options or restricted shares were granted under any of these
plans except under the 2005 Long-Term Incentive Plan.
The compensation cost that has been charged against income
for these plans was $628 million, $627 million and $698 million for
2009, 2008 and 2007, respectively. The total income tax benefit
recognized in the income statement for share-based compensation
costs was $210 million, $210 million and $238 million for 2009,
2008 and 2007, respectively. Share-based compensation costs
capitalized as part of inventory were insignificant in all periods.
Stock options expire 10 years from the date of grant and vest
over service periods that range from six months to five years. All
options are granted at the average of the high and low prices of the
Company’s common stock on the New York Stock Exchange on
the date of grant. Under the 2005 Long-Term Incentive Plan, the
Company may issue up to 260 million shares of common stock.
Shares available for future grants under the 2005 Long-Term
Incentive Plan were 139.7 million at the end of 2009.
The Company settles employee stock option exercises with
treasury shares. Treasury shares are replenished throughout the
year for the number of shares used to settle employee stock
option exercises.
The fair value of each option award was estimated on the date
of grant using the Black-Scholes option valuation model that uses
the assumptions noted in the following table. Expected volatility
represents a blended rate of 4-year daily historical average volatility
rate, and a 5-week average implied volatility rate based on at-the-
money traded Johnson & Johnson options with a life of 2 years.
Historical data is used to determine the expected life of the option.
The risk-free rate was based on the U.S. Treasury yield curve in
effect at the time of grant.
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