Johnson & Johnson
JOHNSON & JOHNSON (Form: 10-K, Received: 02/20/2009 16:19:30)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 28, 2008 Commission file number 1-3215
 
JOHNSON & JOHNSON
 
(Exact name of registrant as specified in its charter)
 
     
New Jersey
  22-1024240
(State of incorporation)   (I.R.S. Employer Identification No.)
     
One Johnson & Johnson Plaza
New Brunswick, New Jersey
  08933
(Address of principal executive offices)   (Zip Code)
 
Registrant’s telephone number, including area code: (732) 524-0400
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
 
     
Title of each class
 
Name of each exchange on which registered
 
Common Stock, Par Value $1.00   New York Stock Exchange
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  þ   No  o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes  o   No  þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ   No  o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer   þ      Accelerated filer   o      Non-accelerated filer   o      Smaller reporting company   o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  þ
 
The aggregate market value of the Common Stock held by non-affiliates computed by reference to the price at which the Common Stock was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $178 billion.
 
On February 9, 2009 there were 2,765,804,457 shares of Common Stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
     
Parts I, II and III:
  Portions of registrant’s annual report to shareholders for fiscal year 2008 (the “Annual Report”).
Parts I and III:
  Portions of registrant’s proxy statement for its 2009 annual meeting of shareholders filed within 120 days after the close of the registrant’s fiscal year (the “Proxy Statement”).
 


 

             
Item
     
Page
 
 
  Business     1  
       General     1  
       Segments of Business     1  
       Geographic Areas     2  
       Raw Materials     2  
       Patents and Trademarks     2  
       Seasonality     3  
       Competition     3  
       Research and Development     3  
       Environment     3  
       Regulation     3  
       Available Information     4  
  Risk Factors     4  
  Unresolved Staff Comments     4  
  Properties     4  
  Legal Proceedings     5  
  Submission of Matters to a Vote of Security Holders     5  
    Executive Officers of the Registrant     5  
 
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     7  
  Selected Financial Data     8  
  Management’s Discussion and Analysis of Financial Condition and Results of Operation     8  
  Quantitative and Qualitative Disclosures About Market Risk     8  
  Financial Statements and Supplementary Data     8  
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     9  
  Controls and Procedures     9  
  Other Information     9  
 
  Directors, Executive Officers and Corporate Governance     10  
  Executive Compensation     10  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     10  
  Certain Relationships and Related Transactions, and Director Independence     11  
  Principal Accountant Fees and Services     11  
 
  Exhibits and Financial Statement Schedules     12  
    Schedule II — Valuation and Qualifying Accounts     13  
    Signatures     14  
    Report of Independent Registered Public Accounting Firm on Financial Statement Schedule     16  
    Exhibit Index     17  
  EX-10.J: AMENDMENTS TO CERTIFICATE OF EXTRA COMPENSATION PLAN
  EX-10.L: AMENDMENTS TO THE DEFERRED FEE PLAN FOR DIRECTORS
  EX-10.N: AMENDMENTS TO THE EXECUTIVE INCOME DEFERRAL PLAN
  EX-10.P: AMENDMENTS TO THE JOHNSON & JOHNSON EXCESS SAVINGS PLAN
  EX-10.R: AMENDMENTS TO THE EXCESS BENEFIT PLAN
  EX-10.V: SUMMARY OF COMPENSATION ARRANGEMENTS
  EX-10.W: SEVERANCE ARRANGEMENT FOR ALEX GORSKY
  EX-12: STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
  EX-13: PAGES OF COMPANY'S ANNUAL REPORT TO SHAREHOLDERS
  EX-21: SUBSIDIARIES
  EX-23: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  EX-31.A: CERTIFICATION
  EX-31.B: CERTIFICATION
  EX-32.A: CERTIFICATION
  EX-32.B: CERTIFICATION
  EX-99: CAUTIONARY STATEMENT


Table of Contents

 
PART I
 
Item 1.  BUSINESS
 
General
 
Johnson & Johnson and its subsidiaries have approximately 118,700 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. Johnson & Johnson is a holding company, which has more than 250 operating companies conducting business in virtually all countries of the world. Johnson & Johnson’s primary focus has been on products related to human health and well-being. Johnson & Johnson was incorporated in the State of New Jersey in 1887.
 
The Company’s structure is based on the principle of decentralized management. The Executive Committee of Johnson & Johnson is the principal management group responsible for the operations and allocation of the resources of the Company. This Committee oversees and coordinates the activities of the Consumer, Pharmaceutical and Medical Devices and Diagnostics business segments. Each subsidiary within the business segments is, with some exceptions, managed by citizens of the country where it is located.
 
Segments of Business
 
Johnson & Johnson’s operating companies are organized into three business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. Additional information required by this item is incorporated herein by reference to the narrative and tabular (but not the graphic) descriptions of segments and operating results under the captions “Management’s Discussion and Analysis of Results of Operations and Financial Condition” on pages 34 through 43 and Note 11 “Segments of Business and Geographic Areas” under “Notes to Consolidated Financial Statements” on page 55 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K.
 
Consumer
 
The Consumer segment includes a broad range of products used in the baby care, skin care, oral care, wound care and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products. The Baby Care franchise includes the JOHNSON’S ® Baby line of products. Major brands in the Skin Care franchise include the AVEENO ® ; CLEAN & CLEAR ® ; JOHNSON’S ® Adult; NEUTROGENA ® ; RoC ® ; LUBRIDERM ® ; Beijing Dabao Cosmetics Co., Ltd.; and Vendôme product lines. The Oral Care franchise includes the LISTERINE ® and REACH ® oral care lines of products. Major brands in the Women’s Health franchise are the CAREFREE ® Pantiliners and STAYFREE ® sanitary protection products. The nutritional and over-the-counter lines include SPLENDA ® , No Calorie Sweetener; the broad family of TYLENOL ® acetaminophen products; SUDAFED ® cold, flu and allergy products; ZYRTEC ® allergy products; MOTRIN ® IB ibuprofen products; and PEPCID ® AC Acid Controller from Johnson & Johnson • Merck Consumer Pharmaceuticals Co. These products are marketed principally to the general public and sold both to wholesalers and directly to independent and chain retail outlets throughout the world.
 
Pharmaceutical
 
The Pharmaceutical segment includes products in the following therapeutic areas: anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology and virology. These products are distributed directly to retailers, wholesalers and health care professionals for prescription use by the general public. Key products in the Pharmaceutical segment include: REMICADE ® (infliximab), a biologic approved for the treatment of Crohn’s disease, ankylosing spondylitis, psoriasis, psoriatic arthritis, ulcerative colitis, and use in the treatment of rheumatoid arthritis; TOPAMAX ® (topiramate), approved for adjunctive and monotherapy use in epilepsy, as well as for the prophylactic treatment of migraines; PROCRIT ® (Epoetin alfa, sold outside the U.S. as EPREX ® ), a biotechnology-derived product that stimulates red blood cell production; RISPERDAL ® oral (risperidone), a medication that treats the symptoms of schizophrenia, bipolar mania and irritability associated with autistic behavior in indicated patients, RISPERDAL ® CONSTA ® (risperidone), a long-acting injectable, and INVEGA TM (paliperdone) Extended-Release tablets, for the treatment of schizophrenia; LEVAQUIN ® (levofloxacin) and FLOXIN ® (ofloxacin), both in the anti-infective field; CONCERTA ® (methylphenidate HCl), a product for the treatment of attention deficit hyperactivity disorder; ACIPHEX ® /PARIET ® , a proton pump inhibitor co-marketed with Eisai Inc.; and DURAGESIC ® /Fentanyl Transdermal (fentanyl transdermal system, sold outside the U.S. as DUROGESIC ® ), a treatment for chronic pain that offers a novel delivery system.


Table of Contents

 
Medical Devices and Diagnostics
 
The Medical Devices and Diagnostics segment includes a broad range of products distributed to wholesalers, hospitals and retailers, used principally in the professional fields by physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics. These products include Cordis’ circulatory disease management products; DePuy’s orthopaedic joint reconstruction, spinal care and sports medicine products; Ethicon’s surgical care and women’s health products; Ethicon Endo-Surgery’s minimally invasive surgical products; LifeScan’s blood glucose monitoring and insulin delivery products; Ortho-Clinical Diagnostics’ professional diagnostic products and Vistakon’s disposable contact lenses. Distribution to these health care professional markets is done both directly and through surgical supply and other dealers.
 
Geographic Areas
 
The international business of Johnson & Johnson is conducted by subsidiaries located in 56 countries outside the United States, which are selling products in virtually all countries throughout the world. The products made and sold in the international business include many of those described above under “— Segments of Business — Consumer,” “— Pharmaceutical” and “— Medical Devices and Diagnostics.” However, the principal markets, products and methods of distribution in the international business vary with the country and the culture. The products sold in international business include not only those developed in the United States, but also those developed by subsidiaries abroad.
 
Investments and activities in some countries outside the United States are subject to higher risks than comparable U.S. activities because the investment and commercial climate is influenced by restrictive economic policies and political uncertainties.
 
Raw Materials
 
Raw materials essential to Johnson & Johnson’s operating companies’ businesses are generally readily available from multiple sources.
 
Patents and Trademarks
 
Johnson & Johnson and its operating companies have made a practice of obtaining patent protection on their products and processes where possible. They own or are licensed under a number of patents relating to their products and manufacturing processes, which in the aggregate are believed to be of material importance to Johnson & Johnson in the operation of its businesses. Sales of the Company’s two largest products, REMICADE ® (infliximab) and TOPAMAX ® (topiramate), accounted for approximately 6% and 4% of Johnson & Johnson’s total revenues, respectively, for fiscal 2008. Accordingly, the patents related to these products are believed to be material to Johnson & Johnson as a whole.
 
The material patents that expired in 2007 and 2008 are related to RISPERDAL ® (risperidone), which expired in the United States in December 2007, and TOPAMAX ® , which expired in the United States in September 2008. The Company has received pediatric extensions for RISPERDAL ® oral and TOPAMAX ® from the FDA, which granted market exclusivity in the United States through June 2008 and March 2009, respectively. The next significant patent scheduled to expire on December 20, 2010 is for LEVAQUIN ® (levofloxacin), which accounted for 2.5% of the Company’s 2008 sales. A pediatric extension for LEVAQUIN ® was granted by the FDA, which extends market exclusivity in the United States through June 20, 2011.
 
Johnson & Johnson’s operating companies have made a practice of selling their products under trademarks and of obtaining protection for these trademarks by all available means. These trademarks are protected by registration in the United States and other countries where such products are marketed. Johnson & Johnson considers these trademarks in the aggregate to be of material importance in the operation of its businesses.


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Seasonality
 
Worldwide sales do not reflect any significant degree of seasonality; however, spending has been heavier in the fourth quarter of each year than in other quarters. This reflects increased spending decisions, principally for advertising and research and development activity.
 
Competition
 
In all of their product lines, Johnson & Johnson’s operating companies compete with companies both large and small, located throughout the world. Competition is strong in all product lines without regard to the number and size of the competing companies involved. Competition in research, involving the development and the improvement of new and existing products and processes, is particularly significant. The development of new and improved products is important to Johnson & Johnson’s success in all areas of its businesses. This also includes protecting the Company’s portfolio of intellectual property. The competitive environment requires substantial investments in continuing research and multiple sales forces. In addition, the development and maintenance of customer acceptance of the products of Johnson & Johnson’s consumer businesses involves significant expenditures for advertising and promotion.
 
Research and Development
 
Research activities represent a significant part of Johnson & Johnson’s subsidiaries’ businesses. Major research facilities are located not only in the United States but also in Belgium, Brazil, Canada, China, France, Germany, India, Japan, the Netherlands, Singapore and the United Kingdom. The costs of worldwide Company-sponsored research activities relating to the development of new products, improvement of existing products, technical support of products and compliance with governmental regulations for the protection of consumers and patients, excluding in-process research and development charges, amounted to $7.6 billion, $7.7 billion and $7.1 billion for fiscal years 2008, 2007 and 2006, respectively. These costs are charged directly to expense, or directly against income, in the year in which incurred.
 
Environment
 
Johnson & Johnson’s operating companies are subject to a variety of federal, state and local environmental protection measures. Johnson & Johnson believes that its operations comply in all material respects with applicable environmental laws and regulations. Johnson & Johnson’s compliance with these requirements did not during the past year, and is not expected to, have a material effect upon its capital expenditures, cash flows, earnings or competitive position.
 
Regulation
 
Most of Johnson & Johnson’s businesses are subject to varying degrees of governmental regulation in the countries in which operations are conducted, and the general trend is toward increasingly stringent regulation. In the United States, the drug, device, diagnostics and cosmetic industries have long been subject to regulation by various federal and state agencies, primarily as to product safety, efficacy, manufacturing, advertising, labeling and safety reporting. The exercise of broad regulatory powers by the FDA continues to result in increases in the amounts of testing and documentation required for FDA clearance of new drugs and devices and a corresponding increase in the expense of product introduction. Similar trends are also evident in major markets outside of the United States.
 
The costs of human health care have been and continue to be a subject of study, investigation and regulation by governmental agencies and legislative bodies around the world. In the United States, attention has been focused on drug prices and profits and programs that encourage doctors to write prescriptions for particular drugs or recommend, use or purchase particular medical devices. Payers have become a more potent force in the market place and increased attention is being paid to drug and medical device pricing, appropriate drug and medical device utilization and the quality and costs of health care. In the United States, implementation of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 and the Deficit Reduction Act of 2005 may cause uncertainty in reimbursement levels in certain product segments.


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The regulatory agencies under whose purview Johnson & Johnson’s operating companies operate have administrative powers that may subject those companies to such actions as product withdrawals, recalls, seizure of products and other civil and criminal sanctions. In some cases, Johnson & Johnson’s operating companies may deem it advisable to initiate product recalls.
 
In addition, business practices in the health care industry have come under increased scrutiny, particularly in the United States, by government agencies and state attorneys general, and resulting investigations and prosecutions carry the risk of significant civil and criminal penalties.
 
Available Information
 
The Company’s main corporate Web site address is www.jnj.com. Copies of Johnson & Johnson’s Quarterly Reports on Form 10-Q, Annual Report on Form 10-K and Current Reports on Form 8-K filed or furnished to the U.S. Securities and Exchange Commission (the “SEC”), and any amendments to the foregoing, will be provided without charge to any shareholder submitting a written request to the Secretary at the principal executive offices of the Company or by calling 1-800-950-5089. All of the Company’s SEC filings are also available on the Company’s Web site at www.investor.jnj.com/governance.cfm , as soon as reasonably practicable after having been electronically filed or furnished to the SEC. All SEC filings are also available at the SEC’s Web site at www.sec.gov . In addition, the written charters of the Audit Committee, the Compensation & Benefits Committee and the Nominating & Corporate Governance Committee of the Board of Directors and the Company’s Principles of Corporate Governance, Policy on Business Conduct for employees and Code of Business Conduct & Ethics for Members of the Board of Directors and Executive Officers are available at the www.investor.jnj.com/governance.cfm Web site address and will be provided without charge to any shareholder submitting a written request, as provided above.
 
Item 1A.  RISK FACTORS
 
Not applicable.
 
Item 1B.  UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
Item 2.  PROPERTIES
 
Johnson & Johnson and its subsidiaries operate 147 manufacturing facilities occupying approximately 21.6 million square feet of floor space.
 
The manufacturing facilities are used by the industry segments of Johnson & Johnson’s business approximately as follows:
 
         
    Square Feet
 
    (in
 
  Segment
 
thousands)
 
 
Consumer
    7,629  
Pharmaceutical
    6,221  
Medical Devices and Diagnostics
    7,703  
         
Worldwide Total
    21,553  
         
 
Within the United States, eight facilities are used by the Consumer segment, 12 by the Pharmaceutical segment and 41 by the Medical Devices and Diagnostics segment. Johnson & Johnson’s manufacturing operations outside the United States are often conducted in facilities that serve more than one business segment.


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The locations of the manufacturing facilities by major geographic areas of the world are as follows:
 
                 
          Square Feet
 
    Number of
    (in
 
Geographic Area
 
Facilities
   
thousands)
 
 
United States
    61       7,973  
Europe
    35       7,239  
Western Hemisphere, excluding U.S.
    16       3,018  
Africa, Asia and Pacific
    35       3,323  
                 
Worldwide Total
    147       21,553  
                 
 
In addition to the manufacturing facilities discussed above, Johnson & Johnson and its subsidiaries maintain numerous office and warehouse facilities throughout the world. Research facilities are also discussed in Item 1 under “Business — Research and Development.”
 
Johnson & Johnson and its subsidiaries generally seek to own their manufacturing facilities, although some, principally in locations abroad, are leased. Office and warehouse facilities are often leased.
 
Johnson & Johnson’s properties are maintained in good operating condition and repair and are well utilized.
 
For information regarding lease obligations, see Note 4 “Rental Expense and Lease Commitments” under “Notes to Consolidated Financial Statements” on page 51 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K. Segment information on additions to property, plant and equipment is contained in Note 11 “Segments of Business and Geographic Areas” under “Notes to Consolidated Financial Statements” on page 55 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K.
 
Item 3.  LEGAL PROCEEDINGS
 
The information set forth in Note 18 “Legal Proceedings” under “Notes to Consolidated Financial Statements” on pages 62 through 66 of the Annual Report is incorporated herein by reference and filed as Exhibit 13 to this Report on Form 10-K.
 
The Company or its subsidiaries are parties to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and comparable state laws, in which the primary relief sought is the cost of past and future remediation. While it is not feasible to predict or determine the outcome of these proceedings, in the opinion of the Company, such proceedings would not have a material adverse effect on the results of operations, cash flows or financial position of the Company.
 
Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
Not applicable.
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
Listed below are the executive officers of Johnson & Johnson as of February 9, 2009, each of whom, unless otherwise indicated below, has been an employee of the Company or its affiliates and held the position indicated during the past five years. There are no family relationships between any of the executive officers, and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected. At the annual meeting of the Board of Directors, the executive officers are elected by the Board to hold office for one year and until their respective successors are elected and qualified, or until earlier resignation or removal.


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Information with regard to the directors of the Company, including those of the following executive officers who are directors, is incorporated herein by reference to the material captioned “Election of Directors” in the Proxy Statement.
 
             
Name
 
Age
   
Position
 
Dominic J. Caruso
    51    
Member, Executive Committee; Vice President, Finance; Chief Financial Officer(a)
Donald M. Casey, Jr.
    49    
Member, Executive Committee; Worldwide Chairman, Comprehensive Care Group(b)
Russell C. Deyo
    59    
Member, Executive Committee; Vice President, General Counsel(c)
Kaye I. Foster-Cheek
    49    
Member, Executive Committee; Vice President, Human Resources(d)
Colleen A. Goggins
    54    
Member, Executive Committee; Worldwide Chairman, Consumer Group(e)
Alex Gorsky
    48    
Member, Executive Committee; Worldwide Chairman, Surgical Care Group(f)
Sherilyn S. McCoy
    50    
Member, Executive Committee; Worldwide Chairman, Pharmaceuticals Group(g)
Christine A. Poon
    56    
Vice Chairman, Board of Directors; Member, Executive Committee(h)
Nicholas J. Valeriani
    52    
Member, Executive Committee; Vice President, Office of Strategy & Growth(i)
William C. Weldon
    60    
Chairman, Board of Directors; Chairman, Executive Committee; Chief Executive Officer
(a) Mr. D. J. Caruso joined the Company in 1999 when the Company acquired Centocor, Inc. At the time of that acquisition, he had been Senior Vice President, Finance of Centocor. Mr. Caruso was named Vice President, Finance of Ortho-McNeil Pharmaceutical, Inc. in 2001 and Vice President, Group Finance of the Company’s Medical Devices and Diagnostics Group in 2003. In 2005, Mr. Caruso was named Vice President of the Company’s Group Finance organization. Mr. Caruso became a Member of the Executive Committee and Vice President, Finance and Chief Financial Officer in 2007.
 
(b) Mr. D. M. Casey, Jr., joined the Company in 1985 and held various positions before becoming President of Johnson & Johnson • Merck Consumer Pharmaceuticals Co. in 1997. In 2001, he was named President of Personal Products Company Division of Johnson & Johnson Consumer Companies, Inc. In 2002, Mr. Casey became the Group President of Johnson & Johnson Vision Care, Inc., and in 2004 was named Company Group Chairman, Vision Care. In 2006, he was named Company Group Chairman of the LifeScan franchise. In 2008, he became a Member of the Executive Committee and Worldwide Chairman, Comprehensive Care Group.
 
(c) Mr. R. C. Deyo joined the Company in 1985 and became Associate General Counsel in 1991. He became a Member of the Executive Committee and Vice President, Administration in 1996 and Vice President, General Counsel in 2004.
 
(d) Ms. K. I. Foster-Cheek joined the Company in 2003 as Vice President, Human Resources for the Johnson & Johnson consumer products companies. In 2004, she was named Vice President, Human Resources for the Consumer & Personal Care Group and was named a member of the Human Resources Leadership Team and the Consumer & Personal Care Group Operating Committee. Ms. Foster-Cheek became a Member of the Executive Committee and Vice President, Human Resources for the Company in 2005. Prior to joining the Company, Ms. Foster-Cheek served in various human resources management positions with Pfizer Inc. for 13 years, most recently supporting its pharmaceutical businesses in Japan, Asia, Africa, Middle East and Latin America.
 
(e) Ms. C. A. Goggins joined the Company in 1981 and held various positions before becoming President of Personal Products Company in 1994. She was named President of Johnson & Johnson Consumer Companies, Inc. in 1995 and Company Group Chairman, North America, Johnson & Johnson Consumer Products in 1998. Ms. Goggins became a Member of the Executive Committee and Worldwide Chairman, Consumer & Personal Care Group in 2001, now known as the Consumer Group.


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(f) Mr. A. Gorsky joined the Company in 2008 as Company Group Chairman and Worldwide Franchise Chairman for Ethicon, Inc. Previously, he was head of the North American pharmaceuticals business at Novartis Pharmaceuticals Corporation from 2004 to 2008. Prior to Novartis, Mr. Gorsky served in various management positions at Johnson & Johnson, including Company Group Chairman for the Company’s pharmaceutical business in Europe, Middle East and Africa and President of Janssen Pharmaceutica Inc. (U.S.). In January 2009, he became a Member of the Executive Committee and Worldwide Chairman, Surgical Care Group.
 
(g) Ms. S. S. McCoy joined the Company in 1982 as an Associate Scientist in Research & Development for Personal Products Company. She was named Vice President, Research & Development for the Personal Products Worldwide Division of McNEIL-PPC, Inc. in 1995, and Vice President, Marketing for its Skin Care franchise in 2000. In 2002, Ms. McCoy became Global President for its Baby and Wound Care franchise. She was named Company Group Chairman and Worldwide Franchise Chairman of Ethicon, Inc. in 2005. In 2008 she became a Member of the Executive Committee and Worldwide Chairman, Surgical Care Group. In January 2009, she became Worldwide Chairman, Pharmaceuticals Group.
 
(h) Ms. C. A. Poon joined the Company in 2000 as a Company Group Chairman in the Pharmaceuticals Group. She became a Member of the Executive Committee and Worldwide Chairman, Pharmaceuticals Group in 2001, was named Worldwide Chairman, Medicines & Nutritionals in 2003 and was appointed Vice Chairman of the Company’s Board of Directors in 2005. She was again named Worldwide Chairman, Pharmaceuticals Group in 2008. Prior to joining the Company, Ms. Poon served in various management positions at Bristol-Myers Squibb Company for 15 years, most recently as President of International Medicines (1998-2000) and President of Medical Devices (1997-1998). Ms. Poon plans to retire from the Company in March 2009.
 
(i) Mr. N. J. Valeriani joined the Company in 1978 and held various positions before becoming President of Ethicon Endo-Surgery, Inc. in 1997. In 2001 he was named Company Group Chairman for Ethicon Endo-Surgery with additional responsibility for the Johnson & Johnson Medical Products Medical Devices and Diagnostics business in Canada. He became Worldwide Franchise Chairman for the DePuy Franchise in 2002. Mr. Valeriani became a Member of the Executive Committee and Vice President, Human Resources in 2003. In 2004 he assumed additional responsibilities as Worldwide Chairman, Diagnostics. In 2005, Mr. Valeriani was appointed Worldwide Chairman, Cardiovascular Devices and Diagnostics and relinquished his Human Resources responsibilities. He became Worldwide Chairman, Medical Devices and Diagnostics Group in 2006. In 2008 Mr. Valeriani became Vice President, Office of Strategy & Growth.
 
PART II
 
Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
As of February 9, 2009, there were 168,784 record holders of Common Stock of the Company. Additional information called for by this item is incorporated herein by reference to: the material under the captions “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Liquidity and Capital Resources — Share Repurchase and Dividends” on page 41; “ — Other Information — Common Stock Market Prices” on page 43; Note 10 “Common Stock, Stock Option Plans and Stock Compensation Agreements” under “Notes to Consolidated Financial Statements” on pages 53 and 54; and “Shareholder Return Performance Graphs” on page 71 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K; and Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters — Equity Compensation Plan Information” of this Report on Form 10-K.
 
Issuer Purchases of Equity Securities
 
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 billion of the Company’s Common Stock. Share repurchases take place on the open market from time to time based on market conditions. 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. The Company does not expect its triple-A credit rating to be affected by the share repurchase program.


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In addition, Common Stock purchases on the open market are made as part of a systematic plan related to the Company’s compensation programs.
 
The following table provides information with respect to Common Stock purchases by the Company during the fiscal fourth quarter of 2008.
 
                                 
                Total Number
       
                of Shares
    Remaining
 
                Purchased as
    Maximum Number
 
                Part of
    of Shares that
 
    Total Number
    Avg. Price
    Publicly Announced
    May Yet Be Purchased
 
    of Shares
    Paid Per
    Plans or
    Under the Plans
 
Period
  Purchased (1)     Share     Programs     or Programs (2)  
 
September 29, 2008 through October 26, 2008
    6,329,500     $ 65.78       6,329,500          
October 27, 2008 through November 23, 2008
    5,472,700     $ 60.50       4,757,600          
November 24, 2008 through December 28, 2008
    2,240,500     $ 57.80                
Total
    14,042,700               11,087,100 (3)     32,224,373  
 
 
(1)   During the fiscal fourth quarter of 2008, the Company repurchased an aggregate of 11,087,100 shares of the Company’s Common Stock pursuant to the repurchase program that was publicly announced on July 9, 2007 and an aggregate of 2,955,600 shares in open-market transactions outside of the program.
 
(2)   As of December 28, 2008, based on the closing price of the Company’s Common Stock on the New York Stock Exchange on December 26, 2008 of $58.56 per share.
 
(3)   As of December 28, 2008, an aggregate of 124,850,500 shares were purchased for a total of $8.1 billion since the inception of the repurchase program announced on July 9, 2007.
 
Item 6.  SELECTED FINANCIAL DATA
 
The information called for by this item is incorporated herein by reference to the material under the caption “Summary of Operations and Statistical Data 1998-2008” on page 70 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K.
 
Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 
The information called for by this item is incorporated herein by reference to the narrative and tabular (but not the graphic) material under the caption “Management’s Discussion and Analysis of Results of Operations and Financial Condition” on pages 34 through 43 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K.
 
Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The information called for by this item is incorporated herein by reference to the material under the caption “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Liquidity and Capital Resources — Financing and Market Risk” on page 40 and Note 1 “Summary of Significant Accounting Policies — Financial Instruments” under “Notes to Consolidated Financial Statements” on pages 49 and 50 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K.
 
Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The information called for by this item is incorporated herein by reference to the Audited Consolidated Financial Statements and Notes thereto and the material under the caption “Report of Independent Registered Public Accounting Firm” on pages 44 through 69 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K.


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Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
Not applicable.
 
Item 9A.   CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures.   At the end of the period covered by this report, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. William C. Weldon, Chairman and Chief Executive Officer, and Dominic J. Caruso, Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Weldon and Caruso concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
 
Management’s Report on Internal Control Over Financial Reporting.   Under Section 404 of the Sarbanes-Oxley Act of 2002, management is required to assess the effectiveness of the Company’s internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company’s internal control over financial reporting is effective.
 
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the preparation of external financial statements in accordance with generally accepted accounting principles.
 
Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
The Company’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 28, 2008. In making this assessment, the Company used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework.” These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The Company’s assessment included extensive documenting, evaluating and testing the design and operating effectiveness of its internal control over financial reporting.
 
Based on the Company’s processes and assessment, as described above, management has concluded that, as of December 28, 2008, the Company’s internal control over financial reporting was effective.
 
The effectiveness of the Company’s internal control over financial reporting as of December 28, 2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which appears in the “Report of Independent Registered Public Accounting Firm” on page 69 of the Annual Report, which is incorporated herein by reference and filed as Exhibit 13 to this Report on Form 10-K.
 
Changes in Internal Control Over Financial Reporting.   During the fiscal quarter ended December 28, 2008, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such referred to above in this Item 9A that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Item 9B.   OTHER INFORMATION
 
Not applicable.


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PART III
 
Item 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The information called for by this item is incorporated herein by reference to the material under the captions “Election of Directors” and “Stock Ownership and Section 16 Compliance — Section 16(b) Beneficial Ownership Reporting Compliance” and the discussion of the Audit Committee under the caption “Corporate Governance — Board Committees” in the Proxy Statement; and the material under the caption “Executive Officers of the Registrant” in Part I of this Report on Form 10-K.
 
The Company’s Policy on Business Conduct, which covers all employees (including the Chief Executive Officer, Chief Financial Officer and Controller), meets the requirements of the SEC rules promulgated under Section 406 of the Sarbanes-Oxley Act of 2002. The Policy on Business Conduct is available on the Company’s Web site at www.investor.jnj.com/governance/policies.cfm , and copies are available to shareholders without charge upon written request to the Secretary at the Company’s principal executive offices. Any substantive amendment to the Policy on Business Conduct or any waiver of the Policy granted to the Chief Executive Officer, the Chief Financial Officer or the Controller will be posted on the Company’s Web site at www.investor.jnj.com/governance.cfm within five business days (and retained on the Web site for at least one year).
 
In addition, the Company has adopted a Code of Business Conduct & Ethics for Members of the Board of Directors and Executive Officers. The Code of Business Conduct & Ethics for Members of the Board of Directors and Executive Officers is available on the Company’s Web site at www.investor.jnj.com/governance/policies.cfm , and copies are available to shareholders without charge upon written request to the Secretary at the Company’s principal executive offices. Any substantive amendment to the Code or any waiver of the Code granted to any member of the Board of Directors or any executive officer will be posted on the Company’s Web site at www.investor.jnj.com/governance.cfm within five business days (and retained on the Web site for at least one year).
 
Item 11.  EXECUTIVE COMPENSATION
 
The information called for by this item is incorporated herein by reference to the material under the captions “Compensation Discussion and Analysis,” “Executive and Director Compensation” and “Compensation Committee Report” in the Proxy Statement.
 
The material incorporated herein by reference to the material under the caption “Compensation Committee Report” in the Proxy Statement shall be deemed furnished, and not filed, in this Report on Form 10-K and shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, as a result of this furnishing, except to the extent that the Registrant specifically incorporates it by reference.
 
Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
Additional information called for by this item is incorporated herein by reference to the material under the captions “Stock Ownership and Section 16 Compliance” in the Proxy Statement and Note 10 “Common Stock, Stock Option Plans and Stock Compensation Agreements” under “Notes to Consolidated Financial Statements” on pages 53 and 54 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K.
 
Equity Compensation Plan Information
 
The following table provides certain information as of December 28, 2008 concerning the shares of the Company’s Common Stock that may be issued under existing equity compensation plans.
 


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Table of Contents

                         
    Number of Securities to
    Weighted Average
    Number of Securities
 
    be Issued Upon Exercise of
    Exercise Price of
    Remaining Available for
 
    Outstanding Options,
    Outstanding Options,
    Future Issuance Under
 
Plan Category   Warrants and Rights     Warrants and Rights     Equity Compensation Plans (4)  
 
Equity Compensation Plans Approved by Security Holders (1)
    236,800,102     $ 52.76       167,603,561  
Equity Compensation Plans Not Approved by Security Holders (2)(3)
    956,844       36.11        
Total
    237,756,946       52.69       167,603,561  
 
 
(1)   Included in this category are the following equity compensation plans, which have been approved by the Company’s shareholders: 1995 Stock Option Plan, 2000 Stock Compensation Plan and 2005 Long-Term Incentive Plan.
 
(2)  Included in this category are 835,744 shares of Common Stock of the Company issuable under various equity compensation plans which were assumed by the Company upon acquisition of the following companies: ALZA Corporation, Scios Inc., Innovasive Devices, Inc., Inverness Medical Technology, Inc. and Centocor, Inc. 596,296 of the shares listed as issuable in this category were issued under plans that were approved by the shareholders of these companies prior to the acquisition and the assumption of these plans by the Company. At the time of each of these acquisitions, options to acquire equity of the acquired company were replaced by options to acquire the Common Stock of the Company. No stock options or equity awards of any type have been made under any of these plans since the assumption of these plans by the Company, and no further stock options or other equity awards of any type will be made under any of these plans in the future.
 
The shares that are included in this column that were issued under plans not approved by shareholders of the applicable acquired company are: 204,277 shares issuable under the 1996 Scios Non-Officer Stock Option Plan; and 35,171 shares issuable under warrants under an Inverness Medical plan.
 
(3)   Also included in this category are 121,100 shares of Common Stock of the Company issuable upon the exercise of outstanding stock options under the Company’s 1997 Stock Option Plan for Non-Employee Directors.
 
(4)   This column excludes shares reflected under the column “Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights.”
 
Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The information called for by this item is incorporated herein by reference to the material under the captions “Transactions with Related Persons” and “Corporate Governance — Director Independence” in the Proxy Statement.
 
Item 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The information called for by this item is incorporated herein by reference to the material under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement.

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PART IV
 
Item 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a) The following documents are filed as part of this report:
 
1.  Financial Statements
 
The following Audited Consolidated Financial Statements and Notes thereto and the material under the caption “Report of Independent Registered Public Accounting Firm” on pages 44 through 69 of the Annual Report are incorporated herein by reference and filed as Exhibit 13 to this Report on Form 10-K:
 
Consolidated Balance Sheets at end of Fiscal Years 2008 and 2007
 
Consolidated Statements of Earnings for Fiscal Years 2008, 2007 and 2006
 
Consolidated Statements of Equity for Fiscal Years 2008, 2007 and 2006
 
Consolidated Statements of Cash Flows for Fiscal Years 2008, 2007 and 2006
 
Notes to Consolidated Financial Statements
 
Report of Independent Registered Public Accounting Firm
 
2.  Financial Statement Schedules
 
Schedule II — Valuation and Qualifying Accounts
 
Schedules other than those listed above are omitted because they are not required or are not applicable.
 
3.  Exhibits Required to be Filed by Item 60l of Regulation S-K
 
The information called for by this item is incorporated herein by reference to the Exhibit Index in this report.


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JOHNSON & JOHNSON AND SUBSIDIARIES
 
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
 
Fiscal Years Ended December 28, 2008, December 30, 2007 and December 31, 2006
(Dollars in Millions)
 
                                 
    Balance at
                Balance at
 
    Beginning of
                End of
 
    Period     Accruals     Payments/ Other     Period  
 
2008
                               
Accrued Rebates (1)
  $ 1,802       5,578       (5,572 )     1,808  
Accrued Returns
    648       402       (256 )     794  
Accrued Promotions
    578       2,991       (3,213 )     356  
                                 
Subtotal
  $ 3,028       8,971       (9,041 )     2,958  
Reserve for doubtful accounts
    193       101       (27 )     267  
Reserve for cash discounts
    71       905       (897 )     79  
                                 
Total
  $ 3,292     $ 9,977 (2 )   $ (9,965 )   $ 3,304  
                                 
                                 
2007
                               
Accrued Rebates (1)
  $ 1,691       5,243       (5,132 )     1,802  
Accrued Returns
    599       395       (346 )     648  
Accrued Promotions
    457       2,908       (2,787 )     578  
                                 
Subtotal
  $ 2,747       8,546       (8,265 )     3,028  
Reserve for doubtful accounts
    160       42       (9 )     193  
Reserve for cash discounts
    62       1,022       (1,013 )     71  
                                 
Total
  $ 2,969       9,610       (9,287 )     3,292  
                                 
                                 
2006
                               
Accrued Rebates (1)
  $ 1,565       5,017       (4,891 )     1,691  
Accrued Returns
    535       210       (146 )     599  
Accrued Promotions
    388       2,284       (2,215 )     457  
                                 
Subtotal
  $ 2,488       7,511       (7,252 )     2,747  
Reserve for doubtful accounts
    164       17       (21 )     160  
Reserve for cash discounts
    57       867       (862 )     62  
                                 
Total
  $ 2,709       8,395       (8,135 )     2,969  
                                 
 
(1)   Includes reserve for customer rebates of $721 million, $710 million and $558 million at December 28, 2008, December 30, 2007 and December 31, 2006, respectively.
 
(2)   Includes $171 million adjustment related to previously estimated accrued sales reserve.


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SIGNATURES
 
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date: February 9, 2009
JOHNSON & JOHNSON
(Registrant)
 
  By 
/s/   W. C. Weldon

W. C. Weldon, Chairman, Board of Directors,
and Chief Executive Officer
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
         
Signature
 
Title
 
Date
 
         
/s/   W. C. Weldon

W. C. Weldon
  Chairman, Board of Directors,
Chief Executive Officer, and Director (Principal Executive Officer)
  February 9, 2009
         
/s/   C. A. Poon

C. A. Poon
  Vice Chairman, Board of Directors, and Director   February 9, 2009
         
/s/   D. J. Caruso

D. J. Caruso
  Chief Financial Officer (Principal Financial Officer)   February 9, 2009
         
/s/   S. J. Cosgrove

S. J. Cosgrove
  Controller (Principal Accounting Officer)   February 9, 2009
         
/s/   M. S. Coleman

M. S. Coleman
  Director   February 9, 2009
         
/s/   J. G. Cullen

J. G. Cullen
  Director   February 9, 2009
         
/s/   M. M. E. Johns

M. M. E. Johns
  Director   February 9, 2009


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Table of Contents

         
Signature
 
Title
 
Date
 
         
/s/   A. G. Langbo

A. G. Langbo
  Director   February 9, 2009
         
/s/   S. L. Lindquist

S. L. Lindquist
  Director   February 9, 2009
         
/s/   L. F. Mullin

L. F. Mullin
  Director   February 9, 2009
         
/s/   W. D. Perez

W. D. Perez
  Director   February 9, 2009
         
/s/   C. Prince

C. Prince
  Director   February 9, 2009
         
/s/   D. Satcher

D. Satcher
  Director   February 9, 2009
         


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Table of Contents

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE
 
To the Board of Directors of
Johnson & Johnson:
 
Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February 17, 2009 appearing in the 2008 Annual Report to Shareholders of Johnson & Johnson (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
 
/s/   PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
 
New York, New York
February 17, 2009


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EXHIBIT INDEX
 
         
Reg. S-K
     
Exhibit Table
    Description
Item No.
   
of Exhibit
 
  3 (a)(i)   Restated Certificate of Incorporation dated April 26, 1990 — Incorporated herein by reference to Exhibit 3(a) of the Registrant’s Form 10-K Annual Report for the year ended December 30, 1990.
  3 (a)(ii)   Certificate of Amendment to the Restated Certificate of Incorporation of the Company dated May 20, 1992 — Incorporated herein by reference to Exhibit 3(a) of the Registrant’s Form 10-K Annual Report for the year ended January 3, 1993.
  3 (a)(iii)   Certificate of Amendment to the Restated Certificate of Incorporation of the Company dated May 21, 1996 — Incorporated herein by reference to Exhibit 3(a)(iii) of the Registrant’s Form 10-K Annual Report for the year ended December 29, 1996.
  3 (a)(iv)   Certificate of Amendment to the Restated Certificate of Incorporation of the Company effective May 22, 2001 — Incorporated herein by reference to Exhibit 3 of the Registrant’s Form 10-Q Quarterly Report for the quarter ended July 1, 2001.
  3 (a)(v)   Certificate of Amendment to the Restated Certificate of Incorporation of the Company effective April 27, 2006 — Incorporated herein by reference to Exhibit 3(i) of the Registrant’s Form 10-Q Quarterly Report for the quarter ended April 2, 2006.
  3 (b)   By-Laws of the Company, as amended effective February 9, 2009 — Incorporated herein by reference to Exhibit 3.1 the Registrant’s Form 8-K Current Report filed February 13, 2009.
  4 (a)   Upon the request of the Securities and Exchange Commission, the Registrant will furnish a copy of all instruments defining the rights of holders of long term debt of the Registrant.
  10 (a)   Stock Option Plan for Non-Employee Directors — Incorporated herein by reference to Exhibit 10(a) of the Registrant’s Form 10-K Annual Report for the year ended December 29, 1996.*
  10 (b)   2000 Stock Option Plan (as amended) — Incorporated herein by reference to Exhibit 10(b) of the Registrant’s Form 10-K Annual Report for the year ended December 29, 2002.*
  10 (c)   1995 Stock Option Plan (as amended) — Incorporated herein by reference to Exhibit 10(b) of the Registrant’s Form 10-K Annual Report for the year ended January 3, 1999.*
  10 (d)   2005 Long-Term Incentive Plan — Incorporated herein by reference to Exhibit 4 of the Registrant’s S-8 Registration Statement filed with the Commission on May 10, 2005 (file no. 333-124785).*
  10 (e)   Form of Stock Option Certificate and Restricted Shares to Non-Employee Directors Certificate under the 2005 Long-Term Incentive Plan — Incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 10-Q Quarterly Report for the quarter ended July 3, 2005.*
  10 (f)   Form of Restricted Stock Unit Certificate under the 2005 Long-Term Incentive Plan — Incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 10-Q Quarterly Report for the quarter ended October 2, 2005.*
  10 (g)   Executive Bonus Plan — Incorporated herein by reference to Exhibit 4 of the Registrant’s Form S-8 Registration Statement filed with the Commission on November 8, 2005 (file no. 333-129542).*
  10 (h)   Executive Incentive Plan (as amended) — Incorporated herein by reference to Exhibit 10(f) of the Registrant’s Form 10-K Annual Report for the year ended December 31, 2000.*
  10 (i)   Domestic Deferred Compensation (Certificate of Extra Compensation) Plan (as amended) — Incorporated herein by reference to Exhibit 10(g) of the Registrant’s Form 10-K Annual Report for the year ended December 28, 2003.*
  10 (j)   Amendments to the Certificate of Extra Compensation Plan effective as of January 1, 2009 — Filed with this document.*
  10 (k)   Deferred Fee Plan for Non-Employee Directors (as amended) — Incorporated herein by reference to Exhibit 10(h) of the Registrant’s Form 10-K Annual Report for the year ended January 2, 2005.*


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Table of Contents

         
Reg. S-K
     
Exhibit Table
    Description
Item No.
   
of Exhibit
 
  10 (l)   Amendments to the Deferred Fee Plan for Directors effective as of January 1, 2009 — Filed with this document.*
  10 (m)   Executive Income Deferral Plan (as amended) — Incorporated herein by reference to Exhibit 10(i) of the Registrant’s Form 10-K Annual Report for the year ended December 28, 2003.*
  10 (n)   Amendments to the Executive Income Deferral Plan effective as of January 1, 2009 — Filed with this document.*
  10 (o)   Excess Savings Plan — Incorporated herein by reference to Exhibit 10(j) of the Registrant’s Form 10-K Annual Report for the year ended December 29, 1996.*
  10 (p)   Amendments to the Johnson & Johnson Excess Savings Plan effective as of January 1, 2009 — Filed with this document.*
  10 (q)   Excess Benefit Plan (Supplemental Retirement Plan) — Incorporated herein by reference to Exhibit 10(h) of the Registrant’s Form 10-K Annual Report for the year ended January 3, 1993.*
  10 (r)   Amendments to the Excess Benefit Plan of Johnson & Johnson and Affiliated Companies effective as of January 1, 2009 — Filed with this document.*
  10 (s)   Executive Life Insurance Plan — Incorporated herein by reference to Exhibit 10(i) of the Registrant’s Form 10-K Annual Report for the year ended January 3, 1993.*
  10 (t)   Stock Option Gain Deferral Plan — Incorporated herein by reference to Exhibit 10(m) of the Registrant’s Form 10-K Annual Report for the year ended January 2, 2000.*
  10 (u)   Estate Preservation Plan — Incorporated herein by reference to Exhibit 10(n) of the Registrant’s Form 10-K Annual Report for the year ended January 2, 2000.*
  10 (v)   Summary of compensation arrangements for Named Executive Officers and Directors  — Filed with this document.*
  10 (w)   Severance Arrangement for Alex Gorsky — Filed with this document.*
  12     Statement of Computation of Ratio of Earnings to Fixed Charges — Filed with this document.
  13     — Pages 34 through 71 of the Company’s Annual Report to Shareholders for fiscal year 2008 (only those portions of the Annual Report incorporated by reference in this report are deemed “filed”) — Filed with this document.
  21     Subsidiaries — Filed with this document.
  23     Consent of Independent Registered Public Accounting Firm — Filed with this document.
  31 (a)   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act — Filed with this document.
  31 (b)   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act — Filed with this document.
  32 (a)   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act — Furnished with this document.
  32 (b)   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act — Furnished with this document.
  99     Cautionary Statement Pursuant to Private Securities Litigation Reform Act of 1995 — “Safe Harbor” for Forward-Looking Statements — Filed with this document.
 
* Management contract or compensatory plan.
 
A copy of any of the Exhibits listed above will be provided without charge to any shareholder submitting a written request specifying the desired exhibit(s) to the Secretary at the principal executive offices of the Company.


18

Exhibit 10(j)
AMENDMENTS TO THE
CERTIFICATE OF EXTRA COMPENSATION PLAN
Effective as of January 1, 2009, the Certificate of Extra Compensation Plan (the “Plan”) shall be amended as follows:
1.  Plan Name Change . The Plan shall be renamed the “Certificate of Long-Term Compensation Plan,” and all references in the Plan to “CEC” shall be changed to “CLC.”
2.  Section 409A Amendments . The following new Article “SEVENTEENTH” shall be inserted at the end of the Plan:
    SEVENTEENTH: Notwithstanding any other provision of the Plan to the contrary, the terms of this Article “SEVENTEENTH” shall apply to the payment of the Formula Value of the Employee’s 409A Shares. For purposes of this Plan, the term “409A Shares” shall mean CLC Shares that are awarded or vested after December 31, 2004 (the “409A Shares”). This Article “SEVENTEENTH” is intended to ensure that the terms of the Plan comply with Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and other guidance issued thereunder (“Section 409A”).
  (a)   Payment of 409A Shares . The Formula Value of an Employee’s 409A Shares shall be payable only upon the occurrence of a 409A Payment Event. Subject to the limitations applicable to Specified Employees set forth in this Article “SEVENTEENTH,” the Company shall pay the Formula Value of the Employee’s 409A Shares in a single lump sum within the 90-day period beginning on the date of the 409A Payment Event. The Employee shall have no influence on any determination as to the tax year in which the payment is made.
 
  (b)   409A Payment Event . For purposes of this Plan, the term “409A Payment Event” shall mean the date on which one of the following occurs with respect to an Employee (or a date related to the occurrence of one of the following):
  i)   Separation from Service (within the meaning of Treasury Regulations Section 1.409A-1(h) and other applicable rules under Section 409A);
 
  ii)   Death; or
 
  iii)   Disability (within the meaning of Section 409A(a)(2)(C) of the Internal Revenue Code of 1986, as amended, (the “Code”) and the regulations thereunder).
      With respect to an Employee who is placed on “long-term disability” as provided in Article “THIRD,” above, the Company shall determine whether a Separation from Service has occurred with respect to the Employee based on the facts and circumstances for purposes of establishing the time of payment for the Employee’s 409A Shares. The Company’s determination shall be made initially within 60 days of the date the Employee is placed on “long-term disability,” and each anniversary of such date thereafter.
 
  (c)   No Deferral of Payment . An Employee may not elect to defer receipt of any portion of the Formula Value of his/her 409A Shares or to receive such amounts in the form of installment payments. An Employee’s election to defer receipt of any portion of his/her CEC holdings or to be paid in installments pursuant to the provisions of Articles “FOURTH” and “SEVENTH,” above, shall be effective solely with respect to the portion of the Formula Value of the Employee’s CLC Shares that were awarded and vested before January 1, 2005 (the “Grandfathered Shares”).
  (d)   Limitations Applicable to Specified Employees . No portion of the Formula Value of a Specified Employee’s 409A Shares shall be paid before the expiration of the six-month period specified in Code Section 409A(a)(2)(B)(i) and the regulations thereunder. This delay shall not affect the payment of any portion of the Formula Value of a Specified Employee’s Grandfathered Shares. For purposes of this Plan, “Specified Employee” shall mean a “key employee” (within the meaning of Code Section 416(i) without regard to paragraph (5) thereof) who is one of the top 50 highest paid officers of the Company on the applicable determination date pursuant to procedures adopted by the Company. For purposes of identifying Specified Employees under this Article “SEVENTEENTH,” “compensation” shall be determined under the safe harbor definition set forth in Treasury Regulation Section 1.415(d)-2(d)(3) and shall exclude all compensation permitted under Treasury Regulation Section 1.415(c)-2(g)(ii).
 
  (e)   Payment Upon Termination of the Plan . Upon termination of the Plan pursuant to Article “SIXTEENTH” hereof with respect to all Employees and the termination of all other arrangements sponsored by the Company that would be aggregated with the Plan under Section 409A, the Company shall have the right, in its sole discretion, and notwithstanding any elections made by an Employee, to pay the Formula Value of an Employee’s 409A Shares in a lump sum to the extent permitted under Section 409A and the regulations and guidance thereunder. All payments made under this Article “SEVENTEENTH” upon termination of the Plan shall be made no earlier than the thirteenth (13 th ) month and no later than the twenty-fourth (24 th ) month after the termination of the Plan. The Company may not accelerate payments pursuant to this Article “SEVENTEENTH” if the termination of the Plan is proximate to a downturn in the Company’s financial health. If the Company exercises its discretion to accelerate payments under this Article “SEVENTEENTH,” the Company shall not adopt any new arrangement that would have been aggregated with the Plan under Section 409A within three (3) years following the date of the Plan’s termination.
 
  (f)   Provisions Intended to Ensure Compliance with Code Section 409A . This Article “SEVENTEENTH” and any other provision of this Plan that applies to 409A Shares, including the rights of the Company or an Employee with respect to the 409A Shares, shall be limited to those terms permitted under Section 409A. Any terms not permitted under Section 409A shall be automatically modified and limited to the extent necessary to comply with Section 409A, but only to the extent such modification or limitation is permitted under Section 409A.
 
      Notwithstanding any other provision to the contrary, effective as of October 3, 2004, the Company may, in its discretion, require or permit on an elective basis a change in the payment terms applicable to an Employee’s 409A Shares in accordance with, and to the fullest extent permitted by, applicable guidance under Section 409A, including, but not limited to, IRS Notice 2005-1, Proposed Treasury Regulations Section 1.409A, Preamble Section XI.C, and IRS Notice 2007-86, provided that such election (i) is made on or before December 31, 2008, (ii) applies only to amounts that would not otherwise be payable in the year of the election, and (iii) does not cause an amount to be paid in the year of the election that would not otherwise be payable in that year.
 
  (g)   Provisions Not Applicable to Grandfathered Shares . This Article “SEVENTEENTH” shall in no event apply to any portion of the Formula Value of an Employee’s Grandfathered Shares. No amendment or change to this Plan or any other change (including an exercise of discretion) with respect to the Grandfathered Shares made after October 3, 2004, shall be effective if such amendment or change would constitute a “material modification” within the meaning of Section 409A.”

 


 

CERTIFICATION OF SECTION 409A AMENDMENTS
TO CERTAIN DEFERRED COMPENSATION PLANS
     WHEREAS, Johnson & Johnson (the “Company”) maintains the Certificate of Extra Compensation Plan, the Executive Income Deferral Plan, and the Deferred Fee Plan for Directors (collectively, the “Plans”);
     WHEREAS, the Compensation & Benefits Committee of the Board of Directors of the Company (the “Committee”) has previously approved and authorized certain amendments to the Plans to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and all regulations and other guidance thereunder, (“Section 409A”), and to make other non-material changes; and
     WHEREAS, the Committee has delegated to the Management Compensation Committee (“the MCC”) the authority (i) to take all actions necessary and proper to effectuate amendments to the Plans that have been approved and authorized by the Committee; and (ii) to approve and adopt any amendment(s) to the Plans that may be necessary to comply with changes to any legal or regulatory requirements that apply to the Plans.
     NOW, THEREFORE, BE IT RESOLVED, that the MCC hereby certifies that each Plan shall be amended to incorporate the amendments attached hereto, effective as of January 1, 2009, unless otherwise specifically set forth therein; and
     FURTHER RESOLVED, that the Vice President, Human Resources of the Company, upon consultation and approval of counsel, is hereby authorized to take any and all actions that she, in her discretion, determines (i) to be necessary or appropriate to incorporate the attached amendments into the applicable Plan, or (ii) to ensure that each Plan, as amended, is properly administered, including, but not limited to, (A) making all conforming changes to the Plan and/or restating the Plan in its entirety, (B) adopting any additional amendments to the Plan that may be necessary or proper to comply with Section 409A, and (C) adopting and/or amending administrative policies and procedures under the Plan.
         
DATED: December 16, 2008   MANAGEMENT COMPENSATION COMMITTEE
OF JOHNSON & JOHNSON
 
       
 
  NAME:   /s/ W. C. Weldon
 
     
 
W. C. WELDON
 
  TITLE:   (Chairman)
 
       
 
  NAME:   /s/ D. J. Caruso
 
     
 
D. J. CARUSO
 
  TITLE:   (Member)
 
       
 
  NAME:   /s/ K. Foster-Cheek
 
     
 
K. FOSTER-CHEEK
 
  TITLE:   (Member)
 
       
 
  NAME:   /s/ C. A. Poon
 
     
 
C. A. POON
 
  TITLE:   (Member)

 

Exhibit 10(l)
AMENDMENTS TO THE
DEFERRED FEE PLAN FOR DIRECTORS
The Deferred Fee Plan for Directors (the “Plan”) shall be amended by inserting the following new Section at the end of the Plan, effective as of January 1, 2009, or as of the date otherwise specifically provided below:
“18. Section 409A Requirements . Notwithstanding any other provision of the Plan to the contrary, effective as of January 1, 2009, the terms of this Section 18 shall apply to the payment of a participant’s deferred compensation account under the Plan. This Section 18 is intended to ensure that the terms of the Plan comply with Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and other guidance issued thereunder (“Section 409A”).
  (a)   Payment of Accounts . Notwithstanding any other provision of the Plan to the contrary, effective as of January 1, 2009, the value of a participant’s deferred compensation account shall be payable solely in a single lump sum within the 90-day period beginning on the participant’s Completion Date or date of death, if earlier. The participant shall have no influence on any determination as to the tax year in which the payment is made.
 
  (b)   No Deferral of Payment . Effective as of January 1, 2009, a participant may not elect to defer receipt of any portion of his deferred compensation account or to receive such amounts in the form of installment payments. A participant’s election to defer receipt of any portion of his deferred compensation account or to be paid in installments pursuant to the provisions of Section 10, above, shall be null and void as of January 1, 2009.
 
  (c)   Provisions Intended to Ensure Compliance with Section 409A . This Section 18 and any other provision of this Plan that applies to deferrals, including the rights of the Company or a participant with respect to the deferrals, shall be limited to those terms permitted under Section 409A. Any terms not permitted under Section 409A shall be automatically modified and limited to the extent necessary to comply with Section 409A, but only to the extent such modification or limitation is permitted under Section 409A.
 
  (d)   Payment Upon Termination of the Plan . Upon termination of the Plan pursuant to this Section 18 with respect to all participants and the termination of all other arrangements sponsored by the Company that would be aggregated with the Plan under Section 409A, the Company shall have the right, in its sole discretion, to pay to each participant the value of his deferred compensation account in a lump sum to the extent permitted under Section 409A. All payments made under this Section 18 upon termination of the Plan shall be made no earlier than the thirteenth (13 th ) month and no later than the twenty-fourth (24 th ) month after the termination of the Plan. The Company may not accelerate payments pursuant to this Section 18 if the termination of the Plan is proximate to a downturn in the Company’s financial health. If the Company exercises its discretion to accelerate payments under this Section 18, the Company shall not adopt any new arrangement that would have been aggregated with the Plan under Section 409A within three (3) years following the date of the Plan’s termination.”

 


 

CERTIFICATION OF SECTION 409A AMENDMENTS
TO CERTAIN DEFERRED COMPENSATION PLANS
     WHEREAS, Johnson & Johnson (the “Company”) maintains the Certificate of Extra Compensation Plan, the Executive Income Deferral Plan, and the Deferred Fee Plan for Directors (collectively, the “Plans”);
     WHEREAS, the Compensation & Benefits Committee of the Board of Directors of the Company (the “Committee”) has previously approved and authorized certain amendments to the Plans to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and all regulations and other guidance thereunder, (“Section 409A”), and to make other non-material changes; and
     WHEREAS, the Committee has delegated to the Management Compensation Committee (“the MCC”) the authority (i) to take all actions necessary and proper to effectuate amendments to the Plans that have been approved and authorized by the Committee; and (ii) to approve and adopt any amendment(s) to the Plans that may be necessary to comply with changes to any legal or regulatory requirements that apply to the Plans.
     NOW, THEREFORE, BE IT RESOLVED, that the MCC hereby certifies that each Plan shall be amended to incorporate the amendments attached hereto, effective as of January 1, 2009, unless otherwise specifically set forth therein; and
     FURTHER RESOLVED, that the Vice President, Human Resources of the Company, upon consultation and approval of counsel, is hereby authorized to take any and all actions that she, in her discretion, determines (i) to be necessary or appropriate to incorporate the attached amendments into the applicable Plan, or (ii) to ensure that each Plan, as amended, is properly administered, including, but not limited to, (A) making all conforming changes to the Plan and/or restating the Plan in its entirety, (B) adopting any additional amendments to the Plan that may be necessary or proper to comply with Section 409A, and (C) adopting and/or amending administrative policies and procedures under the Plan.
         
DATED: December 16, 2008   MANAGEMENT COMPENSATION COMMITTEE
OF JOHNSON & JOHNSON
 
       
 
  NAME:   /s/ W. C. Weldon
 
W. C. WELDON
 
  TITLE:   (Chairman)
 
       
 
  NAME:   /s/ D. J. Caruso
 
D. J. CARUSO
 
  TITLE:   (Member)
 
       
 
  NAME:   /s/ K. Foster-Cheek
 
K. FOSTER-CHEEK
 
  TITLE:   (Member)
 
       
 
  NAME:   /s/ C. A. Poon
 
C. A. POON
 
  TITLE:   (Member)

 

Exhibit 10(n)
AMENDMENTS TO THE
EXECUTIVE INCOME DEFERRAL PLAN
The Executive Income Deferral Plan (the “Plan”) shall be amended by inserting the following two new Sections at the end of the Plan, effective as of January 1, 2009, or as of the date otherwise specifically provided below:
“13. Section 409A Requirements . Notwithstanding any other provision of the Plan to the contrary, effective as of January 1, 2009, the terms of this Section 13 shall apply to the deferral of income elected on or after January 1, 2005 (the “409A Deferrals”), and the payment of such amounts. This Section 13 is intended to ensure that the terms of the Plan comply with Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and other guidance issued thereunder (“Section 409A”).
  (a)   Creation of 409A Accounts . Effective as of January 1, 2005, each participant’s Income Deferral Account shall be divided into two separate accounts as follows: (i) a “409A Account,” which shall consist of all 409A Deferrals and the earnings thereon; and (ii) a “Grandfathered Account,” which shall consist of all Deferred Awards credited to a participant’s Income Deferral Account before January 1, 2005 (the “Grandfathered Deferrals”). Except as specifically provided in this Section 13, all references in this Plan to Income Deferral Accounts shall include the 409A Account and the Grandfathered Account, and all references to Deferred Awards shall include the 409A Deferrals and the Grandfathered Deferrals.
 
  (b)   Election of 409 Deferrals : No participant may elect to defer any portion of any dividend equivalents that are payable under the Company’s CEC Plan on or after January 1, 2009. Effective as of January 1, 2005, each participant may elect (i) to defer any non-performance-based compensation, incentive payment, or dividend equivalent monies for services performed during a taxable year, provided such election is made on or before the end of the taxable year preceding the year in which services are rendered; and (ii) to defer any performance based compensation (as defined in Treasury Regulations Section 1.409A-1(e)) on or before the date that is six months before the end of the performance period, provided that in no event may such election be made after such compensation has become readily ascertainable. The Company shall establish procedures applicable to the form and timing of such deferral elections in accordance with the provisions of this Section 13(b).
 
  (c)   Payment of 409A Accounts . The value of a participant’s 409A Account shall be payable only upon the occurrence of a 409A Payment Event. The Company shall pay the value of a participant’s 409A Account in a single lump sum as soon as practicable after the later of (i) the expiration of the six-month period specified in Section 409A(a)(2)(B)(i) of the Internal Revenue Code of 1986, as amended, (the “Code”) and the regulations thereunder, and (ii) January 15 of the year immediately following the year of the 409A Payment Event. The participant shall have no influence on any determination as to the tax year in which the payment is made.
  (d)   409A Payment Event . For purposes of this Plan, the term “409A Payment Event” shall mean the date on which one of the following occurs with respect to a participant (or a date related to the occurrence of one of the following):
  i)   Separation from Service (within the meaning of Treasury Regulations Section 1.409A-1(h) and other applicable rules under Section 409A);
 
  ii)   Death; or
 
  iii)   Disability (within the meaning of Code Section 409A(a)(2)(C) and the regulations thereunder).
      With respect to a participant who is placed on “long-term disability,” the Company shall determine whether a Separation from Service has occurred with respect to the participant based on the facts and circumstances for purposes of establishing the time of payment for the participant’s 409A Account. The Company’s determination shall be made initially within 60 days of the date the participant is placed on “long-term disability,” and each anniversary of such date thereafter.
 
  (e)   No Deferral of Payment . A participant may not elect to defer receipt of any portion of his 409A Account or to receive such amounts in the form of installment payments. A participant’s election to defer receipt of any portion of his Income Deferral Account or to be paid in installments pursuant to the provisions of Section 7, above, shall be effective solely with respect to the participant’s Grandfathered Account and shall in no event apply to his 409A Account.
 
  (f)   Provisions Intended to Ensure Compliance with Section 409A . This Section 13 and any other provision of this Plan that applies to 409A Deferrals and 409A Accounts, including the rights of the Company or a participant with respect to the 409A Deferrals and 409A Accounts, shall be limited to those terms permitted under Section 409A. Any terms not permitted under Section 409A shall be automatically modified and limited to the extent necessary to comply with Section 409A, but only to the extent such modification or limitation is permitted under Section 409A.
 
      Notwithstanding any other provision to the contrary, effective as of October 3, 2004, the Company may, in its discretion, require or permit on an elective basis a change in the payment terms applicable to a participant’s 409A Account in accordance with, and to the fullest extent permitted by, applicable guidance under Section 409A, including, but not limited to, IRS Notice 2005-1, Proposed Treasury Regulations Section 1.409A, Preamble Section XI.C, and IRS Notice 2007-86, provided that such election (i) is made on or before December 31, 2008, (ii) applies only to amounts that would not otherwise be payable in the year of the election, and (iii) does not cause an amount to be paid in the year of the election that would not otherwise be payable in that year.
  (g)   Provisions Not Applicable to Grandfathered Deferrals and Grandfathered Accounts . This Section 13 shall in no event apply to any portion of a participant’s Grandfather Deferrals or Grandfathered Account. No amendment or change to this Plan or any other change (including an exercise of discretion) with respect to the Grandfathered Deferrals or Grandfathered Accounts made after October 3, 2004, shall be effective if such amendment or change would constitute a “material modification” within the meaning of Section 409A.
14. Payment Upon Termination of the Plan . The Company may terminate the Plan at any time. However, such amendment shall not without the consent of a participant, materially adversely affect any right or obligation with respect to any Deferred Award made theretofore. Upon termination of the Plan pursuant to this Section 14 with respect to all participants and the termination of all other arrangements sponsored by the Company that would be aggregated with the Plan under Section 409A, the Company shall have the right, in its sole discretion, and notwithstanding any elections made by a participant, to pay to each participant the value of his Income Deferral Account in a lump sum to the extent permitted under Section 409A. All payments made under this Section 14 upon termination of the Plan shall be made no earlier than the thirteenth (13 th ) month and no later than the twenty-fourth (24 th ) month after the termination of the Plan. The Company may not accelerate payments pursuant to this Section 14 if the termination of the Plan is proximate to a downturn in the Company’s financial health. If the Company exercises its discretion to accelerate payments under this Section 14, the Company shall not adopt any new arrangement that would have been aggregated with the Plan under Section 409A within three (3) years following the date of the Plan’s termination.”

 


 

CERTIFICATION OF SECTION 409A AMENDMENTS
TO CERTAIN DEFERRED COMPENSATION PLANS
     WHEREAS, Johnson & Johnson (the “Company”) maintains the Certificate of Extra Compensation Plan, the Executive Income Deferral Plan, and the Deferred Fee Plan for Directors (collectively, the “Plans”);
     WHEREAS, the Compensation & Benefits Committee of the Board of Directors of the Company (the “Committee”) has previously approved and authorized certain amendments to the Plans to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and all regulations and other guidance thereunder, (“Section 409A”), and to make other non-material changes; and
     WHEREAS, the Committee has delegated to the Management Compensation Committee (“the MCC”) the authority (i) to take all actions necessary and proper to effectuate amendments to the Plans that have been approved and authorized by the Committee; and (ii) to approve and adopt any amendment(s) to the Plans that may be necessary to comply with changes to any legal or regulatory requirements that apply to the Plans.
     NOW, THEREFORE, BE IT RESOLVED, that the MCC hereby certifies that each Plan shall be amended to incorporate the amendments attached hereto, effective as of January 1, 2009, unless otherwise specifically set forth therein; and
     FURTHER RESOLVED, that the Vice President, Human Resources of the Company, upon consultation and approval of counsel, is hereby authorized to take any and all actions that she, in her discretion, determines (i) to be necessary or appropriate to incorporate the attached amendments into the applicable Plan, or (ii) to ensure that each Plan, as amended, is properly administered, including, but not limited to, (A) making all conforming changes to the Plan and/or restating the Plan in its entirety, (B) adopting any additional amendments to the Plan that may be necessary or proper to comply with Section 409A, and (C) adopting and/or amending administrative policies and procedures under the Plan.
         
DATED: December 16, 2008   MANAGEMENT COMPENSATION COMMITTEE
OF JOHNSON & JOHNSON
 
       
 
  NAME:   /s/ W. C. Weldon
 
W. C. WELDON
 
  TITLE:   (Chairman)
 
       
 
  NAME:   /s/ D. J. Caruso
 
D. J. CARUSO
 
  TITLE:   (Member)
 
       
 
  NAME:   /s/ K. Foster-Cheek
 
K. FOSTER-CHEEK
 
  TITLE:   (Member)
 
 
  NAME:   /s/ C. A. Poon
 
C. A. POON
 
  TITLE:   (Member)

 

Exhibit 10(p)
AMENDMENTS TO THE
JOHNSON & JOHNSON EXCESS SAVINGS PLAN
Effective as of January 1, 2009, or the date otherwise specifically provided below, the Johnson & Johnson Excess Savings Plan (the “Plan”) shall be amended to insert the following new 409A Addendum at the end of the Plan:
409A Addendum
  1.   Section 409A Requirements . Notwithstanding any other provision of the Plan to the contrary, effective as of January 1, 2009, the terms of this 409A Addendum shall apply to the payment of a participant’s Excess Savings Account. This 409A Addendum is intended to ensure that the terms of the Plan comply with Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and other guidance issued thereunder (“Section 409A”). The provisions of this 409A Addendum and any other section of the Plan that applies to the payment of benefits on or after January 1, 2009, shall be limited to those terms permitted under Section 409A. Any terms of the Plan that are not permitted under Section 409A shall be automatically modified and limited to the extent necessary to comply with Section 409A, but only to the extent such modification or limitation is permitted under Section 409A.
 
  2.   409A Payment Event . No payment shall be made to, or in respect of, any participant under this Plan prior to the occurrence of a 409A Payment Event. For purposes of this Plan, the term “409A Payment Event” shall mean the date on which one of the following occurs with respect to a participant (or a date related to the occurrence of one of the following):
  a.   Separation from Service (within the meaning of Treasury Regulations Section 1.409A-1(h) and other applicable rules under Section 409A);
 
  b.   Death;
 
  c.   Disability (within the meaning of Code Section 409A(a)(2)(C) and the regulations thereunder);
With respect to a participant who retires from an Approved Absence from “long-term disability” as defined in the Company’s long-term disability income plan, the Company shall determine whether a Separation from Service has occurred with respect to the participant based on the facts and circumstances for purposes of establishing the time of payment for the participant’s benefits under the Plan. The Company’s determination shall be made initially within 60 days of the date the participant is placed on “long-term disability,” and each anniversary of such date thereafter.
  3.   Payment of Excess Savings Accounts – General . Upon the occurrence of a 409A Payment Event, the value of a participant’s Excess Savings Account shall be paid in a single lump sum within the 90-day period beginning on the date of the 409A Payment Event. In no event shall a participant have any influence on any determination as to the tax year in which a payment is made under this Section 3.
 
  4.   Payment of Excess Savings Account – Grandfathered Payment Election . Notwithstanding any other provision of the Plan to the contrary, if a participant has an Effective Grandfathered Payment Election in place and his 409A Payment Event occurs after the participant attains age 55, the value of a participant’s Excess Savings Account shall be paid in the form and at the time so elected by the participant. For purposes of this Plan, an “Effective Grandfathered Payment Election” is an election by a participant to defer receipt of his Excess Savings Account and/or to receive payment of his Excess Savings Account in the form of installment payments that (i) was submitted on or before December 15, 2008; (ii) was made in accordance with the Plan’s rules and procedures in place at the time of such election, including but not limited to, the form and timing of such election; and (iii) was made at least 12 months before the participant’s 409A Payment Event. The payment commencement date of a participant’s Excess Savings Account under this Section 4 shall be within the 90-day period beginning on the date of the first scheduled payment pursuant to the participant’s Effective Grandfathered Payment Election. In no event shall a participant have any influence on any determination as to the tax year in which a payment is made under this Section 4. The Company shall have the sole and discretionary authority to determine whether a participant has made an Effective Grandfathered Payment Election, including the effective date of such election. A participant’s Effective Grandfathered Payment Election shall be irrevocable as of December 15, 2008, and shall apply to the total value of a participant’s Excess Savings Account.
  5.   Death of Participant Before Commencement of Benefits . If a participant dies before his Excess Savings Account is paid, the value of the participant’s Excess Savings Account shall be paid to the participant’s beneficiary as soon practicable within the 90-day period beginning on the date of the participant’s death.
The delayed payment rules applicable to Specified Employees shall not apply to payments made on account of a participant’s death.
  6.   No Deferral of Payment . Except as provided in Section 4 of this 409A Addendum with respect to a participant’s Effective Grandfathered Payment Election, a participant may not elect to defer receipt of any portion of his benefit under the Plan.
 
  7.   Delayed Payment Rules for Specified Employees . Notwithstanding anything herein to the contrary, no portion of a Specified Employee’s Excess Savings Account that was earned or vested after December 31, 2004, and the earnings thereon (the “409A Amount”) shall be payable before the expiration of the six-month period specified in Code Section 409A(a)(2)(B)(i) and the regulations thereunder. For purposes of this Plan, “Specified Employee” shall mean a “key employee” (within the meaning of Code Section 416(i) without regard to paragraph (5) thereof) who is one of the top 50 highest paid officers of the Company on the applicable determination date pursuant to procedures adopted by the Company. For purposes of identifying Specified Employees under this 409A Addendum, “compensation” shall be determined under the safe harbor definition set forth in Treasury Regulation Section 1.415(d)-2(d)(3) and shall exclude all compensation permitted under Treasury Regulation Section 1.415(c)-2(g)(ii). Any amount that would have been paid to a Specified Employee but for the six-month delay imposed by this Section 7 of the 409A Addendum shall be paid in a single lump sum to the participant during the seventh month after the participant’s 409A Payment Event.
 
  8.   Designated Payment Date . A payment shall be treated as being made on the designated payment date if it is actually made on the designated payment date or on a later date that is either in the same calendar year as the designated payment date or, if later, by the 15th day of the third calendar month following the designated payment date. In addition, a payment shall be treated as made on the designated payment date if it is made no more than 30 days before the designated payment date. Notwithstanding the foregoing, a participant shall in no way be permitted, either directly or indirectly, to designate the taxable year of a payment under this Plan.
  9.   Payment Upon Plan Termination . The Company may terminate the Plan at any time. Upon termination of the Plan with respect to all participants and the termination of all other arrangements sponsored by the Company that would be aggregated with the Plan under Section 409A, the Company shall have the right, in its sole discretion, and notwithstanding any elections made by a participant, to pay to each participant the value of his 409A Amount in a lump sum to the extent permitted under Section 409A. All payments made under this Section 9 of the 409A Addendum upon termination of the Plan shall be made no earlier than the 13 th month and no later than the 24 th month after the termination of the Plan. The Company may not accelerate payments pursuant to this Section 9 of the 409A Addendum if the termination of the Plan is proximate to a downturn in the Company’s financial health. If the Company exercises its discretion to accelerate payments under this Section 9 of the 409A Addendum, the Company shall not adopt any new arrangement that would have been aggregated with the Plan under Section 409A within three years following the date of the Plan’s termination.”

 


 

CERTIFICATION OF SECTION 409A AMENDMENTS
TO CERTAIN EMPLOYEE BENEFIT PLANS
     Effective as of January 1, 2009, or as of such other date otherwise specified therein, the Severance Pay Plan of Johnson & Johnson and Affiliated Companies, the Excess Benefit Plan of Johnson & Johnson and Affiliated Companies, and the Johnson & Johnson Excess Savings Plan (the “Benefit Plans”) shall each be amended to incorporate the applicable amendments attached hereto.
         
DATED: December 23, 2008
      PENSION COMMITTEE
 
      OF JOHNSON & JOHNSON
 
       
 
  NAME:   /s/ K. Foster-Cheek
 
 
      K. FOSTER-CHEEK
 
  TITLE:   (Chair)
 
       
 
  NAME:   /s/ D. J. Caruso
 
       
 
      D. J. CARUSO
 
  TITLE:   (Member)
 
       
 
  NAME:   /s/ E. Dlugacz
 
       
 
      E. DLUGACZ
 
  TITLE:   (Member)
 
       
 
  NAME:   /s/ J. A. Papa
 
       
 
      J. A. PAPA
 
  TITLE:   (Member)

 

Exhibit 10(r)
AMENDMENTS TO THE
EXCESS BENEFIT PLAN OF JOHNSON & JOHNSON AND AFFILIATED COMPANIES
Effective as of January 1, 2009, or the date otherwise specifically provided below, the Excess Benefit Plan of Johnson & Johnson and Affiliated Companies (the “Plan”) shall be amended to insert the following new 409A Addendum at the end of the Plan:
409A Addendum
  1.   Section 409A Requirements . Notwithstanding any other provision of the Plan to the contrary, effective as of January 1, 2009, the terms of this 409A Addendum shall apply to the payment of a participant’s 409A Benefit. This 409A Addendum is intended to ensure that the terms of the Plan comply with Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and other guidance issued thereunder (“Section 409A”). The provisions of this 409A Addendum and any other section of the Plan that applies to the payment of benefits on or after January 1, 2009, shall be limited to those terms permitted under Section 409A. Any terms of the Plan that are not permitted under Section 409A shall be automatically modified and limited to the extent necessary to comply with Section 409A, but only to the extent such modification or limitation is permitted under Section 409A.
 
  2.   409A Benefit . Effective as of January 1, 2009, each participant’s Excess Pension Benefit shall be split into the participant’s 409A Benefit and the participant’s Grandfathered Benefit, as follows:
  a.   409A Benefit. A participant’s “409A Benefit” shall be equal to the participant’s total accrued benefit under the Plan less the participant’s Grandfathered Benefit.
 
  b.   Grandfathered Benefit . A participant’s “Grandfathered Benefit” shall be the portion of the participant’s benefit that was accrued, earned, and vested as of December 31, 2004, determined under the rules in effect as of that date.
  3.   409A Payment Event . No payment shall be made to, or in respect of, a participant’s 409A Benefit under this Plan prior to the occurrence of a 409A Payment Event. For purposes of this Plan, the term “409A Payment Event” shall mean the date on which one of the following occurs with respect to a participant (or a date related to the occurrence of one of the following):
  a.   Separation from Service (within the meaning of Treasury Regulations Section 1.409A-1(h) and other applicable rules under Section 409A);
 
  b.   Death;
 
  c.   Disability (within the meaning of Code Section 409A(a)(2)(C) and the regulations thereunder);
With respect to a participant who retires from an Approved Absence from “long-term disability” as defined in the Company’s long-term disability income plan, the Company shall determine whether a Separation from Service has occurred with respect to the participant based on the facts and circumstances for purposes of establishing the time of payment for the participant’s benefits under the Plan. The Company’s determination shall be made initially within 60 days of the date the participant is placed on “long-term disability,” and each anniversary of such date thereafter.
  4.   Payment of 409A Benefit . Upon the occurrence of a 409A Payment Event, a participant’s 409A Benefit shall be paid on the participant’s Pension Commencement Date. For purposes of this Plan, a participant’s “Pension Commencement Date” shall be the first day of the month on or after the participant’s (i) 55 th birthday or (ii) 409A Payment Event, whichever is later. The time and form of payment of a participant’s Grandfathered Benefit shall be governed by the terms of the Plan in effect as of October 3, 2004.
 
  5.   Form of Payment of 409A Benefit . Unless otherwise elected by a participant pursuant to applicable rules and procedures under the Plan, a participant’s 409A Benefit shall be payable in the form of a single life annuity if the participant is single when the payment commences, or in the form of a joint and 50% surviving spouse annuity if the participant is married when the distribution commences. A participant may elect in writing, in such manner, at such times, and pursuant to any rules and procedures as the Company may adopt, to receive his 409A Benefit in any form of payment that is available under the Consolidated Retirement Plan of Johnson & Johnson (the “Qualified Plan”), other than the Level Income Options, provided that such election satisfies each of the following conditions:
  a.   The change in the form of payment complies with Section 409A and Treasury Regulations Section 1.409A-2(b)(2)(ii);
 
  b.   Payment of the participant’s 409A Benefit has not commenced as of the date of the election;
 
  c.   The actuarially equivalent life annuity form elected by the participant has the same scheduled Payment Commencement Date as the annuity that would otherwise have been paid absent such election; and
 
  d.   The annuities are determined by the Company to be actuarially equivalent applying reasonable actuarial assumptions and methods.
Notwithstanding the foregoing, if the lump sum value of a participant’s total accrued benefit under the Plan is less than $5,000, the participant’s total benefit under the Plan shall be paid to the participant or the participant’s beneficiary, in the event of the participant’s death, in a single lump sum as soon as practicable within the 90-day period commencing on the participant’s 409A Payment Event. In addition, if a participant is eligible to receive any portion of his 409A Benefit in the form of a lump sum payment, that portion of his 409A Benefit shall be paid to him in the form of a lump sum on the participant’s Pension Commencement Date, and the remaining portion of his 409A Benefit shall be paid in the applicable annuity form in accordance with this Section 5.
  6.   Death of Participant Before Commencement of Benefits . If a participant dies before his Pension Commencement Date, his 409A Benefit shall be paid to the participant’s beneficiary commencing as of the first day of the month on or after (i) the participant’s 55th birthday or (ii) the participant’s date of death, whichever is later. The delayed payment rules applicable to Specified Employees shall not apply to payments made on account of a participant’s death.
 
  7.   No Deferral of Payment . A participant may not elect to defer receipt of any portion of his benefit under the Plan.
  8.   Delayed Payment Rules for Specified Employees . Notwithstanding anything herein to the contrary, no portion of a Specified Employee’s 409A Benefit shall be payable before the expiration of the six-month period specified in Code Section 409A(a)(2)(B)(i) and the regulations thereunder. For purposes of this Plan, “Specified Employee” shall mean a “key employee” (within the meaning of Code Section 416(i) without regard to paragraph (5) thereof) who is one of the top 50 highest paid officers of the Company on the applicable determination date pursuant to procedures adopted by the Company. For purposes of identifying Specified Employees under this 409A Addendum, “compensation” shall be determined under the safe harbor definition set forth in Treasury Regulation Section 1.415(d)-2(d)(3) and shall exclude all compensation permitted under Treasury Regulation Section 1.415(c)-2(g)(ii). Any amount that would have been paid to a Specified Employee but for the six-month delay imposed by this Section 8 of the 409A Addendum shall be paid in a single lump sum to the participant during the seventh month after the participant’s 409A Payment Event.
This Section 8 of the 409A Addendum shall in no event apply to a participant’s Grandfathered Benefit.
  9.   Designated Payment Date . A payment shall be treated as being made on the designated payment date if it is actually made on the designated payment date or on a later date that is either in the same calendar year as the designated payment date or, if later, by the 15th day of the third calendar month following the designated payment date. In addition, a payment shall be treated as made on the designated payment date if it is made no more than 30 days before the designated payment date. Notwithstanding the foregoing, a participant shall in no way be permitted, either directly or indirectly, to designate the taxable year of a payment under this Plan.
 
  10.   Payment Upon Plan Termination . The Company may terminate the Plan at any time. Upon termination of the Plan with respect to all participants and the termination of all other arrangements sponsored by the Company that would be aggregated with the Plan under Section 409A, the Company shall have the right, in its sole discretion, and notwithstanding any elections made by a participant, to pay to each participant the actuarially equivalent value of his Excess Pension Benefit determined as of the Plan termination date in a lump sum, to the extent permitted under Section 409A. All payments made under this Section 10 of the 409A Addendum upon termination of the Plan shall be made no earlier than the 13 th month and no later than the 24 th month after the termination of the Plan. The Company may not accelerate payments pursuant to this Section 10 of the 409A Addendum if the termination of the Plan is proximate to a downturn in the Company’s financial health. If the Company exercises its discretion to accelerate payments under this Section 10 of the 409A Addendum, the Company shall not adopt any new arrangement that would have been aggregated with the Plan under Section 409A within three years following the date of the Plan’s termination.
 
  11.   Special Transition Election . Notwithstanding any other provision to the contrary, effective as of October 3, 2004, the Company may, in its discretion, require or permit on an elective basis a change in the payment terms applicable to a participant’s 409A Benefit in accordance with, and to the fullest extent permitted by, applicable guidance under Section 409A, including, but not limited to, IRS Notice 2005-1, Proposed Treasury Regulations Section 1.409A, Preamble Section XI.C, and IRS Notice 2007-86, provided that such election (i) is made on or before December 31, 2008, (ii) applies only to amounts that would not otherwise be payable in the year of the election, and (iii) does not cause an amount to be paid in the year of the election that would not otherwise be payable in that year. In particular, with respect to a participant who is eligible to receive a portion of his 409A Benefit in the form of a lump sum payment, the Company may, in its discretion, permit such participant to make an irrevocable election on or before December 31, 2008, to receive such portion in a lump sum payment as of his Pension Commencement Date. Any payment election made by a participant to receive his benefit in a lump sum payment under this Section 11 of the 409A Addendum shall be irrevocable as of the date submitted in accordance with the procedures established by the Company.
  12.   Provisions Not Applicable to Grandfathered Benefits . Unless otherwise specifically provided for herein, this 409A Addendum shall in no event apply to any portion of a participant’s Grandfathered Benefit. No amendment or change to this Plan or any other change (including an exercise of discretion) with respect to a participant’s Grandfathered Benefit made after October 3, 2004, shall be effective if such amendment or change would constitute a “material modification” within the meaning of Section 409A.

 


 

CERTIFICATION OF SECTION 409A AMENDMENTS
TO CERTAIN EMPLOYEE BENEFIT PLANS
     Effective as of January 1, 2009, or as of such other date otherwise specified therein, the Severance Pay Plan of Johnson & Johnson and Affiliated Companies, the Excess Benefit Plan of Johnson & Johnson and Affiliated Companies, and the Johnson & Johnson Excess Savings Plan (the “Benefit Plans”) shall each be amended to incorporate the applicable amendments attached hereto.
         
DATED: December 23, 2008
      PENSION COMMITTEE
 
      OF JOHNSON & JOHNSON
 
       
 
  NAME:   /s/ K. Foster-Cheek
 
 
      K. FOSTER-CHEEK
 
  TITLE:   (Chair)
 
       
 
  NAME:   /s/ D. J. Caruso
 
       
 
      D. J. CARUSO
 
  TITLE:   (Member)
 
       
 
  NAME:   /s/ E. Dlugacz
 
       
 
      E. DLUGACZ
 
  TITLE:   (Member)
 
       
 
  NAME:   /s/ J. A. Papa
 
       
 
      J. A. PAPA
 
  TITLE:   (Member)

 

EXHIBIT 10(v)
 
Summary of Compensation Arrangements for
Named Executive Officers and Directors
 
Compensation Arrangements for Named Executive Officers
 
Following is a description of the compensation arrangements that have been approved by the Compensation & Benefits Committee of the Board of Directors of Johnson & Johnson (the “Compensation Committee”) on February 9, 2009 for the Company’s Chief Executive Officer, Chief Financial Officer and the other three most highly compensated executive officers in 2008 (the “Named Executive Officers”).
 
Annual Base Salary:
 
The Compensation Committee has approved the following base salaries, effective February 23, 2009, for the Named Executive Officers:
 
         
William C. Weldon
  $ 1,802,500  
Chairman/CEO        
Dominic J. Caruso
  $ 727,600  
Vice President, Finance; CFO        
Christine A. Poon
    —*  
Vice Chairman, Worldwide Chairman, Pharmaceuticals Group        
Russell C. Deyo
  $ 835,600  
Vice President, General Counsel        
Colleen Goggins
  $ 800,100  
Worldwide Chairman, Consumer Group        
 
* Will retire in March 2009
 
While the Compensation Committee had recommended a merit increase in Mr. Weldon’s base salary for 2009 based on his strong performance in 2008, Mr. Weldon recommended to the Compensation Committee that his salary for 2009 stay the same as it was for 2008, in recognition of the current global economic environment. The Compensation Committee accepted and approved Mr. Weldon’s recommendation.
 
Performance Bonus:
 
The Compensation Committee has approved the following bonus performance payments for performance in 2008 (paid in the form of 85% cash and 15% Company Common Stock as determined by the Compensation Committee):
 
         
Mr. Weldon
  $ 3,700,000  
Mr. Caruso
  $ 900,000  
Ms. Poon
  $ 1,500,000  
Mr. Deyo
  $ 1,000,000  
Ms. Goggins
  $ 1,050,000  
 
Stock Option and Restricted Share Unit Grants:
 
The Compensation Committee has approved the following stock option and Restricted Share Unit (“RSU”) grants under the Company’s 2005 Long-Term Incentive Plan (the “LTI Plan”). The stock options were granted at an exercise price of $58.33, at the “fair market value” (calculated as the average of the high and low prices of the Company’s Common Stock on the New York Stock Exchange) on February 9, 2009. The options will become exercisable on February 10, 2012 and expire on February 8, 2019. The RSUs will vest on February 9, 2012, upon which, the holder, if still employed by the Company on such date, will receive one share of the Company’s Common Stock for each RSU.
 


 

                         
Mr. Weldon
    627,464 stock options       52,289       RSUs  
Mr. Caruso
    110,578 stock options       9,215       RSUs  
Mr. Deyo
    138,865 stock options       11,572       RSUs  
Ms. Goggins
    144,008 stock options       12,001       RSUs  
 
Non-Equity Incentive Plan Awards:
 
The Compensation Committee has approved the following non-equity incentive plan awards in recognition of performance during 2008 under the Company’s Certificate of Long-Term Compensation (“CLC”) program (formerly known as the Certificate of Extra Compensation program). Awards are not paid out until retirement or other termination of employment. As of the end of fiscal year 2008, the CLC value per unit was $32.47. The CLC unit value will vary over time based on the performance of the Company. Awards of CLC units are not granted to every executive officer for every year.
 
                 
Mr. Weldon
    125,000       CLC units  
Mr. Caruso
    40,000       CLC units  
Mr. Deyo
    22,000       CLC units  
Ms. Goggins
    70,000       CLC units  
 
Equity Compensation for Non-Employee Directors
 
Each Non-Employee Director receives non-retainer equity compensation in the first quarter of each year under the LTI Plan in the form of shares of restricted Common Stock having a fair market value of $100,000 on the grant date. Accordingly, each Non-Employee Director was granted 1,714 shares of restricted Common Stock under the LTI Plan on February 9, 2009 for service on the Board in 2008. The restricted shares will become freely transferable on February 9, 2012.

Exhibit 10(w)
KAYE FOSTER – CHEEK
Executive Committee Member
Vice President, Human Resources
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, NJ 08550
February 19, 2009
Mr. Alex Gorsky
Worldwide Chairman, Surgical Care Group
Executive Committee Member
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
Dear Alex:
The forgoing shall reconfirm the mutual understanding between you and Johnson & Johnson (the “Company”) regarding the terms of your severance arrangement, originally agreed to in your offer letter dated January 9, 2008.
If the Company terminates your employment, other than for cause, within two years from February 11, 2008, the date you rejoined the Company, you shall be offered, in return for your execution of a general release, a severance payment in an amount determined in accordance with the Johnson & Johnson Severance Pay Plan, which severance payment shall be, however, in a minimum amount equal to one year of base salary. In addition, the Company will make a payment to you, upon execution of a general release, equal to one year of base salary in the event that you resign upon the Company’s requirement that you relocate your employment outside the New Jersey-Eastern Pennsylvania area within two years of February 11, 2008 without your consent. Any payment pursuant to this letter agreement shall not be subject to mitigation or right of set-off, but shall be subject to appropriate taxes and withholdings.
Upon your acceptance of this letter agreement, the foregoing will replace and supercede all previous agreements, either written or oral, regarding the terms of your severance arrangement. Please signify your acceptance of the terms of this letter agreement by signing one copy of this letter agreement and returning it to me. If you have any questions concerning this letter agreement, please feel free to give me a call.
         
  Sincerely,

/s/ Kaye Foster-Cheek
 
KAYE FOSTER-CHEEK
Executive Committee Member
Vice President, Human Resources
 
 
     
     
     
 
     
cc:
  M. Ullmann
 
  L. Uthgenannt
 
  D. Ng
Alex Gorsky
February 19, 2009
Page 2 of 2
Agreed & Accepted:
         
 
       
/s/ Alex Gorsky
  February 19, 2009    
 
       
Signature
  Date    

 

EXHIBIT 12
 
JOHNSON & JOHNSON AND SUBSIDIARIES
 
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (1)
(Dollars in Millions)
 
                                         
    Fiscal Year Ended  
    December 28,
    December 30,
    December 31,
    January 1,
    January 2,
 
    2008     2007     2006     2006     2005  
 
Determination of Earnings:
                                       
Earnings Before Provision for Taxes on Income
  $ 16,929     $ 13,283     $ 14,587     $ 13,116     $ 12,331  
Fixed Charges
    538       397       158       137       272  
                                         
Total Earnings as Defined
  $ 17,467     $ 13,680     $ 14,745     $ 13,253     $ 12,603  
                                         
Fixed Charges and Other:
                                       
Rents
    103       101       95       83       85  
Interest Expense Before Capitalization of Interest
    583       426       181       165       323  
                                         
Total Fixed Charges
  $ 686     $ 527     $ 276     $ 248     $ 408  
                                         
Ratio of Earnings to Fixed Charges
    25.46       25.96       53.42       53.44       30.89  
                                         
(1)   The ratio of earnings to fixed charges is computed by dividing the sum of earnings before provision for taxes on income and fixed charges by fixed charges. Fixed charges represent interest expense (before interest is capitalized), amortization of debt discount and an appropriate interest factor on operating leases.

Exhibit 13
 
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
         
  34    
Organization and Business Segments
  34    
Results of Operations
  35    
Analysis of Sales by Business Segments
  37    
Analysis of Consolidated Earnings Before Provision for Taxes on Income
  40    
Liquidity and Capital Resources
  41    
Other Information
  43    
Cautionary Factors That May Affect Future Results
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
         
  44    
Consolidated Balance Sheets
  45    
Consolidated Statements of Earnings
  46    
Consolidated Statements of Equity
  47    
Consolidated Statements of Cash Flows
  48    
Notes to Consolidated Financial Statements
  69    
Report of Independent Registered Public Accounting Firm
  69    
Management’s Report on Internal Control over
       
Financial Reporting
  70    
Summary of Operations and Statistical Data 1998-2008
  71    
Shareholder Return Performance Graphs


         
JOHNSON & JOHNSON 2008 ANNUAL REPORT
    33


 

Management’s Discussion and Analysis of Results of Operations and Financial Condition
Organization and Business Segments
DESCRIPTION OF THE COMPANY AND BUSINESS SEGMENTS
Johnson & Johnson and its subsidiaries (the “Company”) have approximately 118,700 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The Company conducts business in virtually all countries of the world with the primary focus on products related to human health and well-being.
     The Company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. The Consumer segment includes a broad range of products used in the baby care, skin care, oral care, wound care and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products. These products are marketed to the general public and sold both to distributors and directly to independent and chain retail outlets throughout the world. The Pharmaceutical segment includes products in the following therapeutic areas: anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology and virology. These products are distributed directly to retailers, wholesalers and health care professionals for prescription use. The Medical Devices and Diagnostics segment includes a broad range of products used principally in the professional fields by physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics. These products include Cordis’ circulatory disease management products; DePuy’s orthopaedic joint reconstruction, spinal care and sports medicine products; Ethicon’s surgical care and women’s health products; Ethicon Endo-Surgery’s minimally invasive surgical products; LifeScan’s blood glucose monitoring and insulin delivery products; Ortho-Clinical Diagnostics’ professional diagnostic products and Vistakon’s disposable contact lenses.
     The Company’s structure is based upon the principle of decentralized management. The Executive Committee of Johnson & Johnson is the principal management group responsible for the operations and allocation of the resources of the Company. This Committee oversees and coordinates the activities of the Consumer, Pharmaceutical and Medical Devices and Diagnostics business segments.
     In all of its product lines, the Company competes with companies both local and global, located throughout the world. Competition exists in all product lines without regard to the number and size of the competing companies involved. Competition in research, involving the development and the improvement of new and existing products and processes, is particularly significant. The development of new and innovative products is important to the Company’s success in all areas of its business. This also includes protecting the Company’s portfolio of intellectual property. The competitive environment requires substantial investments in continuing research and in sales forces. In addition, the development and maintenance of customer demand for the Company’s consumer products involves significant expenditures for advertising and promotion.
MANAGEMENT’S OBJECTIVES
A primary objective of the Company is to achieve superior levels of capital efficient profitable growth. To accomplish this, the Company’s management operates the business consistent with certain strategic principles that have proven successful over time. To this end, the Company participates in growth areas in human health care and is committed to attaining leadership positions in these growth areas through the development of innovative products and services. New products introduced within the past five years accounted for approximately 30% of 2008 sales. In 2008, $7.6 billion, or 11.9% of sales, was invested in research and development, consistent with 2007. This investment reflects management’s commitment to the importance of ongoing development of new and differentiated products and services to sustain long-term growth.
     With more than 250 operating companies located in 57 countries, the Company views its principle of decentralized management as an asset and fundamental to the success of a broadly based business. It also fosters an entrepreneurial spirit, combining the extensive resources of a large organization with the ability to react quickly to local market changes and challenges.
     The Company is committed to developing global business leaders who can drive growth objectives. Businesses are managed for the long-term in order to sustain leadership positions and achieve growth that provides an enduring source of value to our shareholders.
     Unifying the management team and the Company’s dedicated employees in achieving these objectives is Our Credo. Our Credo provides a common set of values and serves as a constant reminder of the Company’s responsibilities to its customers, employees, communities and shareholders. The Company believes that these basic principles, along with its overall mission of improving the quality of life for people everywhere, will enable Johnson & Johnson to continue to be among the leaders in the health care industry.
Results of Operations
ANALYSIS OF CONSOLIDATED SALES
In 2008, worldwide sales increased 4.3% to $63.7 billion, compared to increases of 14.6% in 2007 and 5.6% in 2006. These sales increases consisted of the following:
                               
Sales increase due to:
      2008       2007       2006
Volume
      1.1%         10.1         3.8  
Price
      0.8         1.4         1.5  
Currency
      2.4         3.1         0.3  
                   
Total
      4.3%         14.6         5.6  
                   
Sales by U.S. companies were $32.3 billion in 2008, $32.4 billion in 2007 and $29.8 billion in 2006. This represents a decrease of 0.4% in 2008 and increases of 9.0% and 4.9% in 2007 and 2006, respectively. Sales by international companies were $31.4 billion in 2008, $28.7 billion in 2007 and $23.5 billion in 2006. This represents an increase of 9.7% in 2008, 21.7% in 2007 and 6.4% in 2006.


   
34
JOHNSON & JOHNSON 2008 ANNUAL REPORT


 

(SALES10YEAR)
     The five-year compound annual growth rates for worldwide, U.S. and international sales were 8.8%, 5.0% and 13.6%, respectively. The ten-year compound annual growth rates for worldwide, U.S. and international sales were 10.3%, 9.6% and 11.2%, respectively.
(SALES-REGION)
     All international geographic regions experienced sales growth during 2008, consisting of 7.3% in Europe, 10.5% in the Western Hemisphere (excluding the U.S.) and 13.9% in the Asia-Pacific, Africa regions. These sales increases include the impact of currency fluctuations between the U.S. dollar and foreign currencies, which had positive impacts of 5.5% in Europe, 2.8% in the Western Hemisphere (excluding the U.S.) and 5.5% in the Asia-Pacific, Africa region.
     In 2008, 2007 and 2006, the Company did not have a customer that represented 10% or more of total consolidated revenues.
(SALES-SEGMENT)
Analysis of Sales by Business Segments
CONSUMER SEGMENT
Consumer segment sales in 2008 were $16.0 billion, an increase of 10.8% over 2007 with 8.3% of this change due to operational growth and the remaining 2.5% due to positive currency fluctuations. U.S. Consumer segment sales were $6.9 billion, an increase of 8.3%. International sales were $9.1 billion, an increase of 12.8%, with 8.3% as a result of operations and 4.5% due to currency fluctuations over 2007.
     The Over-the-Counter (OTC) Pharmaceuticals and Nutritionals franchise sales were $5.9 billion, an increase of 14.6% from 2007. The primary contributor to the growth was the successful launch of over-the-counter ZYRTEC ® allergy product line in the U.S. In 2008, the Company announced a voluntary labeling change on children’s cough and cold medicines regarding usage for children under the age of 4 years, to encourage the safe, effective use of these products. These actions did not have a significant impact on sales for the OTC Pharmaceuticals and Nutritionals franchise.
     The Skin Care franchise sales grew by 10.8% to $3.4 billion in 2008. The sales growth was primarily due to the AVEENO ® , CLEAN & CLEAR ® , NEUTROGENA ® and JOHNSON’S ® Adult product lines, as well as new products related to the acquisition of Beijing Dabao Cosmetics Co. Ltd. The Baby Care franchise sales grew by 11.7% to $2.2 billion in 2008. This growth was primarily in international markets across all product lines. The Women’s Health franchise sales grew by 5.8% to $1.9 billion in 2008 primarily due to the successful launch of new products. The Oral Care franchise sales grew by 9.1% to $1.6 billion in 2008. Sales growth was driven by the performance of the LISTERINE ® mouthwash product line.
     Consumer segment sales in 2007 were $14.5 billion, an increase of 48.3% over 2006 with 44.2% of this change due to operational growth and the remaining 4.1% due to positive currency fluctuations. U.S. Consumer segment sales were $6.4 billion, an increase of 40.1%. International sales were $8.1 billion, an increase of 55.5%, with 47.8% as a result of operations and 7.7% due to currency fluctuations over 2006. The acquisition of Pfizer Inc.’s Consumer Healthcare business, net of the related divestitures, increased both total sales growth and operational growth for the total Consumer segment by 40.3% in 2007.


 
Major Consumer Franchise Sales:
                                                   
 
                                    % Change  
(Dollars in Millions)
    2008       2007       2006         '08 vs. '07     '07 vs. '06  
 
OTC Pharmaceuticals & Nutritionals
    $ 5,894         5,142         2,742         14.6 %       87.5  
Skin Care
      3,381         3,051         2,633         10.8         15.9  
Baby Care
      2,214         1,982         1,740         11.7         13.9  
Women’s Health
      1,911         1,806         1,666         5.8         8.4  
Oral Care
      1,624         1,488         406         9.1         266.5  
Wound Care/Other
      1,030         1,024         587         0.6         74.4  
                               
Total
    $ 16,054         14,493         9,774             10.8 %       48.3  
                               
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
35


 

PHARMACEUTICAL SEGMENT
Pharmaceutical segment sales in 2008 were $24.6 billion, a decrease of 1.2% over 2007, with an operational decline of 3.1% and 1.9% increase due to the positive impact of currency fluctuations. U.S. Pharmaceutical segment sales were $14.9 billion, a decrease of 4.9%. International Pharmaceutical segment sales were $9.7 billion, an increase of 5.1%, which included 0.1% of operational growth and 5.0% related to the positive impact of currency fluctuations.
     REMICADE ® (infliximab), a biologic approved for the treatment of Crohn’s disease, ankylosing spondylitis, psoriasis, psoriatic arthritis, ulcerative colitis and use in the treatment of rheumatoid arthritis, achieved sales of $3.7 billion in 2008, with growth of 12.7% over prior year. Growth was driven by increased demand due to the introduction of new clinical data and overall market growth. REMICADE ® is competing in a market which is experiencing increased competition due to new entrants and the expansion of indications for existing competitors.
     TOPAMAX ® (topiramate), which has been approved for adjunctive and monotherapy use in epilepsy, as well as for the prophylactic treatment of migraines, achieved sales of $2.7 billion in 2008, an increase of 11.3% over prior year. The growth was primarily due to increases in the migraine category partially offset by generic competition in certain markets outside the U.S. The patent for TOPAMAX ® (topiramate) in the U.S. expired in September 2008. In July 2008, the U.S. Food and Drug Administration (FDA) granted pediatric exclusivity for TOPAMAX ® , which extends market exclusivity in the U.S. until March 2009. In 2008, U.S. sales of TOPAMAX ® were $2.3 billion. The expiration of the product patent or loss of market exclusivity is likely to result in a significant reduction in sales.
     PROCRIT ® (Epoetin alfa) and EPREX ® (Epoetin alfa) had combined sales of $2.5 billion in 2008, a decline of 14.7% compared to prior year. The decline was primarily due to the declining markets for Erythropoiesis Stimulating Agents (ESAs) in the U.S. The FDA issued an order requiring a labeling supplement making specific revisions to the label for ESAs, including PROCRIT ® . The label for PROCRIT ® was updated July 30, 2008, based on review of emerging safety data for the use of ESAs in patients with cancer. Outside the U.S., new competition and the emerging safety data issues have contributed to the lower sales results for EPREX ® . Discussions with European regulators regarding changes to the label for ESAs, including EPREX ® , are nearing finalization.
     RISPERDAL ® (risperidone), a medication that treats the symptoms of schizophrenia, bipolar mania and irritability associated with autistic behavior in indicated patients, experienced a sales decline of 37.8% to $2.1 billion in 2008. Market exclusivity for RISPERDAL ® oral in the U.S. expired on June 29, 2008. Loss of market exclusivity for the RISPERDAL ®
oral patent has resulted in a significant reduction in sales in the U.S. In 2008, U.S. sales of RISPERDAL ® oral were $1.3 billion. In the first half of the 2008 fiscal year U.S. sales of RISPERDAL ® oral were $1.1 billion and $0.2 billion in the second half.
     RISPERDAL ® CONSTA ® (risperidone), a long-acting injectable for the treatment of schizophrenia, achieved sales of $1.3 billion in 2008, representing an increase of 16.0% as compared to the prior year. The growth was due to a positive shift from once per day therapies to longer-acting RISPERDAL ® CONSTA ® .
     CONCERTA ® (methylphenidate HCl), a product for the treatment of attention deficit hyperactivity disorder (ADHD), achieved sales of $1.2 billion in 2008, representing an increase of 21.3% over 2007. Sales results were favorably impacted by approximately $115 million related to a change in the estimate of accrued sales reserves. An additional contributor to the sales growth was market growth. Although the original CONCERTA ® patent expired in 2004, the FDA has not approved any generic version that is substitutable for CONCERTA ® . Two parties have filed Abbreviated New Drug Applications (ANDAs) for generic versions of CONCERTA ® , which are pending and may be approved at any time.
     LEVAQUIN ® (levofloxacin)/FLOXIN ® (ofloxacin) and ACIPHEX ® /PARIET ® (rabeprazole sodium) experienced sales declines of 3.3% and 14.7%, respectively, versus the prior year due to competition in the category. DURAGESIC ® /Fentanyl Transdermal (fentanyl transdermal system) sales declined 11.0% versus the prior year due to generic competition.
     In 2008, Other Pharmaceutical sales were $7.2 billion, representing a growth of 10.9% over prior year. Contributors to the increase were sales of VELCADE ® (bortezomib), a product for the treatment of multiple myeloma, PREZISTA ® (darunavir), for the treatment of HIV/AIDS patients and INVEGA ® (paliperidone), a once-daily atypical antipsychotic.
     During 2008, the Company received regulatory approval in the U.S., Canada and European Union for INTELENCE TM (etravirine) for HIV combination therapy. STELARA TM (ustekinumab) was approved in Canada and the European Union for the treatment of moderate to severe plaque psoriasis and is currently under review with the FDA. In addition, NUCYNTA TM (tapentadol) immediate-release tablets for the relief of moderate to severe acute pain in adults 18 years of age or older was approved in the U.S.
     The Company also received approvals expanding the indications for several key products, including CONCERTA ® , to treat ADHD in adults ages 18 to 65 in the U.S., VELCADE ® , in combination with melphalan and prednisone for the treatment of patients with previously untreated multiple myeloma in the European Union


 
Major Pharmaceutical Product Revenues*:
                                                   
 
                                      % Change  
(Dollars in Millions)
    2008       2007       2006         '08 vs. '07     '07 vs. '06  
 
REMICADE ® (infliximab)
    $ 3,748         3,327         3,013         12.7 %       10.4  
TOPAMAX ® (topiramate)
      2,731         2,453         2,027         11.3         21.0  
PROCRIT ® /EPREX ® (Epoetin alfa)
      2,460         2,885         3,180         (14.7 )       (9.3 )
RISPERDAL ® (risperidone)
      2,126         3,420         3,334         (37.8 )       2.6  
LEVAQUIN ® /FLOXIN ® (levofloxacin/ofloxacin)
      1,591         1,646         1,530         (3.3 )       7.6  
RISPERDAL ® CONSTA ® (risperidone)
      1,309         1,128         849         16.0         32.9  
CONCERTA ® (methylphenidate HCl)
      1,247         1,028         930         21.3         10.5  
ACIPHEX ® /PARIET ® (rabeprazole sodium)
      1,158         1,357         1,239         (14.7 )       9.5  
DURAGESIC ® /Fentanyl Transdermal (fentanyl transdermal system)
      1,036         1,164         1,295         (11.0 )       (10.1 )
Other
      7,161         6,458         5,870         10.9         10.0  
                               
Total
    $ 24,567         24,866         23,267                (1.2 )%       6.9  
                               
* Prior year amounts have been reclassified to conform to current presentation.


   
36
JOHNSON & JOHNSON 2008 ANNUAL REPORT


 

and PREZISTA ® , for once-daily dosing as part of HIV combination therapy in treatment-naïve adults and traditional approval as a twice-daily dose for use in treatment-experienced adult patients in the U.S. Outside the U.S., the European Commission granted full approval of PREZISTA ® in combination with ritonavir and other anti-retroviral medicinal products for the treatment of HIV-1 infection, and extended the indication to include all treatment-experienced adult patients.
     The Company submitted applications for regulatory approval of four additional compounds in 2008. Golimumab, a monthly subcutaneous treatment for adults with active forms of rheumatoid arthritis, psoriatic arthritis and ankylosing spondylitis, was filed in the U.S. and European Union. In the U.S., filings were submitted for rivaroxaban, an oral, once-daily anticoagulant for the prevention of deep vein thrombosis (DVT) and pulmonary embolism (PE) in patients undergoing hip or knee replacement surgery, carisbamate, for the adjunctive treatment of partial-onset seizures in patients 16 years of age and older, and trabectedin, known as YONDELIS ® outside the U.S., administered in combination with DOXIL ® (doxorubicin HCl liposome injection) for the treatment of women with relapsed ovarian cancer.
     Pharmaceutical segment sales in 2007 were $24.9 billion, an increase of 6.9% over 2006, with 4.3% of this change due to operational growth and the remaining 2.6% increase related to the positive impact of currency fluctuations. U.S. Pharmaceutical segment sales were $15.6 billion, an increase of 3.4%. International Pharmaceutical segment sales were $9.3 billion, an increase of 13.3%, which included 5.9% of operational growth and 7.4% related to the positive impact of currency fluctuations.
MEDICAL DEVICES AND DIAGNOSTICS SEGMENT
The Medical Devices and Diagnostics segment achieved sales of $23.1 billion in 2008, representing an increase of 6.4% over the prior year, with operational growth of 3.5% and 2.9% due to a positive impact from currency fluctuations. U.S. sales were $10.5 billion, an increase of 1.0%. International sales were $12.6 billion, an increase of 11.3%, with 5.8% from operations and a positive currency impact of 5.5%.
     The DePuy franchise achieved sales of $5.0 billion in 2008, an 8.8% increase over prior year. This growth was primarily due to DePuy’s orthopaedic joint reconstruction products, including the hip and knee product lines. Additionally, new product launches in the Mitek sports medicine product line contributed to the growth.
     The Ethicon Endo-Surgery franchise achieved sales of $4.3 billion in 2008, an 11.8% increase over prior year. This growth was mainly driven by the HARMONIC ® technology business due to the success of newly launched products and the underlying strength of
the technology. Additional contributors to the growth were the REALIZE ® Gastric Band in the U.S. and endoscopy products outside the U.S.
     The Ethicon franchise achieved sales of $3.8 billion in 2008, a 6.6% increase over prior year. This was a result of growth in the hemostasis, meshes and biosurgical product lines.
     Sales in the Cordis franchise were $3.1 billion, a decline of 8.5% over 2007. The decline reflects lower sales of the CYPHER ® Sirolimus-eluting Coronary Stent due to increased global competition. The decline was partially offset by the performance of the Biosense Webster and neurovascular businesses.
     The Diabetes Care franchise achieved sales of $2.5 billion in 2008, a 6.8% increase over prior year. This growth was driven by sales in the Animas business due to new product launches and sales growth in the ULTRA ® product lines outside the U.S.
     The Vision Care franchise achieved sales of $2.5 billion in 2008, a 13.2% increase over prior year. Sales of ACUVUE ® OASYS™, 1-DAY ACUVUE ® MOIST™, and ACUVUE ® OASYS™ for ASTIGMATISM were the major contributors to this growth.
     The Ortho-Clinical Diagnostics franchise achieved sales of $1.8 billion in 2008, an 8.0% increase over prior year resulting from growth in both immunohematology and immunodiagnostics products.
     The Medical Devices and Diagnostics segment achieved sales of $21.7 billion in 2007, representing an increase over prior year of 7.2%, with operational growth of 3.9% and 3.3% due to a positive impact from currency fluctuations. U.S. sales were $10.4 billion, an increase of 3.2%. International sales were $11.3 billion, an increase of 11.1%, with 4.6% from operations and a positive currency impact of 6.5%.
Analysis of Consolidated Earnings Before Provision for Taxes on Income
Consolidated earnings before provision for taxes on income increased by $3.6 billion to $16.9 billion in 2008 as compared to the $13.3 billion earned in 2007. Contributing to the $3.6 billion increase in 2008 were lower in-process research and development charges of $0.6 billion, higher income from divestitures of $0.5 billion and higher litigation gains of $0.5 billion versus restructuring charges of $0.7 billion and the write-down of the NATRECOR ® intangible asset of $0.7 billion recorded in 2007. The decrease in 2007 of 8.9% over the $14.6 billion in 2006 was primarily due to restructuring charges and the write-down of the NATRECOR ® intangible asset in 2007. As a percent to sales, consolidated earnings before provision for taxes on income in 2008 was 26.5% versus 21.7% in 2007. The sections that follow highlight the significant components of the changes in consolidated earnings before provision for taxes on income.


 
Major Medical Devices and Diagnostics Franchise Sales*:
                                                   
 
                                      % Change  
(Dollars in Millions)
    2008       2007       2006         '08 vs. '07     '07 vs. '06  
DEPUY ®
    $ 4,989         4,587         4,105         8.8 %       11.7  
ETHICON ENDO-SURGERY ®
      4,286         3,834         3,376         11.8         13.6  
ETHICON ®
      3,840         3,603         3,223         6.6         11.8  
CORDIS ®
      3,135         3,425         4,088         (8.5 )       (16.2 )
Diabetes Care
      2,535         2,373         2,074         6.8         14.4  
Vision Care
      2,500         2,209         1,879         13.2         17.6  
ORTHO-CLINICAL DIAGNOSTICS ®
      1,841         1,705         1,538         8.0         10.9  
                               
Total
    $ 23,126         21,736         20,283                6.4 %       7.2  
                               
* Prior year amounts have been reclassified to conform to current presentation.
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
37


 

Cost of Products Sold and Selling, Marketing and Administrative Expenses: Cost of products sold and selling, marketing and administrative expenses as a percent to sales were as follows:
                               
 
% of Sales
      2008     2007       2006  
                   
Cost of products sold
      29.1 %       29.1         28.2  
Percent point increase over the prior year
              0.9         0.5  
Selling, marketing and administrative expenses
      33.7         33.5         32.7  
Percent point increase/(decrease) over the prior year
      0.2         0.8         (1.4 )
                   
In 2008, cost of products sold as a percent to sales remained flat to the prior year. The change in the mix of businesses, with higher sales growth in the Consumer business and a slight sales decline in the Pharmaceutical business continues to have a negative impact on the cost of products sold as a percent to sales. In 2008, this was offset by manufacturing efficiencies and non-recurring positive items in 2008 and negative items in 2007. There was an increase in the percent to sales of selling, marketing and administrative expenses in 2008 primarily due to the change in the mix of businesses, whereby
a greater proportion of sales were attributable to the Consumer segment, which has higher selling, marketing and administrative spending. Additionally, in 2008 the Company utilized the gain associated with the divestiture of the Professional Wound Care business of Ethicon, Inc. to fund increased investment spending. This was partially offset by ongoing cost containment efforts.
     In 2007, there was an increase in the percent to sales of cost of products sold primarily due to the impact of newly acquired consumer brands. There was an increase in the percent to sales of selling, marketing and administrative expenses in 2007 primarily due to the impact of newly acquired consumer brands partially offset by cost containment efforts.
     In 2006, there was an increase in the percent to sales of cost of products sold. This was due to unfavorable product mix and higher manufacturing costs in the Pharmaceutical and Consumer segments. There was a decrease in the percent to sales of selling, marketing and administrative expenses in 2006. This was a result of leveraging selling expenses and a reduction in advertising and promotional spending.


 
   Research and Development expense (excluding in-process research and development charges) by segment of business was as follows:
                                                       
 
      2008     2007       2006  
(Dollars in Millions)
    Amount       % of Sales     Amount     % of Sales       Amount     % of Sales  
                   
Consumer
    $ 624       3.9 %       564       3.9         395       4.0  
Pharmaceutical
      5,095             20.7         5,265       21.2         4,964       21.3  
Medical Devices and Diagnostics
      1,858       8.0         1,851       8.5         1,766       8.7  
                                               
Total research and development expense
    $ 7,577       11.9         7,680       12.6         7,125       13.4  
Percent (decrease)/increase over the prior year
      (1.3 )%               7.8                 10.3          
                   

Research and Development: Research and development activities represent a significant part of the Company’s business. These expenditures relate to the development of new products, improvement of existing products, technical support of products and compliance with governmental regulations for the protection of consumers and patients.
     In 2008, the reduction in the Pharmaceutical research and development spending was primarily due to increased efficiencies in Pharmaceutical research and development activities.
Restructuring: The Company has achieved approximately $1.6 billion in annual cost savings as outlined in the restructuring program announced in 2007. See Note 22 to the Consolidated Financial Statements for additional details related to the restructuring.
In-Process Research and Development: In 2008, the Company recorded a charge for in-process research and development (IPR&D) of $181 million before and after tax related to the acquisitions of Amic AB, SurgRx, Inc., HealthMedia, Inc. and Omrix Biopharmaceuticals, Inc. HealthMedia, Inc, a privately held company that creates web-based behavior change interventions, accounted for $7 million before tax of the IPR&D charges and was included in the operating profit of the Consumer segment. The IPR&D charges for all of the following acquisitions were included in the operating profit of the Medical Devices and Diagnostics segment. Amic AB, a Swedish developer of in vitro diagnostic technologies for use in point-of-care and near-patient settings (outside the physical facilities of the clinical laboratory), accounted for $40 million before tax of the IPR&D charges. SurgRx, Inc., a privately held developer of the advanced bipolar tissue sealing system used in the ENSEAL ® family of devices, accounted for $7 million before tax of the IPR&D charges. Omrix Biopharmaceuticals, Inc.,
a fully integrated biopharmaceutical company that develops and markets biosurgical and immunotherapy products, accounted for $127 million before tax of the IPR&D charges.
     In 2007, the Company recorded a charge for IPR&D of $807 million before and after tax related to the acquisition of Conor Medsystems, Inc. The IPR&D charge was included in the operating profit of the Medical Devices and Diagnostics segment.
     In 2006, the Company recorded IPR&D charges of $559 million before tax related to the acquisitions of the Consumer Healthcare business of Pfizer Inc., Vascular Control Systems, Inc., Ensure Medical, Inc., ColBar LifeScience Ltd., Hand Innovations LLC and Future Medical Systems S.A. The charge related to the Consumer Healthcare business acquired from Pfizer Inc. accounted for $320 million before tax of the IPR&D charges and was included in the operating profit of the Consumer segment. The IPR&D charges for all of the following acquisitions were included in the operating profit of the Medical Devices and Diagnostics segment. Vascular Control Systems, Inc., a privately held company focused on developing medical devices to treat fibroids and to control bleeding in obstetric and gynecologic applications, accounted for $87 million before tax of the IPR&D charges. Ensure Medical, Inc., a privately held company that develops devices for post-catheterization closure of the femoral artery, accounted for $66 million before tax of the IPR&D charges. ColBar LifeScience Ltd., a privately held company specializing in reconstructive medicine and tissue engineering, accounted for $49 million before tax of the IPR&D charges. Hand Innovations LLC, a privately held manufacturer of fracture fixation products for the upper extremities, accounted for $22 million before tax of the IPR&D charges. Future Medical Systems S.A., a privately held company that


   
38
JOHNSON & JOHNSON 2008 ANNUAL REPORT


 

primarily develops, manufactures and markets arthroscopic fluid management systems, accounted for $15 million before tax of the IPR&D charges.
Other (Income) Expense, Net: Other (income) expense, net includes gains and losses related to the sale and write-down of certain investments in equity securities held by Johnson & Johnson Development Corporation, gains and losses on the disposal of property, plant and equipment, currency gains and losses, minority interests, litigation settlements and liabilities and royalty income. The favorable change of $1.5 billion in other (income) expense, net from 2008 to 2007 was primarily due to an increase in income from net litigation settlements and awards of $0.5 billion, a gain of $0.5 billion from the divestiture of the Professional Wound Care business of Ethicon, Inc. in 2008 and the NATRECOR ® intangible asset write-down of $0.7 billion in 2007.
     In 2007, other (income) expense, net included a charge of $678 million before tax related to the NATRECOR ® intangible asset write-down. A gain of $622 million associated with the Guidant acquisition agreement termination fee, less associated expenses, was included in 2006. In addition, 2006 also included expenses associated with the recording of additional product liability reserves and the integration costs associated with the acquisition of the Consumer Healthcare business of Pfizer Inc.
OPERATING PROFIT BY SEGMENT
Operating profits by segment of business were as follows:
                                         
 
                          Percent of  
                          Segment Sales  
(Dollars in Millions)
    2008       2007         2008     2007  
                         
Consumer
    $ 2,674         2,277         16.7 %       15.7  
Pharmaceutical
      7,605         6,540         31.0         26.3  
Med Devices and Diagnostics
      7,223         4,846         31.2         22.3  
                         
Total (1)
      17,502         13,663         27.4         22.4  
Less: Expenses not allocated to segments (2)
      573         380                      
                         
Earnings before provision for taxes on income
    $ 16,929         13,283         26.5 %       21.7  
                         
(1) See Note 11 to the Consolidated Financial Statements for more details.
 
(2) Amounts not allocated to segments include interest (income) expense, minority interest, and general corporate (income) expense.
(BAR CHART)
Consumer Segment: In 2008, Consumer segment operating profit increased 17.4% from 2007. As a percent to sales, 2008 operating profit increased to 16.7%. Cost synergies, lower integration costs in 2008 related to the acquisition of the Consumer Healthcare business of Pfizer Inc., and other cost containment initiatives contributed to the increased operating profit. In 2007, Consumer segment operating profit increased 65.7% from 2006 due to the acquisition costs associated with the Consumer Healthcare business of Pfizer Inc. in 2006. As a percent to sales, 2007 operating profit increased to 15.7%. IPR&D expenses of $320 million as well as expenses associated with
the Consumer Healthcare business of Pfizer Inc. integration were recorded during 2006.
Pharmaceutical Segment: In 2008, Pharmaceutical segment operating profit increased 16.3% from 2007. As a percent to sales, 2008 operating profit increased to 31.0%. The primary driver of the improved operating profit was due to the restructuring charges of $429 million and $678 million for the NATRECOR ® intangible asset write-down recorded in 2007. In 2007, Pharmaceutical segment operating profit decreased 5.1% from 2006. As a percent to sales, 2007 operating profit decreased to 26.3% resulting from $429 million of restructuring charges and $678 million for the NATRECOR ® intangible asset write-down in 2007.
Medical Devices and Diagnostics Segment: In 2008, the operating profit in the Medical Devices and Diagnostics segment increased 49.1% from 2007. As a percent to sales, 2008 operating profit increased to 31.2%. The improved operating profit was the result of the $429 million gain from net litigation settlements, favorable product mix, manufacturing efficiencies and lower IPR&D charges of $174 million in 2008 versus $807 million in 2007. Additionally, $301 million of restructuring charges were recorded in 2007. In 2007, the operating profit in the Medical Devices and Diagnostics segment decreased 20.9% from 2006. As a percent to sales, 2007 operating profit decreased to 22.3%, resulting from $807 million of IPR&D charges and $301 million of restructuring charges in 2007, while 2006 included the gain associated with the Guidant acquisition agreement termination fee, less associated expenses, of $622 million.
Interest (Income) Expense: Interest income in 2008 decreased by $91 million due to lower rates of interest earned despite higher average cash balances. The cash balance, including marketable securities, was $12.8 billion at the end of 2008, and averaged $12.2 billion as compared to the $6.6 billion average cash balance in 2007. The increase in the average cash balance was primarily due to cash generated from operating activities.
     Interest expense in 2008 increased by $139 million due to a higher debt balance. In the second half of 2007 the Company converted some of its short-term debt to fixed long-term debt at higher interest rates. The net debt balance at the end of 2008 was $11.9 billion as compared to $9.5 billion at the end of 2007. The higher debt balance in 2008 was primarily due to the purchase of the Company’s common stock under the ongoing Common Stock repurchase program announced on July 9, 2007 and to fund acquisitions.
     Interest income in 2007 decreased by $377 million due to lower average cash balances. The decline in the average cash balance was primarily due to the acquisition of the Consumer Healthcare business of Pfizer Inc. on December 20, 2006.
     Interest expense in 2007 increased by $233 million as compared to prior year due to a higher average debt balance. The net debt balance at the end of 2007 was $9.5 billion as compared to $6.6 billion at the end of 2006. The higher debt balance in 2007 was due to the debt associated with the acquisition of the Consumer Healthcare business of Pfizer Inc. and the Common Stock repurchase program announced in 2007.
     Interest income in 2006 increased by $342 million due primarily to higher rates of interest, as well as a higher average cash balance, despite the $5.0 billion Common Stock repurchase program and an increase in acquisition activity as compared to prior year.
     Interest expense in 2006 increased slightly as compared to 2005 due to a higher average debt balance, from $2.6 billion in 2005 to $3.1 billion in 2006. This was partially offset by a decrease in interest rates.


   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
39


 

Provision for Taxes on Income: The worldwide effective income tax rate was 23.5% in 2008, 20.4% in 2007 and 24.2% in 2006. The 2008 tax rate increased as compared to 2007 due to increases in taxable income in higher tax jurisdictions relative to taxable income in lower jurisdictions. In addition, the 2007 tax rate benefited from a one-time gain of $267 million related to a business restructuring of certain international subsidiaries, as well as increases in taxable income in lower tax jurisdictions relative to taxable income in higher tax jurisdictions and lower international tax rates in certain countries as compared to the prior year.
Liquidity and Capital Resources
LIQUIDITY & CASH FLOWS
Cash and cash equivalents were $10.8 billion at the end of 2008 as compared with $7.8 billion at the end of 2007. The primary sources of cash that contributed to the $3.0 billion increase versus prior year were $15.0 billion of cash generated from operating activities and $2.7 billion net proceeds from long and short-term debt. The major uses of cash were capital spending of $3.1 billion, acquisitions of $1.2 billion, dividends to shareholders of $5.0 billion and the repurchase of common stock, net of proceeds from the exercise of options, of $5.2 billion.
     Cash flow from operations of $15.0 billion is the result of $12.9 billion of net earnings and $3.5 billion of non-cash charges related to depreciation and amortization, stock based compensation, and $0.2 billion of IPR&D offset by increased working capital of $0.8 billion and a net use related to changes in assets and liabilities net of effects from acquisitions of $0.8 billion.
     In 2008, the Company continued to have access to liquidity through the commercial paper market. For additional details on borrowings, see Note 6 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 2009.
(BAR CHART)
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 28, 2008 market rates would increase the unrealized value of the Company’s forward contracts by $226 million. Conversely, a 10% depreciation of the U.S. Dollar from the December 28, 2008 market rates would decrease the unrealized value of the Company’s forward contracts by $276 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 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 $97 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 counterparty. Management believes the risk of loss is remote.
     The Company has access to substantial sources of funds at numerous banks worldwide. In September 2008, the Company secured a new 364-day and 5-year Credit Facility. Total credit available to the Company approximates $7.7 billion, of which $6.3 billion expires September 24, 2009, and $1.4 billion expires September 25, 2013. Interest charged on borrowings under the credit line agreements 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 2008 and 2007 were $11.9 billion and $9.5 billion, respectively. The increase in borrowings between 2008 and 2007 was a result of financing general corporate purposes and the continuation of the Common Stock repurchase program announced in 2007. In 2008, net cash (cash and current marketable securities, net of debt) was $1.0 billion compared to net debt of $0.2 billion in 2007. Total debt represented 21.8% of total capital (shareholders’ equity and total debt) in 2008 and 18.0% of total capital in 2007. Shareholders’ equity per share at the end of 2008 was $15.35 compared with $15.25 at year-end 2007, an increase of 0.7%.
     Johnson & Johnson continues to be one of a few industrial companies with a Triple A credit rating and to have access to credit at commercially favorable terms. A summary of borrowings can be found in Note 6 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 operations. The following table summarizes the Company’s contractual obligations and their aggregate maturities as of December 28, 2008 (see Notes 4, 6 and 13 to the Consolidated Financial Statements for further details):
                                 
 
                    Unfunded        
    Operating     Debt     Retirement        
(Dollars in Millions)
  Leases     Obligations (1)   Plans     Total  
 
2009
  $ 171       221       56            448  
2010
    145       22       58       225  
2011
    123       18       62       203  
2012
    107       620       66       793  
2013
    89       507       70       666  
After 2013
    93       6,953       436       7,482  
     
Total
  $ 728       8,341       748       9,817  
 
(1) Amounts do not include interest expense.
For tax matters, see Note 8 to the Consolidated Financial Statements.


   
40
JOHNSON & JOHNSON 2008 ANNUAL REPORT


 

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 December 28, 2008, the Company repurchased an aggregate of 124.9 million shares of Johnson & Johnson common stock under the current repurchase program at a cost of $8.1 billion. 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 2008 for the 46th consecutive year. Cash dividends paid were $1.795 per share in 2008, compared with dividends of $1.620 per share in 2007 and $1.455 per share in 2006. The dividends were distributed as follows:
                               
 
      2008       2007       2006  
                   
First quarter
    $ 0.415         0.375         0.330  
Second quarter
      0.460         0.415         0.375  
Third quarter
      0.460         0.415         0.375  
Fourth quarter
      0.460         0.415         0.375  
                   
Total
    $ 1.795         1.620         1.455  
 
On January 5, 2009, the Board of Directors declared a regular cash dividend of $0.460 per share, payable on March 10, 2009, to shareholders of record as of February 24, 2009. The Company expects to continue the practice of paying regular cash dividends.
Other Information
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of results of operations and financial condition are based on the Company’s consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires that management make estimates and assumptions that affect the amounts reported for revenues, expenses, assets, liabilities and other related disclosures. Actual results may or may not differ from these estimates. The Company believes that the understanding of certain key accounting policies and estimates are essential in achieving more insight into the Company’s operating results and financial condition. These key accounting policies include revenue recognition, income taxes, legal and self-insurance contingencies, valuation of long-lived assets, assumptions used to determine the amounts recorded for pensions and other employee benefit plans and accounting for stock options.
Revenue Recognition: The Company recognizes revenue from product sales when goods are shipped or delivered, and title and risk of loss pass to the customer. Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded.
     Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates, the largest being the Medicaid rebate provision, are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. The Company evaluates market conditions for products or groups of products primarily through the analysis of wholesaler and other third-party sell-through and market research data, as well as internally generated information.
     Sales returns are generally estimated and recorded based on historical sales and returns information. Products that exhibit unusual sales or return patterns due to dating, competition or other marketing matters are specifically investigated and analyzed as part of the accounting for sales return accruals.
     Sales returns allowances represent a reserve for products that may be returned due to expiration, destruction in the field, or in specific areas, product recall. The returns reserve is based on historical return trends by product and by market as a percent to gross sales.
     Promotional programs, such as product listing allowances and cooperative advertising arrangements, are recorded in the year incurred. Continuing promotional programs include coupons and volume-based sales incentive programs. The redemption cost of consumer coupons is based on historical redemption experience by product and value. Volume-based incentive programs are based on estimated sales volumes for the incentive period and are recorded as products are sold. The Company also earns service revenue for co-promotion of certain products and includes it in sales to customers. Promotional arrangements are evaluated to determine the appropriate amounts to be deferred.
     In addition, the Company enters into collaboration arrangements, which contain multiple revenue generating activities. The revenue for these arrangements is recognized as each activity is performed or delivered, based on the relative fair value. Upfront fees received as part of these arrangements are deferred and recognized as revenue earned over the obligation period.
     Reasonably likely changes to assumptions used to calculate the accruals for rebates, returns and promotions are not anticipated to have a material effect on the financial statements. The Company currently discloses the impact of changes to assumptions in the quarterly or annual filing in which there is a material financial statement impact.
     Below are tables which show the progression of accrued rebates, returns, promotions, reserve for doubtful accounts and reserve for cash discounts by segment of business for the fiscal years ended December 28, 2008 and December 30, 2007.
CONSUMER SEGMENT
                                 
 
    Balance at                     Balance at  
    Beginning             Payments/     End  
(Dollars in Millions)
  of Period     Accruals     Other     of Period  
 
2008
                               
Accrued rebates (1)
  $ 217       300       (386 )     131  
Accrued returns
    113       135       (133 )     115  
Accrued promotions
    297       2,369       (2,464 )     202  
     
Subtotal
  $ 627       2,804       (2,983 )     448  
     
Reserve for doubtful accounts
    71       41       (2 )     110  
Reserve for cash discounts
    23       272       (273 )     22  
     
Total
  $ 721       3,117       (3,258 )     580  
     
2007
                               
Accrued rebates (1)
  $ 164       492       (439 )     217  
Accrued returns
    92       257       (236 )     113  
Accrued promotions
    211       2,249       (2,163 )     297  
     
Subtotal
  $ 467       2,998       (2,838 )     627  
     
Reserve for doubtful accounts
    42       17       12       71  
Reserve for cash discounts
    15       278       (270 )     23  
     
Total
  $ 524       3,293       (3,096 )     721  
 
(1) Includes reserve for customer rebates of $73 million at December 28, 2008 and $76 million at December 30, 2007, recorded as a contra asset.


   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
41


 

PHARMACEUTICAL SEGMENT
                               
 
  Balance at                     Balance at  
  Beginning             Payments/     End  
(Dollars in Millions)
of Period     Accruals     Other     of Period  
 
2008
                             
Accrued rebates (1)
  $1,249       3,331       (3,319 )     1,261  
Accrued returns
  345       168       (23 )     490  
Accrued promotions
  263       414       (570 )     107  
     
Subtotal
  $1,857       3,913       (3,912 )     1,858  
     
Reserve for doubtful accounts
  26       24       (2 )     48  
Reserve for cash discounts
  24       376       (377 )     23  
     
Total
  $1,907       4,313 (2)     (4,291 )     1,929  
     
2007
                             
Accrued rebates (1)
  $1,233       3,175       (3,159 )     1,249  
Accrued returns
  324       36       (15 )     345  
Accrued promotions
  205       523       (465 )     263  
     
Subtotal
  $1,762       3,734       (3,639 )     1,857  
     
Reserve for doubtful accounts
  30             (4 )     26  
Reserve for cash discounts
  29       531       (536 )     24  
     
Total
  $1,821       4,265       (4,179 )     1,907  
 
(1) Includes reserve for customer rebates of $344 million at December 28, 2008 and $321 million at December 30, 2007, recorded as a contra asset.
 
(2) Includes $115 million adjustment related to previously estimated accrued sales reserves.
MEDICAL DEVICES AND DIAGNOSTICS SEGMENT
                               
 
  Balance at                     Balance at  
  Beginning             Payments/     End  
(Dollars in Millions)
of Period     Accruals     Other     of Period  
 
2008
                             
Accrued rebates (1)
  $336       1,947       (1,867 )     416  
Accrued returns
  190       99       (100 )     189  
Accrued promotions
  18       208       (179 )     47  
     
Subtotal
  $544       2,254       (2,146 )     652  
     
Reserve for doubtful accounts
  96       36       (23 )     109  
Reserve for cash discounts
  24       257       (247 )     34  
     
Total
  $664       2,547 (2)     (2,416 )     795  
     
2007
                             
Accrued rebates (1)
  $294       1,576       (1,534 )     336  
Accrued returns
  183       102       (95 )     190  
Accrued promotions
  41       136       (159 )     18  
     
Subtotal
  $518       1,814       (1,788 )     544  
     
Reserve for doubtful accounts
  88       25       (17 )     96  
Reserve for cash discounts
  18       213       (207 )     24  
     
Total
  $624       2,052       (2,012 )     664  
 
(1) Includes reserve for customer rebates of $304 million at December 28, 2008 and $313 million at December 30, 2007, recorded as a contra asset.
 
(2) Includes $56 million adjustment related to previously estimated sales rebate reserve.
The Company also earns service revenue for co-promotion of certain products. For all years presented, service revenues were less than 2% of total revenues and are included in sales to customers.
Income Taxes: Income taxes are recorded based on amounts refundable or payable for the current year and include the results of any difference between GAAP accounting and tax reporting, recorded as deferred tax assets or liabilities. The Company estimates deferred tax assets and liabilities based on current tax regulations and rates. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities in the future. Management believes that changes in these estimates would not have a material
effect on the Company’s results of operations, cash flows or financial position.
     In 2007, the Company adopted FASB Interpretation 48 (FIN48), Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification and other matters. See Note 8 to the Consolidated Financial Statements for further information regarding income taxes.
     At December 28, 2008 and December 30, 2007, the cumulative amounts of undistributed international earnings were approximately $27.7 billion and $23.7 billion, respectively. The Company intends to continue to reinvest its undistributed international earnings to expand its international operations; therefore, no U.S. tax expense has been recorded with respect to the undistributed portion not intended for repatriation.
Legal and Self Insurance Contingencies: The Company records accruals for various contingencies including legal proceedings and product liability cases as these arise in the normal course of business. The accruals are based on management’s judgment as to the probability of losses and, where applicable, actuarially determined estimates. Additionally, the Company records insurance receivable amounts from third-party insurers when recovery is probable. As appropriate, reserves against these receivables are recorded for estimated amounts that may not be collected from third-party insurers.
Long-Lived and Intangible Assets: The Company assesses changes in economic conditions and makes assumptions regarding estimated future cash flows in evaluating the value of the Company’s property, plant and equipment, goodwill and intangible assets. As these assumptions and estimates may change over time, it may or may not be necessary for the Company to record impairment charges.
Employee Benefit Plans: The Company sponsors various retirement and pension plans, including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide. These plans are based on assumptions for the discount rate, expected return on plan assets, expected salary increases and health care cost trend rates. See Note 13 to the Consolidated Financial Statements for further details on these rates and the effect a rate change would have on the Company’s results of operations.
Stock Options: During the fiscal first quarter of 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share Based Payment. The Company has applied the modified retrospective transition method to implement SFAS No. 123(R). Previously reported financial statements have been restated in accordance with the provisions of SFAS No. 123(R). See Note 10 for further information regarding stock options.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 to the Consolidated Financial Statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of December 28, 2008.


   
42
JOHNSON & JOHNSON 2008 ANNUAL REPORT


 

ECONOMIC AND MARKET FACTORS
The Company is aware that its products are used in an environment where, for more than a decade, policymakers, consumers and businesses have expressed concerns about the rising cost of health care. In response to these concerns, the Company has a long-standing policy of pricing products responsibly. For the period 1998-2008, in the United States, the weighted average compound annual growth rate of the Company’s net price increases for health care products (prescription and over-the-counter drugs, hospital and professional products) was below the U.S. Consumer Price Index (CPI).
     Inflation rates continue to have an effect on worldwide economies and, consequently, on the way companies operate. In the face of increasing costs, the Company strives to maintain its profit margins through cost reduction programs, productivity improvements and periodic price increases.
     The Company is exposed to fluctuations in currency exchange rates. A 1% change in the value of the U.S. dollar as compared to all foreign currencies in which the Company had sales, income or expense in 2008 would have increased or decreased the translation of foreign sales by $300 million and income by $50 million.
     The Company faces various worldwide health care changes that may continue to result in pricing pressures that include health care cost containment and government legislation relating to sales, promotions and reimbursement.
     Changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage, as a result of the current global economic downturn will continue to impact the Company’s businesses.
     The Company also operates in an environment which has become increasingly hostile to intellectual property rights. Generic drug firms have filed Abbreviated New Drug Applications (ANDAs) seeking to market generic forms of most of the Company’s key pharmaceutical products, prior to expiration of the applicable patents covering those products. In the event the Company is not successful in defending the patent claims challenged in ANDA filings, the generic firms will then introduce generic versions of the product at issue, resulting in the potential for substantial market share and revenue losses for that product. For further information see the discussion on “Litigation Against Filers of Abbreviated New Drug Applications” in Note 18 to the Consolidated Financial Statements.
LEGAL PROCEEDINGS
The Company is involved in numerous product liability cases in the United States, many of which concern alleged adverse reactions to drugs and medical devices. The damages claimed are substantial, and while the Company is confident of the adequacy of the warnings and instructions for use which accompany such products, it is not feasible to predict the ultimate outcome of litigation. However, the Company believes that if any liability results from such cases, it will be substantially covered by existing amounts accrued in the Company’s balance sheet under its self-insurance program and by third-party product liability insurance.
     The Company is also involved in a number of patent, trademark and other lawsuits, as well as investigations, incidental to its business. The ultimate legal and financial liability of the Company in respect to all claims, lawsuits and proceedings referred to above cannot be estimated with any certainty. However, in the Company’s opinion, based on its examination of these matters, its experience to date and discussions with counsel, the ultimate outcome of legal proceedings, net of liabilities already accrued in the Company’s balance sheet, is not expected to have a material adverse effect on the Company’s financial condition, although the resolution in any
reporting period of one or more of these matters could have a significant impact on the Company’s results of operations and cash flows for that period.
     See Note 18 to the Consolidated Financial Statements for further information regarding legal proceedings.
COMMON STOCK MARKET PRICES
The Company’s common stock is listed on the New York Stock Exchange under the symbol JNJ. The composite market price ranges for Johnson & Johnson common stock during 2008 and 2007 were:
                                     
 
      2008       2007  
      High     Low       High     Low  
             
First quarter
    $ 68.85       61.17         68.22       59.87  
Second quarter
      68.32       63.40         65.45       59.95  
Third quarter
      72.76       63.10         65.75       59.72  
Fourth quarter
      69.86       52.06         68.75       63.55  
Year-end close
      $58.56         67.38    
             
Cautionary Factors That May Affect Future Results
This Annual Report contains forward-looking statements. Forward-looking statements do not relate strictly to historical or current facts and anticipate results based on management’s plans that are subject to uncertainty. Forward-looking statements may be identified by the use of words such as “plans,” “expects,” “will,” “anticipates,” “estimates” and other words of similar meaning in conjunction with, among other things, discussions of future operations, financial performance, the Company’s strategy for growth, product development, regulatory approval, market position and expenditures.
     Forward-looking statements are based on current expectations of future events. The Company cannot guarantee that any forward-looking statement will be accurate, although the Company believes that it has been reasonable in its expectations and assumptions. Investors should realize that if underlying assumptions prove inaccurate or that unknown risks or uncertainties materialize, actual results could vary materially from the Company’s expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. The Company does not undertake to update any forward-looking statements as a result of new information or future events or developments.
     Risks and uncertainties include general industry conditions and competition; economic conditions, such as interest rate and currency exchange rate fluctuations; technological advances, new products and patents attained by competitors; challenges inherent in new product development, including obtaining regulatory approvals; challenges to patents; U.S. and foreign health care reforms and governmental laws and regulations; trends toward health care cost containment; increased scrutiny of the health care industry by government agencies; product efficacy or safety concerns resulting in product recalls or regulatory action.
     The Company’s report on Form 10-K for the year ended December 28, 2008 includes, in Exhibit 99, a discussion of additional factors that could cause actual results to differ from expectations. The Company notes these factors as permitted by the Private Securities Litigation Reform Act of 1995.


   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
43


 

                     
Consolidated Balance Sheets
    Johnson & Johnson and Subsidiaries  
         
                 
At December 28, 2008 and December 30, 2007 (Dollars in Millions Except Share and Per Share Data) (Note 1)
    2008       2007  
             
 
                   
Assets
                   
             
Current assets
                   
Cash and cash equivalents (Notes 1 and 14)
    $ 10,768         7,770  
Marketable securities (Notes 1 and 14)
      2,041         1,545  
Accounts receivable trade, less allowances for doubtful accounts $268 (2007, $193)
      9,719         9,444  
Inventories (Notes 1 and 2)
      5,052         5,110  
Deferred taxes on income (Note 8)
      3,430         2,609  
Prepaid expenses and other receivables
      3,367         3,467  
             
 
                   
Total current assets
      34,377         29,945  
             
Marketable securities, non-current (Notes 1 and 14)
      4         2  
Property, plant and equipment, net (Notes 1 and 3)
      14,365         14,185  
Intangible assets, net (Notes 1 and 7)
      13,976         14,640  
Goodwill, net (Notes 1 and 7)
      13,719         14,123  
Deferred taxes on income (Note 8)
      5,841         4,889  
Other assets (Note 5)
      2,630         3,170  
             
 
                   
Total assets
    $ 84,912         80,954  
             
 
                   
Liabilities and Shareholders’ Equity
                   
             
Current liabilities
                   
Loans and notes payable (Note 6)
    $ 3,732         2,463  
Accounts payable
      7,503         6,909  
Accrued liabilities
      5,531         6,412  
Accrued rebates, returns and promotions
      2,237         2,318  
Accrued salaries, wages and commissions
      1,432         1,512  
Accrued taxes on income
      417         223  
             
 
                   
Total current liabilities
      20,852         19,837  
             
 
                   
Long-term debt (Note 6)
      8,120         7,074  
Deferred taxes on income (Note 8)
      1,432         1,493  
Employee related obligations (Notes 5 and 13)
      7,791         5,402  
Other liabilities
      4,206         3,829  
             
 
                   
Total liabilities
      42,401         37,635  
             
 
                   
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)
      3,120         3,120  
Accumulated other comprehensive income (Note 12)
      (4,955 )       (693 )
Retained earnings
      63,379         55,280  
             
 
      61,544         57,707  
 
                   
Less: common stock held in treasury, at cost (Note 20)
(350,665,000 shares and 279,620,000 shares)
      19,033         14,388  
             
 
                   
Total shareholders’ equity
      42,511         43,319  
             
 
                   
Total liabilities and shareholders’ equity
    $ 84,912         80,954  
             
See Notes to Consolidated Financial Statements
   
44
JOHNSON & JOHNSON 2008 ANNUAL REPORT


 

                               
Consolidated Statements of Earnings
    Johnson & Johnson and Subsidiaries  
         
                         
                         
(Dollars in Millions Except Per Share Figures) (Note 1)
    2008       2007       2006  
                   
 
                             
Sales to customers
    $ 63,747         61,095         53,324  
                   
 
                             
Cost of products sold
      18,511         17,751         15,057  
                   
 
                             
Gross profit
      45,236         43,344         38,267  
 
                             
Selling, marketing and administrative expenses
      21,490         20,451         17,433  
Research expense
      7,577         7,680         7,125  
Purchased in-process research and development (Note 17)
      181         807         559  
Restructuring (Note 22)
              745          
Interest income
      (361 )       (452 )       (829 )
Interest expense, net of portion capitalized (Note 3)
      435         296         63  
Other (income) expense, net
      (1,015 )       534         (671 )
                   
 
      28,307         30,061         23,680  
                   
Earnings before provision for taxes on income
      16,929         13,283         14,587  
Provision for taxes on income (Note 8)
      3,980         2,707         3,534  
                   
 
                             
Net earnings
    $ 12,949         10,576         11,053  
                   
 
                             
Basic net earnings per share (Notes 1 and 19)
    $ 4.62         3.67         3.76  
                   
 
                             
Diluted net earnings per share (Notes 1 and 19)
    $ 4.57         3.63         3.73  
                   
See Notes to Consolidated Financial Statements
   
CONSOLIDATED FINANCIAL STATEMENTS
45


 

                                                 
Consolidated Statements of Equity
                    Johnson & Johnson and Subsidiaries  
                                             
                            Accumulated                
                            Other             Treasury  
            Comprehensive     Retained     Comprehensive     Common Stock     Stock  
(Dollars in Millions) (Note 1)
  Total     Income     Earnings     Income     Issued Amount     Amount  
 
 
                                               
Balance, January 1, 2006
    $38,710               42,310       (755 )     3,120       (5,965 )
 
Net earnings
    11,053       11,053       11,053                          
Cash dividends paid
    (4,267 )             (4,267 )                        
Employee compensation and stock option plans
    1,858               181                       1,677  
Conversion of subordinated debentures
    26               (10 )                     36  
Repurchase of common stock
    (6,722 )                                     (6,722 )
Other
    23               23                          
Other comprehensive income, net of tax:
                                               
Currency translation adjustment
    362       362               362                  
Unrealized losses on securities
    (9 )     (9 )             (9 )                
Employee benefit plans
    (1,710 )     (34 )             (1,710 )                
Losses on derivatives & hedges
    (6 )     (6 )             (6 )                
Reclassification adjustment
            (9 )                                
 
                                             
Total comprehensive income
            11,357                                  
 
                                             
 
                                               
                   
Balance, December 31, 2006
    $39,318               49,290       (2,118 )     3,120       (10,974 )
 
Net earnings
    10,576       10,576       10,576                          
Cash dividends paid
    (4,670 )             (4,670 )                        
Employee compensation and stock option plans
    2,311               131                       2,180  
Conversion of subordinated debentures
    9               (4 )                     13  
Repurchase of common stock
    (5,607 )                                     (5,607 )
Adoption of FIN 48
    (19 )             (19 )                        
Other
    (24 )             (24 )                        
Other comprehensive income, net of tax:
                                               
Currency translation adjustment
    786       786               786                  
Unrealized gains on securities
    23       23               23                  
Employee benefit plans
    670       670               670                  
Losses on derivatives & hedges
    (54 )     (54 )             (54 )                
Reclassification adjustment
            (5 )                                
 
                                             
Total comprehensive income
            11,996                                  
 
                                             
 
                                               
                   
Balance, December 30, 2007
    $43,319               55,280       (693 )     3,120       (14,388 )
 
Net earnings
    12,949       12,949       12,949                          
Cash dividends paid
    (5,024 )             (5,024 )                        
Employee compensation and stock option plans
    2,180               175                       2,005  
Conversion of subordinated debentures
                  (1 )                     1  
Repurchase of common stock
    (6,651 )                                     (6,651 )
Other comprehensive income, net of tax:
                                               
Currency translation adjustment
    (2,499 )     (2,499 )             (2,499 )                
Unrealized losses on securities
    (59 )     (59 )             (59 )                
Employee benefit plans
    (1,870 )     (1,870 )             (1,870 )                
Gains on derivatives & hedges
    166       166               166                  
Reclassification adjustment
            (27 )                                
 
                                             
Total comprehensive income
            8,660                                  
 
                                             
 
                                               
                   
Balance, December 28, 2008
    $42,511               63,379       (4,955 )     3,120       (19,033 )
 
See Notes to Consolidated Financial Statements
   
46
JOHNSON & JOHNSON 2008 ANNUAL REPORT


 

                               
Consolidated Statements of Cash Flows
      Johnson & Johnson and Subsidiaries  
                         
                         
(Dollars in Millions) (Note 1)
    2008       2007       2006  
                   
 
                             
Cash flows from operating activities
                             
                   
Net earnings
    $ 12,949         10,576         11,053  
Adjustments to reconcile net earnings to cash flows from operating activities:
                             
Depreciation and amortization of property and intangibles
      2,832         2,777         2,177  
Stock based compensation
      627         698         659  
Purchased in-process research and development
      181         807         559  
Intangible asset write-down (NATRECOR ® )
              678          
Decrease/(increase) in deferred tax provision
      22         (1,762 )       (1,168 )
Accounts receivable allowances
      86         22         (14 )
Changes in assets and liabilities, net of effects from acquisitions:
                             
Increase in accounts receivable
      (736 )       (416 )       (699 )
(Increase)/decrease in inventories
      (101 )       14         (210 )
(Decrease)/increase in accounts payable and accrued liabilities
      (272 )       2,642         1,750  
Increase in other current and non-current assets
      (1,600 )       (1,578 )       (269 )
Increase in other current and non-current liabilities
      984         564         410  
             
Net cash flows from operating activities
      14,972         15,022         14,248  
                   
 
                             
Cash flows from investing activities
                             
                   
Additions to property, plant and equipment
      (3,066 )       (2,942 )       (2,666 )
Proceeds from the disposal of assets
      785         457         511  
Acquisitions, net of cash acquired (Note 17)
      (1,214 )       (1,388 )       (18,023 )
Purchases of investments
      (3,668 )       (9,659 )       (467 )
Sales of investments
      3,059         7,988         426  
Other (primarily intangibles)
      (83 )       (368 )       (72 )
                   
 
                             
Net cash used by investing activities
      (4,187 )       (5,912 )       (20,291 )
                   
 
                             
Cash flows from financing activities
                             
                   
Dividends to shareholders
      (5,024 )       (4,670 )       (4,267 )
Repurchase of common stock
      (6,651 )       (5,607 )       (6,722 )
Proceeds from short-term debt
      8,430         19,626         6,385  
Retirement of short-term debt
      (7,319 )       (21,691 )       (2,633 )
Proceeds from long-term debt
      1,638         5,100         6  
Retirement of long-term debt
      (24 )       (18 )       (13 )
Proceeds from the exercise of stock options/excess tax benefits
      1,486         1,562         1,135  
                   
 
                             
Net cash used by financing activities
      (7,464 )       (5,698 )       (6,109 )
                   
 
                             
Effect of exchange rate changes on cash and cash equivalents
      (323 )       275         180  
                   
Increase/(decrease) in cash and cash equivalents
      2,998         3,687         (11,972 )
Cash and cash equivalents, beginning of year (Note 1)
      7,770         4,083         16,055  
                   
 
                             
Cash and cash equivalents, end of year (Note 1)
    $ 10,768         7,770         4,083  
                   
 
                             
Supplemental cash flow data
                             
                   
Cash paid during the year for:
                             
Interest
    $ 525         314         143  
Income taxes
      4,068         4,099         4,250  
 
                             
Supplemental schedule of noncash investing and financing activities
                             
                   
Treasury stock issued for employee compensation and
stock option plans, net of cash proceeds
    $ 593         738         622  
Conversion of debt
              9         26  
 
                             
Acquisitions
                             
                   
Fair value of assets acquired
    $ 1,328         1,620         19,306  
Fair value of liabilities assumed
      (114 )       (232 )       (1,283 )
                   
 
                             
Net cash paid for acquisitions
    $ 1,214         1,388         18,023  
                   
See Notes to Consolidated Financial Statements
   
CONSOLIDATED FINANCIAL STATEMENTS
47


 

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Johnson & Johnson and subsidiaries (the “Company”). Inter-company accounts and transactions are eliminated.
DESCRIPTION OF THE COMPANY AND BUSINESS SEGMENTS
The Company has approximately 118,700 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The Company conducts business in virtually all countries of the world and its primary focus is on products related to human health and well-being.
     The Company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. The Consumer segment manufactures and markets a broad range of products used in the baby care, skin care, oral care, wound care and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products. These products are marketed to the general public and sold both to distributors and directly to independent and chain retail outlets throughout the world. The Pharmaceutical segment includes products in the following therapeutic areas: anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology and virology. These products are distributed directly to retailers, wholesalers and health care professionals for prescription use. The Medical Devices and Diagnostics segment includes a broad range of products used principally in the professional fields by physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics. These products include Cordis’ circulatory disease management products; DePuy’s orthopaedic joint reconstruction, spinal care and sports medicine products; Ethicon’s surgical care and women’s health products; Ethicon Endo-Surgery’s minimally invasive surgical products; LifeScan’s blood glucose monitoring and insulin delivery products; Ortho-Clinical Diagnostics’ professional diagnostic products and Vistakon’s disposable contact lenses.
NEW ACCOUNTING PRONOUNCEMENTS
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement was effective in the fiscal first quarter of 2008 except for non-financial assets and liabilities recognized or disclosed at fair value on a recurring basis, for which the effective date is for fiscal years beginning after November 15, 2008. The Company adopted SFAS No. 157 in the fiscal first quarter of 2008, the impact of which is discussed in Note 23.
     In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities , which permits an entity to measure certain financial assets and financial liabilities at fair value. SFAS No. 159 was effective for fiscal year 2008 and the Company adopted it in the fiscal first quarter of 2008. The adoption of SFAS No. 159 did not have a material effect on the Company’s results of operations, cash flows or financial position.
     EITF Issue 07-03: Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities. This issue is effective for financial statements issued for fiscal years beginning after December 15, 2007 and was adopted by the Company in the fiscal first quarter of 2008. This issue requires nonrefundable advance payments for research and development to be capitalized and recognized as an expense as related goods are delivered or services are performed. The adoption of EITF 07-03 did not have a significant impact on the Company’s results of operations, cash flows or financial position.
RECENTLY ISSUED ACCOUNTING STANDARDS,
NOT ADOPTED AS OF DECEMBER 28, 2008
In December 2007, FASB issued SFAS No. 141(R), Business Combinations , and No. 160, Noncontrolling Interests in Consolidated Financial Statements . These statements aim to improve, simplify and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. These statements are effective for fiscal years beginning after December 15, 2008. SFAS No. 141(R) will have a significant impact on the manner in which the Company accounts for future acquisitions beginning in the fiscal year 2009. Significant changes include the capitalization of in-process research and development (IPR&D), expensing of acquisition related restructuring actions and transaction related costs and the recognition of contingent purchase price consideration at fair value at the acquisition date. In addition, changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period will be recognized in earnings rather than as an adjustment to the cost of acquisition. This accounting treatment for taxes is applicable to acquisitions that occurred both prior and subsequent to the adoption of SFAS No. 141(R). The Company believes that the adoption of SFAS No. 141(R) and SFAS No. 160 will not have a material effect on its results of operations, cash flows or financial position.
     In March 2008, the FASB issued SFAS Statement No. 161, Disclosures About Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, to enhance the disclosure regarding the Company’s derivative and hedging activities, to improve the transparency of financial reporting. This statement is effective for fiscal years beginning after November 15, 2008. The adoption of SFAS No. 161 will have no impact on the Company’s results of operations, cash flows or financial position.
     EITF Issue 07-01: Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property . This issue is effective for financial statements issued for fiscal years beginning after December 15, 2008. This issue addresses the income statement classification of payments made between parties in a collaborative arrangement. The adoption of EITF 07-01 is not expected to have a significant impact on the Company’s results of operations, cash flows or financial position.
     EITF Issue 08-07: Accounting for Defensive Intangible Assets. This issue applies to acquired intangible assets in situations in which an entity does not intend to actively use the asset, but intends to hold the asset to prevent others from obtaining access to the asset, except for intangible assets that are used in research and development activities. This issue is effective for fiscal years beginning after December 15, 2008. The adoption of EITF 08-07 is not expected to have a significant impact on the Company’s results of operations, cash flows or financial position.


   
48
JOHNSON & JOHNSON 2008 ANNUAL REPORT

 


 

CASH EQUIVALENTS
The Company considers securities with maturities of three months or less, when purchased, to be cash equivalents.
INVESTMENTS
Short-term marketable securities are carried at cost, which approximates fair value. Investments classified as available-for-sale are carried at estimated fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income. Long-term debt securities that the Company has the ability and intent to hold until maturity are carried at amortized cost, which also approximates fair value. Management determines the appropriate classification of its investment in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. The Company periodically reviews its investments in equity securities for impairment and adjusts these investments to their fair value when a decline in market value is deemed to be other than temporary.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are stated at cost. The Company utilizes the straight-line method of depreciation over the estimated useful lives of the assets:
         
Building and building equipment
  20-40 years
Land and leasehold improvements
  10-20 years
Machinery and equipment
  2-13 years
The Company capitalizes certain computer software and development costs, included in machinery and equipment, when incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are amortized over the estimated useful lives of the software, which generally range from 3 to 5 years.
     The Company reviews long-lived assets to assess recoverability using undiscounted cash flows. When necessary, charges for impairments of long-lived assets are recorded for the amount by which the present value of future cash flows is less than the carrying value of these assets.
REVENUE RECOGNITION
The Company recognizes revenue from product sales when the goods are shipped or delivered and title and risk of loss pass to the customer. Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded.
     Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates, the largest being the Medicaid rebate provision, are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. The Company evaluates market conditions for products or groups of products primarily through the analysis of wholesaler and other third-party sell-through and market research data, as well as internally generated information.
     Sales returns are generally estimated and recorded based on historical sales and returns information. Products that exhibit unusual sales or return patterns due to dating, competition or other marketing matters are specifically investigated and analyzed as part of the accounting for sales return accruals. Sales returns allowances represent a reserve for products that may be returned due to expiration, destruction in the field, or in specific areas, product recall.
The returns reserve is based on historical return trends by product and by market as a percent to gross sales.
     Promotional programs, such as product listing allowances and cooperative advertising arrangements, are recorded in the year incurred. Continuing promotional programs include coupons and volume-based sales incentive programs. The redemption cost of consumer coupons is based on historical redemption experience by product and value. Volume-based incentive programs are based on the estimated sales volumes for the incentive period and are recorded as products are sold. The Company also earns service revenue for co-promotion of certain products and includes it in sales to customers. Promotional arrangements are evaluated to determine the appropriate amounts to be deferred.
     In addition, the Company enters into collaboration arrangements, which contain multiple revenue generating activities. The revenue for these arrangements is recognized as each activity is performed or delivered, based on the relative fair value. Upfront fees received as part of these arrangements are deferred and recognized as revenue earned over the obligation period.
SHIPPING AND HANDLING
Shipping and handling costs incurred were $1,017 million, $934 million and $693 million in 2008, 2007 and 2006, respectively, and are included in selling, marketing and administrative expense. The amount of revenue received for shipping and handling is less than 0.5% of sales to customers for all periods presented.
INVENTORIES
Inventories are stated at the lower of cost or market determined by the first-in, first-out method.
INTANGIBLE ASSETS AND GOODWILL
SFAS No. 142 requires that goodwill and non-amortizable intangible assets be assessed annually for impairment. The Company completed the annual impairment test for 2008 in the fiscal fourth quarter and no impairment was determined. Future impairment tests will be performed annually in the fiscal fourth quarter, or sooner if a triggering event occurs.
     Intangible assets that have finite useful lives continue to be amortized over their useful lives, and are reviewed for impairment when warranted by economic conditions. See Note 7 for further details on Intangible Assets.
FINANCIAL INSTRUMENTS
The Company follows the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction.
     The Company uses forward exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany product and third-party purchases of raw materials denominated in foreign currency. The Company also uses currency swaps to manage currency risk primarily related to borrowings. Both of these types of derivatives are designated as cash flow hedges. Additionally, the Company uses forward exchange contracts to offset its exposure to certain foreign currency denominated assets and liabilities. These forward exchange contracts are not designated as hedges and therefore, changes in the fair values of these derivatives are recognized currently in earnings, thereby offsetting the current earnings effect of the related foreign currency assets and liabilities.


     
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   49

 


 

     The designation as a cash flow hedge is made at the entrance date into the derivative contract. At inception, all derivatives are expected to be highly effective. Changes in the fair value of a derivative that is designated as a cash flow hedge and is highly effective are recorded in accumulated other comprehensive income until the underlying transaction affects earnings, and are then reclassified to earnings in the same account as the hedged transaction. The fair value of a derivative instrument (i.e., forward foreign exchange contract, currency swap) is the aggregation, by currency, of all future cash flows discounted to its present value at prevailing market interest rates and subsequently converted to the U.S. Dollar at the current spot foreign exchange rate.
     On an ongoing basis, the Company assesses whether each derivative continues to be highly effective in offsetting changes in the cash flows of hedged items. If, and when, a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is included in current period earnings, and was insignificant in 2008, 2007 and 2006.
     The Company documents all relationships between hedged items and derivatives. The overall risk management strategy includes reasons for undertaking hedge transactions and entering into derivatives. The objectives of this strategy are: (1) minimize foreign currency exposure’s impact on the Company’s financial performance; (2) protect the Company’s cash flow from adverse movements in foreign exchange rates; (3) ensure the appropriateness of financial instruments; and (4) manage the enterprise risk associated with financial institutions.
PRODUCT LIABILITY
Accruals for product liability claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. As a result of cost and availability factors, effective November 1, 2005, the Company ceased purchasing third-party product liability insurance. Based on the availability of prior coverage, receivables for insurance recoveries related to product liability claims are recorded on an undiscounted basis, when it is probable that a recovery will be realized.
RESEARCH AND DEVELOPMENT
Research and development expenses are expensed as incurred. Upfront and milestone payments made to third-parties in connection with research and development collaborations are expensed as incurred up to the point of regulatory approval. Payments made to third-parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are included in other intangibles, net of accumulated amortization.
ADVERTISING
Costs associated with advertising are expensed in the year incurred and are included in the selling, marketing and administrative expenses. Advertising expenses worldwide, which are comprised of television, radio, print media and Internet advertising, were $2.9 billion in 2008, $2.7 billion in 2007 and $1.9 billion in 2006.
INCOME TAXES
The Company intends to continue to reinvest its undistributed international earnings to expand its international operations; therefore, no U.S. tax expense has been recorded with respect to the undistributed portion not intended for repatriation. At December 28, 2008 and December 30, 2007, the cumulative amount of undistributed international earnings were approximately $27.7 billion and $23.7 billion, respectively.
     Deferred income taxes are recognized for tax consequences of temporary differences by applying enacted statutory tax rates, applicable to future years, to differences between the financial reporting and the tax basis of existing assets and liabilities.
NET EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities were exercised or converted into common stock using the treasury stock method.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported. Estimates are used when accounting for sales discounts, rebates, allowances and incentives, product liabilities, income taxes, depreciation, amortization, employee benefits, contingencies and intangible asset and liability valuations. For instance, in determining annual pension and post-employment benefit costs, the Company estimates the rate of return on plan assets, and the cost of future health care benefits. Actual results may or may not differ from those estimates.
ANNUAL CLOSING DATE
The Company follows the concept of a fiscal year, which ends on the Sunday nearest to the end of the month of December. Normally each fiscal year consists of 52 weeks, but every five or six years, as will be the case in 2009, the fiscal year consists of 53 weeks.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to current year presentation.
2. Inventories
At the end of 2008 and 2007, inventories were comprised of:
                     
 
(Dollars in Millions)
    2008       2007  
             
Raw materials and supplies
    $ 839         905  
Goods in process
      1,372         1,384  
Finished goods
      2,841         2,821  
             
 
    $ 5,052         5,110  
             


     
50
  JOHNSON & JOHNSON 2008 ANNUAL REPORT

 


 

3. Property, Plant and Equipment
At the end of 2008 and 2007, property, plant and equipment at cost and accumulated depreciation were:
                     
 
(Dollars in Millions)
    2008       2007  
             
Land and land improvements
    $ 886         756  
Buildings and building equipment
      7,720         7,913  
Machinery and equipment
      15,234         14,554  
Construction in progress
      3,552         3,243  
             
 
      27,392         26,466  
Less accumulated depreciation
      13,027         12,281  
             
 
    $ 14,365         14,185  
             
The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2008, 2007 and 2006 was $147 million, $130 million and $118 million, respectively.
     Depreciation expense, including the amortization of capitalized interest in 2008, 2007 and 2006, was $2.0 billion, $1.9 billion and $1.6 billion, respectively.
     Upon retirement or other disposal of property, plant and equipment, the costs and related amounts of accumulated depreciation or amortization are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds are recorded in earnings.
4. Rental Expense and Lease Commitments
Rentals of space, vehicles, manufacturing equipment and office and data processing equipment under operating leases were approximately $309 million in 2008, $302 million in 2007 and $285 million in 2006.
     The approximate minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year at December 28, 2008 are:
                                                 
 
(Dollars in Millions)
    After        
2009   2010     2011     2012     2013     2013     Total  
 
$171
    145       123       107       89       93       728  
Commitments under capital leases are not significant.
5. Employee Related Obligations
At the end of 2008 and 2007, employee related obligations were:
                     
 
(Dollars in Millions)
    2008       2007  
             
Pension benefits
    $ 4,382         2,014  
Postretirement benefits
      2,217         2,134  
Postemployment benefits
      870         1,119  
Deferred compensation
      772         740  
             
Total employee obligations
      8,241         6,007  
Less current benefits payable
      450         605  
             
Employee related obligations — long-term
    $ 7,791         5,402  
             
Prepaid employee related obligations of $136 million and $481 million for 2008 and 2007, respectively, are included in other assets on the consolidated balance sheet.
6. Borrowings
The components of long-term debt are as follows:
                                     
 
              Effective               Effective  
(Dollars in Millions)
    2008     Rate %       2007     Rate %  
             
3% Zero Coupon
Convertible Subordinated
Debentures due 2020
    $ 183       3.00 %       178       3.00  
4.95% Debentures due 2033
      500       4.95         500       4.95  
3.80% Debentures due 2013
      500       3.82         500       3.82  
6.95% Notes due 2029
      294       7.14         294       7.14  
6.73% Debentures due 2023
      250       6.73         250       6.73  
6.625% Notes due 2009
      199       6.80         199       6.80  
5.55% Debentures due 2017
      1,000       5.55         1,000       5.55  
5.95% Notes due 2037
      995       5.99         995       5.99  
5.50% Notes due 2024
(500 GBP1.4759) (2) /(500 GBP1.9944) (3)
      731 (2)     5.71         989 (3)     5.71  
4.75% Notes due 2019
(1B Euro 1.4000) (2) /
(1B Euro 1.4573) (3)
      1,390 (2)     5.35         1,447 (3)     5.35  
5.15% Debentures due 2012
      599       5.18         599       5.18  
5.86% Debentures due 2038
      700       5.86                    
5.15% Debentures due 2018
      898       5.15                    
Other (Includes Industrial Revenue Bonds)
      102               132        
             
 
      8,341 (4)     5.46 (1)       7,083 (4)     5.47 (1)
Less current portion
      221                 9        
             
 
    $ 8,120                 7,074          
             
(1) Weighted average effective rate.
(2) Translation rate at December 28, 2008.
(3) Translation rate at December 30, 2007.
(4) The excess of the fair value over the carrying value of debt was $1.4 billion in 2008 and $0.3 billion in 2007.
The Company has access to substantial sources of funds at numerous banks worldwide. In September 2008, the Company secured a new 364-day and 5-year Credit Facility. Total credit available to the Company approximates $7.7 billion of which $6.3 billion expires September 24, 2009, and $1.4 billion expires September 25, 2013. Interest charged on borrowings under the credit line agreements is based on either bids provided by banks, the prime rate or London Interbank Offered Rates (LIBOR), plus applicable margins. Commitment fees under the agreements are not material.
     The Company filed a shelf registration with the Securities and Exchange Commission that became effective March 11, 2008 which enables the Company to issue an unlimited aggregate principal amount in debt securities and warrants to purchase debt securities. The Company issued bonds in June 2008 for a total of $1.6 billion for general corporate purposes.
     On July 28, 2000, ALZA Corporation, a subsidiary of the Company, completed a private offering of the 3% Zero Coupon Convertible Subordinated Debentures, which were issued at a price of $551.26 per $1,000 principal amount at maturity. Under the terms of the 3% Debentures, holders are entitled to convert their debentures into approximately 15.0 million shares of Johnson & Johnson stock at a price of $40.102 per share. Approximately 11.4 million shares have been issued as of December 28, 2008, due to voluntary conversions by note holders. At the option of the holder, the 3% Debentures may be repurchased by the Company on July 28, 2013, at a purchase price equal to the issue price plus accreted original issue discount to such purchase date. The Company, at its option, may also redeem any or all of the 3% Debentures after July 28, 2003 at the issue price plus accreted original issue discount.


     
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   51

 


 

     Throughout 2008 the Company continued to have access to liquidity through the commercial paper market. Short-term borrowings and the current portion of long-term debt amounted to approximately $3.7 billion at the end of 2008, of which $3.1 billion was raised under the Commercial Paper Program. The remainder represents principally local borrowing by international subsidiaries.
     Aggregate maturities of long-term obligations commencing in 2008 are:
                                         
 
(Dollars in Millions)
    After  
2009
  2010     2011     2012     2013     2013  
 
$221
    22       18       620       507       6,953  
7. Intangible Assets and Goodwill
At the end of 2008 and 2007, the gross and net amounts of intangible assets and goodwill were:
                     
 
(Dollars in Millions)
    2008       2007  
             
Trademarks (non-amortizable) — gross
    $ 5,879         6,457  
Less accumulated amortization
      145         144  
             
Trademarks (non-amortizable) — net
    $ 5,734         6,313  
             
Patents and trademarks — gross
    $ 5,119         4,597  
Less accumulated amortization
      1,820         1,615  
             
Patents and trademarks — net
    $ 3,299         2,982  
             
Other intangibles — gross
    $ 7,376         7,399  
Less accumulated amortization
      2,433         2,054  
             
Other intangibles — net
    $ 4,943         5,345  
             
Subtotal intangible assets — gross
    $ 18,374         18,453  
Less accumulated amortization
      4,398         3,813  
             
Subtotal intangible assets — net
    $ 13,976         14,640  
             
Goodwill — gross
    $ 14,441         14,866  
Less accumulated amortization
      722         743  
             
Goodwill — net
    $ 13,719         14,123  
             
Total intangible assets and goodwill — gross
    $ 32,815         33,319  
Less accumulated amortization
      5,120         4,556  
             
Total intangible assets and goodwill — net
    $ 27,695         28,763  
             
Goodwill as of December 28, 2008 and December 30, 2007, as allocated by segment of business is as follows:
                                 
 
                    Med Dev        
(Dollars in Millions)
  Consumer     Pharm     and Diag     Total  
 
Goodwill at December 31, 2006
  $ 7,866       902       4,572       13,340  
     
Acquisitions
    3             449       452  
Translation/other
    256       62       13       331  
     
Goodwill at December 30, 2007
  $ 8,125       964       5,034       14,123  
     
Acquisitions
    191             286       477  
Translation/other
    (842 )     (1 )     (38 )     (881 )
     
Goodwill at December 28, 2008
  $ 7,474       963       5,282       13,719  
 
The weighted average amortization periods for patents and trademarks and other intangible assets are 16 years and 28 years, respectively. The amortization expense of amortizable assets for the fiscal years ended December 28, 2008, December 30, 2007 and December 31, 2006 was $788 million, $844 million and $594 million before tax, respectively. Certain patents and intangible assets were written down to fair value during fiscal years 2008, 2007 and 2006, with the resulting charge included in amortization expense.
The estimated amortization expense for the five succeeding years approximates $814 million before tax, per year. Substantially all of the amortization expense is included in cost of products sold.
8. Income Taxes
The provision for taxes on income consists of:
                               
 
(Dollars in Millions)
    2008       2007       2006  
                   
Currently payable:
                             
U.S. taxes
    $ 2,334         2,990         3,625  
International taxes
      1,624         1,479         1,077  
                   
 
      3,958         4,469         4,702  
                   
Deferred:
                             
U.S. taxes
      126         (722 )       (726 )
International taxes
      (104 )       (1,040 )       (442 )
                   
 
      22         (1,762 )       (1,168 )
                   
 
    $ 3,980         2,707         3,534  
                   
A comparison of income tax expense at the U.S. statutory rate of 35% in 2008, 2007 and 2006, to the Company’s effective tax rate is as follows:
                               
 
(Dollars in Millions)
    2008       2007       2006  
                   
U.S.
    $ 6,579         5,237         8,110  
International
      10,350         8,046         6,477  
                   
Earnings before taxes on income:
    $ 16,929         13,283         14,587  
                   
Tax rates:
                             
U.S. statutory rate
      35.0 %       35.0         35.0  
Puerto Rico and Ireland operations
      (6.8 )       (8.8 )       (7.5 )
Research and orphan drug tax credits
      (0.6 )       (0.8 )       (0.7 )
U.S. state and local
      1.6         2.1         1.6  
International subsidiaries excluding Ireland
      (5.6 )       (7.3 )       (3.5 )
U.S. manufacturing deduction
      (0.4 )       (0.3 )       (0.2 )
In process research and development (IPR&D)
      0.4         2.1         0.6  
U.S. Tax international income
      (0.5 )       (1.9 )       (0.7 )
All other
      0.4         0.3         (0.4 )
                   
Effective tax rate
      23.5 %       20.4         24.2  
                   
The Company has subsidiaries manufacturing in Ireland under an incentive tax rate. In addition, the Company has subsidiaries operating in Puerto Rico under various tax incentive grants. The increase in the 2008 tax rate was mainly attributed to increases in taxable income in higher tax jurisdictions relative to taxable income in lower jurisdictions. The decrease in the 2007 tax rate was mainly attributed to a business restructuring of certain international subsidiaries, resulting in a one-time benefit of $267 million, which reduced the effective tax rate by 2%.


     
52
  JOHNSON & JOHNSON 2008 ANNUAL REPORT

 


 

     Temporary differences and carry forwards for 2008 and 2007 are as follows:
                                     
 
      2008       2007  
      Deferred Tax       Deferred Tax  
(Dollars in Millions)
    Asset     Liability       Asset     Liability  
             
Employee related obligations
    $ 2,615                 1,727          
Stock based compensation
      1,296                 1,173          
Depreciation
              (523 )               (463 )
Non-deductible intangibles
              (1,791 )               (1,554 )
International R&D capitalized for tax
      1,914                 1,773          
Reserves & liabilities
      688                 1,155          
Income reported for tax purposes
      629                 487          
Miscellaneous international
      1,357       (251 )       1,177       (127 )
Capitalized intangibles
      74                 89          
Miscellaneous U.S.
      1,754                 542          
             
Total deferred income taxes
    $ 10,327       (2,565 )       8,123       (2,144 )
             
The difference between the net deferred tax on income per the balance sheet and the net deferred tax above is included in taxes on income on the balance sheet. The 2008 deferred tax Miscellaneous U.S. includes current year tax receivables.
     The Company adopted FIN No. 48, Accounting for Uncertainty in Income Taxes effective January 1, 2007. The Company had $1.7 billion of gross unrecognized tax benefits, as of December 30, 2007. The Company classifies liabilities for unrecognized tax benefits and related interest and penalties as long-term liabilities. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense. During the fiscal year ended December 28, 2008, the Company recognized $106 million of interest expense with an after-tax impact of $69 million. For the year ended December 30, 2007, the Company recognized $58 million of interest expense and $42 million of interest income with an after-tax impact of $10 million expense. The total amount of accrued interest was $227 million and $187 million in 2008 and 2007, respectively.
     The following table summarizes the activity related to unrecognized tax benefits:
                     
 
(Dollars in Millions)
    2008       2007  
             
Beginning of year
    $ 1,653         1,262  
Increases related to current year tax positions
      545         487  
Increases related to prior period tax positions
      87         77  
Decreases related to prior period tax positions
      (142 )       (117 )
Settlements
      (137 )       (14 )
Lapse of statute of limitations
      (28 )       (42 )
             
End of year
    $ 1,978         1,653  
             
All of the unrecognized tax benefits of approximately $2.0 billion at December 28, 2008, if recognized, would affect the Company’s annual effective tax rate. The Company conducts business and files tax returns in numerous countries and currently has tax audits in progress with a number of tax authorities. The U.S. Internal Revenue Service (IRS) has completed its audit for the tax years through 2002. In other major jurisdictions where the Company conducts business, the years remain open generally back to the year 2002 with some jurisdictions remaining open as far back as 1995. The Company does not expect that the total amount of unrecognized tax benefits will significantly change over the next twelve months. The Company does not expect a significant payment within the next twelve months, and is not able to provide a reasonably reliable estimate of the timing of any future tax payments relating to uncertain tax positions.
9. International Currency Translation
For translation of its subsidiaries operating in non-U.S. Dollar currencies, 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 currency 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 2008, 2007 and 2006 for foreign currency translation adjustments is included in Note 12.
     Net currency transaction and translation gains and losses included in other (income) expense were losses of $31 million, $23 million and $18 million in 2008, 2007 and 2006, respectively.
10. Common Stock, Stock Option Plans and
Stock Compensation Agreements
STOCK OPTIONS
At December 28, 2008, the Company had 14 stock-based compensation 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 Centocor, Innovasive Devices, ALZA, Inverness, and Scios Stock Option Plans. During 2008, no options or restricted shares were granted under any of these plans except under the 2005 Long-Term Incentive Plan.
     The compensation cost recorded under SFAS No. 123(R) that has been charged against income for these plans was $627 million for 2008, $698 million for 2007 and $659 million for 2006. The total income tax benefit recognized in the income statement for share-based compensation costs was $210 million for 2008, $238 million for 2007 and $228 million for 2006. 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 167.6 million at the end of 2008.


     
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   53

 


 

     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.
     The average fair value of options granted was $7.66, $11.67 and $12.22 in 2008, 2007 and 2006, respectively. The fair value was estimated based on the weighted average assumptions of:
                               
 
      2008       2007       2006  
                   
Risk-free rate
      2.97 %       4.78 %       4.60 %
Expected volatility
      15.0 %       14.7 %       19.6 %
Expected life
    6.0 yrs       6.0 yrs       6.0 yrs
Dividend yield
      2.90 %       2.50 %       2.50 %
                   
A summary of option activity under the Plan as of December 28, 2008, December 30, 2007 and December 31, 2006 and changes during the years ending on those dates is presented below:
                         
 
                    Aggregate  
            Weighted     Intrinsic  
    Outstanding     Average     Value  
  (Shares in Thousands)        Shares        Exercise Price     (Dollars in Millions)  
 
Shares at January 1, 2006
    248,542       $53.05       $2,031  
 
                       
Options granted
    28,962       58.38          
Options exercised
    (26,152 )     42.80          
Options canceled/forfeited
    (8,425 )     59.33          
     
Shares at December 31, 2006
    242,927       54.57       $2,788  
                         
Options granted
    26,789       65.61          
Options exercised
    (33,224 )     45.92          
Options canceled/forfeited
    (7,863 )     63.00          
     
Shares at December 30, 2007
    228,629       56.83       $2,411  
                         
Options granted
    22,428       61.80          
Options exercised
    (30,033 )     50.27          
Options canceled/forfeited
    (5,525 )     61.90          
     
Shares at December 28, 2008
    215,499       $58.14       $   597  
 
The total intrinsic value of options exercised was $506 million, $625 million and $542 million in 2008, 2007 and 2006, respectively. The total unrecognized compensation cost was $632 million as of December 28, 2008, $652 million as of December 30, 2007 and $649 million as of December 31, 2006. The weighted average period for this cost to be recognized was 1.06 years, 1.01 years and 0.99 years for 2008, 2007 and 2006, respectively.
     The following table summarizes stock options outstanding and exercisable at December 28, 2008:
                                         
 
 (Shares in Thousands)     Outstanding     Exercisable  
                    Average             Average  
 Exercise           Average     Exercise             Exercise  
 Price Range   Options     Life (1)   Price     Options     Price  
 
$  3.62-$29.07
    325       1.5     $ 18.00       325     $ 18.00  
$31.27-$40.08
    349       0.9       35.22       349       35.22  
$40.98-$50.08
    11,263       1.1       49.61       11,263       49.61  
$50.50-$52.11
    19,600       1.8       50.70       19,600       50.70  
$52.20-$53.77
    23,759       4.1       52.22       23,759       52.22  
$53.93-$54.89
    27,992       5.0       53.93       27,992       53.93  
$55.01-$58.25
    27,803       3.1       57.30       27,775       57.30  
$58.34-$66.08
    69,136       8.0