Annual Report

Johnson&JohnsonEmily Cecil

ACG2021 004

Executive Summary• Johnson & Johnson has become a worldwide leader in the

field of health care. By year end 2005 the company reached a new sales record of $50.5 billion, a 7 percent increase form the year before. Johnson & Johnson has growing pharmaceutical and medical diagnostics braches that are continuing to expand. The Johnson & Johnson arms reach far beyond the consumer brands such as Johnson’s Baby, Tylenol, and Neutrogena that the public has come to know and respect. The company has plans to dive deeper in virology, in developing resistant strains against the HIV virus. The company is also developing new advances in cardiovascular health, and anti-psychotics.

After an intensive review of the financial statements for 2005, it is clear that the company is also moving ahead financially. The cash flow increased to $11.9 billion, and thus Johnson & Johnson was able to increase its dividends to its share holders. Total assets and total stockholders equity increased while total liabilities decreased. Research and development expenses also increased. Johnson & Johnson has a commitment to new improvements in the health care field that will help to improve lives around the world.

• Investor Relations - Annual Reports & Proxy

IntroductionIntroduction

n Chief Executive Officer : William C. Weldon Chief Executive Officer : William C. Weldon Chairman, and Board of DirectorsChairman, and Board of Directors

n Location of home office: 1 Johnson & Johnson Location of home office: 1 Johnson & Johnson Plaza, New Brunswick, NJ 08933Plaza, New Brunswick, NJ 08933

n Johnson & Johnson is a worldwide leader in the manufacture of Johnson & Johnson is a worldwide leader in the manufacture of pharmaceuticals and health care products. The Johnson &Johnson family pharmaceuticals and health care products. The Johnson &Johnson family of corporations includes Neutrogena, Johnson’s Baby, Splenda, Tylenol, of corporations includes Neutrogena, Johnson’s Baby, Splenda, Tylenol, and countless others. The Medical and Diagnostics businesses are and countless others. The Medical and Diagnostics businesses are becoming an ever growing part of Johnson & Johnson and are committed becoming an ever growing part of Johnson & Johnson and are committed to the prevention of disease as well as new medical and surgical to the prevention of disease as well as new medical and surgical improvements. improvements.

Audit Report

l Johnson & Johnson have a corporate staff of internal auditors who travel around the world monitoring the accounting system. Other independent auditors include the Pricewaterhouse Coopers LLP, who are an independent public accounting firm who perform an audit of the financial statements.

l After reviewing the consolidated financial statements of Johnson & Johnson in accordance with the standards of the Public Company Accounting Oversight Board the auditors found that the financial statements accurately show the financial position of the company. The auditors also came to the conclusion that the companies internal control over financial reporting was also accurate and fair.

l Report of Independent Registered Public Accounting available at http://www.jnj.com/2005AnnualReport/financials/independent/index.htm

Stock Market Information

• Security: JNJ• Exchange: New York

Stock Exchange• Currency: US Dollars • Most Recent Price of

Stock: $64.75 • Dividend per share:

$.38 as of 8/25/06• Date of the above

information: Oct. 10, 2006

• As an investor, I would highly recommend buying and holding Johnson & Johnson stock as an investment. In 2005 Johnson & Johnson “increased [their] quarterly dividend to shareholders for the 43rd consecutive year ,..by nearly 16 percent to $.33 (Johnson & Johnson Annual Report p1).

Industry Situation and Company Plansn Johnson & Johnson was founded in 1886 and has become a worldwide

leader in the manufacturing of pharmaceutical, medical devices, and consumer goods. The corporation is made of 230 subsidiary companies and operates in almost every company in the world. Some of the most well know consumer products include Band-Aid, Tylenol, Johnson’s Baby, Aveeno, Clean and Clear, Stayfree, and more. The pharmaceutical branch includes anti-infective, cardiovascular, neurology, psychotropic, hematology, as well as others. The primary focus and outlook of the industry has been to improve the future of health care around the world. In 2005 Johnson & Johnson “invested $6.3 billion in research and development, a $1.1 billion increase, or more than 21 percent above [the] 2004 investment (Johnson & Johnson Annual Report 2005). Expansions and “business building acquisitions” are also a large part of the future of the industry (Johnson & Johnson Annual Report 2005). In 2005 Johnson &Johnson acquired Animas, an insulin delivery corporation, as well as Hand Innovations LLC. A leader in the extremities market. The health care industry is growing and expanding everyday, and so is Johnson & Johnson. Their dedication to research and development and their promise to continue to improve health care for people around the world solidifies Johnson & Johnson as a successful and long standing industry.

n Sources: www.marketwatch.com http://en.wikipedia.org/wiki/Johnson_&_Johnson Johnson&Johnson 2005 Annual Report

Income Statement

n The income statement from the 2005 Annual Report is in multi step format.

n Gross Profit , Income from Operation, and Net Income all increased from 2004 to 2005. These increases were achieved through efforts in cost management and greater productivity.

(Dollars in Millions)

Gross Profit

Income from operations

Net Income

2004 33,926 47,348 8,509

2005 36,560 50,514 10,411

Balance SheetAssets = Liabilities + Stockholders’

Equity

$58, 025(Dollars in Millions)

20,154 37,871

Important and impressive increases on the balance sheet include current assets, inventories, total current assets, property, plant, and equipment, accounts receivable, and total stockholders’ equity. Some of the note worthy decreases include total current liabilities, total liabilities, accounts payable, and long term debt. All of these movements helped Johnson & Johnson reach record high financial status in 2005 with a 7 percent growth rate of $50.5 billion.

Statement of Cash FlowsStatement of Cash Flows

Cash flows for the past two years have been more than net Cash flows for the past two years have been more than net income. income.

Cash Flows: 2005-11,877Cash Flows: 2005-11,877 2004- 11,1312004- 11,131

Net Income: 2005- 10, 411 Net Income: 2005- 10, 411 2004- 8,5092004- 8,509 The company has been growing through acquisitions, The company has been growing through acquisitions,

investments and the purchasing of property, plant, and investments and the purchasing of property, plant, and equipment. In 2005 Johnson & Johnson paid $2,632 billion in equipment. In 2005 Johnson & Johnson paid $2,632 billion in additions to property, plant, and equipment, $5,660 billion in additions to property, plant, and equipment, $5,660 billion in investments, and $987 million in acquisitions.investments, and $987 million in acquisitions.

Johnson & Johnson’s primary source of financing are short term Johnson & Johnson’s primary source of financing are short term loans.loans.

Johnson & Johnson has seen an overall increase in cash from Johnson & Johnson has seen an overall increase in cash from 2004 to 2005. The end of the year cash for 2004 was $9,203 2004 to 2005. The end of the year cash for 2004 was $9,203 billion followed by a substantial increase to $16,055 billion in billion followed by a substantial increase to $16,055 billion in 2005. 2005.

Accounting PoliciesAccounting Policies

Inventories: Inventories are stated at the at the lower of cost or market determined Inventories: Inventories are stated at the at the lower of cost or market determined by the first in, first out method. by the first in, first out method.

Revenue Recognition: The company recognizes revenue from product sales when 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.the goods are shipped or delivered and title and risk of loss pass to the customer.

Property, Plant, and Equipment are stated at cost. Property, Plant, and Equipment are stated at cost. Short term marketable securities are carried at cost, which approximates fair value. Short term marketable securities are carried at cost, which approximates fair value. 1. Summary of Significant Accounting Policies 2. Inventories 3. Property, plant, and 1. Summary of Significant Accounting Policies 2. Inventories 3. Property, plant, and

Equipment 4. Rental Expense and Lease Commitments 5. Employee Related Equipment 4. Rental Expense and Lease Commitments 5. Employee Related Obligations 6. Borrowings 7. Intangible Assets and Goodwill 8. Income Taxes 9. Obligations 6. Borrowings 7. Intangible Assets and Goodwill 8. Income Taxes 9. International Currency Translation 10. Common Stock, Stock Option Plans, and International Currency Translation 10. Common Stock, Stock Option Plans, and Stock Compensation Agreements 11. Segments of Business and Geographic Stock Compensation Agreements 11. Segments of Business and Geographic Areas 12. Accumulated other Comprehensive Income 13. Pensions and other Areas 12. Accumulated other Comprehensive Income 13. Pensions and other Benefit Plans 14. Cash Equivalents and Marketable Securities 15. Financial Benefit Plans 14. Cash Equivalents and Marketable Securities 15. Financial Instruments 16. Savings Plan 17. Mergers, Acquisitions and Divestitures 18. Legal Instruments 16. Savings Plan 17. Mergers, Acquisitions and Divestitures 18. Legal Proceedings 19. Earnings per share 20. Capital and Treasury Stock 21. Selected Proceedings 19. Earnings per share 20. Capital and Treasury Stock 21. Selected Quarterly Financial Data (unaudited) 22. Subsequent Events Quarterly Financial Data (unaudited) 22. Subsequent Events

Financial Analysis Liquidity Ratios Working Capital: 2005- 31,392-12,635= 18,759 2004- 27,320- 13,927= 13,393 Current Ratio: 2005- 31,394/12,635= 2.5 2004- 27,320/13927= 1.9 Receivable Turnover: 2005- 50,514/6920.5= 7.29 2004- 47348/6702.5=7.06 Average days’ sales uncollected: 2005- 365/7.29= 50.07 2004- 365/7.06= 51.7 Inventory Turnover: 2005- 13,954/3851.50= 3.62 2004- 13422/3666= 3.7 Average days’ inventory on hand: 2005- 365/3.62= 100 2004- 365/3.7= 99.7

Financial Analysis Profitability Financial Analysis Profitability RatiosRatios

Profit Margin: 2005- 10411/50514= 20.61%Profit Margin: 2005- 10411/50514= 20.61%

2004- 8509/47348= 18%2004- 8509/47348= 18% Asset Turnover: 2005- 50514/55671= .91Asset Turnover: 2005- 50514/55671= .91

2004- 47348/50790= .932004- 47348/50790= .93 Return on Assets: 2005- 10411/55671= 18.7%Return on Assets: 2005- 10411/55671= 18.7%

2004- 8509/50790= 16.8%2004- 8509/50790= 16.8% Return on Equity: 2005- 10411/34842= 29.88%Return on Equity: 2005- 10411/34842= 29.88%

2004- 8509/29341= 29%2004- 8509/29341= 29%

Financial Analysis Solvency Ratio

Debt to Equity:2005- 20154/ 37871= .52004- 21504/ 31813= .68 The debt to equity for 2005 was .5

meaning that the stockholders, rather than the creditors own the majority of the company.

Financial Analysis Market Strength Ratios

Price/Earnings per share:

2005- 10411/2973.9= 3.50

2004- 8509/2968.4= 2.87 Dividend Yield:

2005- 1.275/62.17= 2.05%

2004- 1.095/55.98= 1.96%