UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-3215
JOHNSON & JOHNSON
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-1024240
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
New Brunswick, New Jersey 08933
(Address of principal executive offices, including zip code)
732-524-0400
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 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 X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
On October 23, 1998, 1,344,669,448 shares of Common Stock,
$1.00 par value, were outstanding.
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JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
Part I - Financial Information Page No.
Consolidated Balance Sheet -
September 27, 1998 and December 28, 1997 3
Consolidated Statement of Earnings for the
Fiscal Quarter Ended September 27, 1998 and
September 28, 1997 5
Consolidated Statement of Earnings for the
Fiscal Nine Months Ended September 27, 1998 and
September 28, 1997 6
Consolidated Statement of Cash Flows for the
Fiscal Nine Months Ended September 27, 1998 and
September 28, 1997 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
Signatures 24
Part II - Other Information
Items 1 through 4 are not applicable
Item 5 - Other Information 23
Item 6 - Exhibits and Reports on Form 8-K 23
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Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited; Dollars in Millions)
ASSETS
September 27, December 28,
1998 1997
Current Assets:
Cash and cash equivalents $ 3,742 2,753
Marketable securities, at cost 84 146
Accounts receivable, trade, less
allowances $353 (1997 - $358) 3,724 3,329
Inventories (Note 4) 2,897 2,516
Deferred taxes on income 852 831
Prepaid expenses and other
receivables 877 988
Total current assets 12,176 10,563
Marketable securities, non-current 382 385
Property, plant and equipment, at cost10,068 9,444
Less accumulated depreciation and
amortization 4,093 3,634
5,975 5,810
Intangible assets, net (Note 5) 3,297 3,261
Deferred taxes on income 411 332
Other assets 1,092 1,102
Total assets $ 23,333 21,453
See Notes to Consolidated Financial Statements
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JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited; Dollars in Millions)
LIABILITIES AND SHAREOWNERS' EQUITY
September 27,
December 28,
Current Liabilities: 1998
1997
Loans and notes payable $ 575 714
Accounts payable 1,487 1,753
Accrued liabilities 2,427 2,258
Accrued salaries, wages and commissions 574 332
Taxes on income 337 226
Total current liabilities 5,400 5,283
Long-term debt 1,117 1,126
Deferred tax liability 260 175
Certificates of extra compensation 145 126
Other liabilities 2,473 2,384
Shareowners' Equity:
Preferred stock - without par value
(authorized and unissued 2,000,000
shares) - -
Common stock - par value $1.00 per share
(authorized 2,160,000,000 shares;
issued 1,534,824,000 shares) 1,535 1,535
Note receivable from employee stock
ownership plan (45) (51)
Accumulated other comprehensive
Income (Note 2) (397) (378)
Retained earnings 14,278 12,661
15,371 13,767
Less common stock held in treasury,
at cost (189,892,000 & 189,687,000
shares) 1,433 1,408
Total shareowners' equity 13,938 12,359
Total liabilities and shareowners'
equity $23,333 21,453
See Notes to Consolidated Financial Statements
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JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited; dollars & shares in millions
except per share figures)
Fiscal Quarter Ended
Sept. 27, Percent Sept. 28, Percent
1998 to Sales 1997 to
Sales
Sales to customers (Note 6)$5,724 100.0 5,586 100.0
Cost of products sold 1,758 30.7 1,750 31.3
Selling, marketing and
administrative expenses 2,151 37.6 2,149 38.5
Research expense 511 8.9 516 9.2
Interest income (67) (1.2) (58) (1.0)
Interest expense, net of
portion capitalized 26 .5 36 .6
Other (income)expense, net 28 .5 (4) -
4,407 77.0 4,389 78.6
Earnings before provision
for taxes on income 1,317 23.0 1,197 21.4
Provision for taxes on
income (Note 3) 356 6.2 342 6.1
NET EARNINGS $ 961 16.8 855 15.3
NET EARNINGS PER SHARE (Notes 1 and 8)
Basic $ .71 .64
Diluted $ .70 .63
CASH DIVIDENDS PER SHARE $ .25 .22
AVG. SHARES OUTSTANDING
Basic 1,344.9 1,335.1
Diluted 1,373.0 1,363.9
See Notes to Consolidated Financial Statements
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JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited; dollars & shares in millions
except per share figures)
Fiscal Nine Months Ended
Sept. 27, Percent Sept. 28, Percent
1998 to Sales 1997 to
Sales
Sales to customers (Note 6)$17,290 100.0 16,999 100.0
Cost of products sold 5,338 30.9 5,271 31.0
Selling, marketing and
administrative expenses 6,365 36.8 6,429 37.8
Research expense 1,537 8.9 1,514 8.9
Interest income (192) (1.1) (151) (.8)
Interest expense, net of
portion capitalized 80 .5 104 .6
Other (income)expense, net 40 .2 39 .2
13,168 76.2 13,206 77.7
Earnings before provision
for taxes on income 4,122 23.8 3,793 22.3
Provision for taxes on
income (Note 3) 1,146 6.6 1,120 6.6
NET EARNINGS $ 2,976 17.2 2,673 15.7
NET EARNINGS PER SHARE (Notes 1 and 8)
Basic $ 2.21 2.00
Diluted $ 2.17 1.96
CASH DIVIDENDS PER SHARE$ .72 .63
AVG. SHARES OUTSTANDING
Basic 1,345.0 1,333.7
Diluted 1,371.4 1,363.8
See Notes to Consolidated Financial Statements
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JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited; Dollars in Millions)
Fiscal Nine Months
Ended
Sept. 27, Sept.
28
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $2,976 2,673
Adjustments to reconcile net earnings to
cash flows:
Depreciation and amortization of
property and intangibles 906 868
Increase in accounts receivable, trade,
less allowances (345) (555)
Increase in inventories (358) (272)
Changes in other assets and liabilities 350 536
NET CASH FLOWS FROM OPERATING ACTIVITIES 3,529 3,250
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment(848) (761)
Proceeds from the disposal of assets 20 46
Acquisition of businesses, net of cash
acquired (78) (158)
Other, principally intangible assets (96) (89)
NET CASH USED BY INVESTING ACTIVITIES (1,002) (962)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to shareowners (969) (841)
Repurchase of common stock (653) (429)
Proceeds from short-term debt 174 240
Retirement of short-term debt (193) (185)
Proceeds from long-term debt - 6
Retirement of long-term debt (142) (190)
Proceeds from the exercise of stock options 223 156
NET CASH USED BY FINANCING ACTIVITIES (1,560) (1,243)
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 22 (62)
INCREASE IN CASH AND CASH EQUIVALENTS 989 983
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 2,753 2,011
CASH AND CASH EQUIVALENTS, END OF PERIOD$ 3,742 2,994
See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - The accompanying interim financial statements and
related notes should be read in conjunction with the Consolidated
Financial Statements of Johnson & Johnson and Subsidiaries (the
"Company") and related notes as contained in the Annual Report on
Form 10-K for the fiscal year ended December 28, 1997. The
interim financial statements include all adjustments (consisting
only of normal recurring adjustments) and accruals necessary in
the judgment of management for a fair presentation of such
statements.
At year-end 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 that requires the reporting of both
basic and diluted earnings per share. Basic earnings per share
is computed by dividing net income available to common
shareowners 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 or other
contracts to issue common stock were exercised or converted into
common stock. Prior periods have been restated to reflect the
new standard.
NOTE 2 - ADOPTION OF SFAS NO. 130
At March 29, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting and
display of an alternative income measurement and its components
(revenue, expenses, gains and losses) in a full set of general
purpose financial statements. The total comprehensive income for
the nine months ended September 27, 1998 is $2,957 million,
compared with $2,405 million for the same period a year ago.
Total comprehensive income includes net earnings, net unrealized
currency gains and losses on translation and net unrealized gains
and losses on securities.
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NOTE 3 - INCOME TAXES
The effective income tax rates for 1998 and 1997 are as follows:
1998 1997
First Quarter 29.6% 30.2%
First Half 28.2 30.0
Nine Months 27.8 29.5
The effective income tax rates for the first nine months of 1998
and 1997 are 27.8% and 29.5%, respectively, as compared to the
U.S. federal statutory rate of 35%. The difference from the
statutory rate is the result of domestic subsidiaries operating
in Puerto Rico under a grant for tax relief expiring on December
31, 2007 and the result of subsidiaries manufacturing in Ireland
under an incentive tax rate expiring on December 31, 2010. The
decrease in the 1998 worldwide effective tax rate was primarily
due to a greater proportion of taxable income derived from lower
tax rate countries
NOTE 4 - INVENTORIES
(Dollars in Millions) Sept. 27, 1998 Dec. 28, 1997
Raw materials and supplies $ 890 655
Goods in process 440 417
Finished goods 1,567 1,444
$ 2,897 2,516
NOTE 5 - INTANGIBLE ASSETS
(Dollars in Millions) Sept. 27, 1998 Dec. 28, 1997
Intangible assets $ 4,085 3,885
Less accumulated amortization 788 624
$ 3,297 3,261
The excess of the cost over the fair value of net assets of
purchased businesses is recorded as goodwill and is amortized on
a straight-line basis over periods of 40 years or less.
The cost of other acquired intangibles is amortized on a
straight-line basis over their estimated useful lives.
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NOTE 6 - SALES TO CUSTOMERS BY SEGMENT OF BUSINESS AND GEOGRAPHIC
AREAS
(Dollars in Millions)
SALES BY SEGMENT OF BUSINESS
Third Quarter Nine Months
Percent Percent
Increase/ Increase/
1998 1997 (Decrease) 1998 1997 (Decrease)
Consumer
Domestic $ 806 801 .6 2,398 2,400 (.1)
International 781 783 (.3) 2,398 2,481 (3.3)
1,587 1,584 .2% 4,796 4,881
(1.7)%
Pharmaceutical
Domestic 1,153 993 16.1 3,500 2,888 21.2
International 945 925 2.2 2,852 2,907 (1.9)
2,098 1,918 9.4% 6,352 5,795 9.6%
Professional
Domestic 1,117 1,168 (4.4) 3,275 3,502 (6.5)
International 922 916 .7 2,867 2,821 1.6
2,039 2,084 (2.2)% 6,142 6,323
(2.9)%
Domestic 3,076 2,962 3.8 9,173 8,790 4.4
International 2,648 2,624 .9 8,117 8,209 (1.1)
Worldwide $5,724 5,586 2.5% 17,290 16,999 1.7%
SALES BY GEOGRAPHIC AREAS
Third Quarter Nine Months
Percent Percent
Increase/ Increase/
1998 1997 (Decrease) 1998 1997 (Decrease)
Domestic $3,076 2,962 3.8 9,173 8,790 4.4
Europe 1,482 1,373 7.9 4,607 4,478 2.9
Western Hemisphere
excluding U.S. 520 512 1.6 1,560 1,518 2.8
Asia-Pacific,
Africa 646 739 (12.6) 1,950 2,213 (11.9)
Worldwide $5,724 5,586 2.5% 17,290 16,999 1.7%
NOTE 7 - ACQUISITIONS
During the first quarter, the Company completed the acquisition
of IsoStent, Inc. The Company acquired intellectual property and
specific assets, including the BX Stent, a new flexible
interventional medical device in development for treatment of
coronary artery disease. Pro forma results of the acquisition,
assuming that the transaction was consummated at the beginning of
each year presented, would not be materially different from the
results reported.
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NOTE 8 - EARNINGS PER SHARE
The following is a reconciliation of basic net earnings per
share to diluted net earnings per share for the nine months ended
September 27, 1998 and September 28, 1997:
Fiscal Fiscal
Quarter Ended Nine
Months Ended
Sept. 27, Sept. 28, Sept.
27, Sept. 28,
1998 1997
1998 1997
Basic net earnings per share$ .71 .64 2.21 2.00
Average shares outstanding
- basic 1,344.9 1,335.1 1,345.0 1,333.7
Potential shares exercisable
under stock option plans 68.3 70.3 68.0 71.5
Less: shares which could be
repurchased under treasury
stock method (40.2) (41.5) (41.6) (41.4)
Adjusted averages shares
outstanding - diluted 1,373.0 1,363.9 1,371.4 1,363.8
Diluted earnings per share $ .70 .63 2.17 1.96
NOTE 9 - PENDING LEGAL PROCEEDINGS
The Company, along with numerous other pharmaceutical
manufacturers and distributors, is a defendant in a large number
of individual and class actions brought by retail pharmacies in
state and federal courts under the antitrust laws. These cases
assert price discrimination and price-fixing violations resulting
from an alleged industry-wide agreement to deny retail
pharmacists price discounts on sales of brand name prescription
drugs. The Company believes the claims against the Company in
these actions are without merit and is defending them vigorously.
In September 1998, trial of the liability phase of the federal
class action brought on behalf of retail pharmacists against the
Company, three other pharmaceutical manufacturers and six
wholesalers, began before a jury in Chicago. In the event
liability is established, the damages phase will begin before the
same jury. Twenty other pharmaceutical manufacturers named in
the complaint previously settled. It is anticipated that the
trial will last several months. While the Company is confident
of the legality of its conduct, it is not possible to predict
with certainty the outcome of the jury trial or the size of a
damage award, if any.
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Further, the Company together with another contact lens
manufacturer, a trade association and various individual
defendants, is a defendant in several consumer class actions and
an action brought by multiple State Attorneys General on behalf
of consumers alleging violations of federal and state antitrust
laws. These cases assert that enforcement of the Company's long-
standing policy of selling contact lenses only to licensed eye
care professionals is a result of an unlawful conspiracy to
eliminate alternative distribution channels from the disposable
contact lens market. The Company believes that these actions are
without merit and is defending them vigorously.
In August 1998, the Company's Ortho Biotech subsidiary
commenced an arbitration hearing under its license agreement
with Amgen, Inc. and Kirin-Amgen, Inc. concerning marketing
rights to what Amgen refers to as Novel Erythropoeis Stimulating
Protein or NESP. NESP is an analogue of the recombinant human
erythropoietin currently marketed by Ortho as Procrit (Eprex
outside the U.S.) and by Amgen as Epogen. Amgen has taken the
position in the arbitration that Ortho has no rights to NESP and
that Amgen is free to sell it into U.S. and international markets
reserved exclusively to Ortho under Ortho's license agreements
with Amgen and Kirin-Amgen. Ortho disputes Amgen's contentions
and takes the position that NESP is covered by its existing
license agreements pursuant to which Ortho has exclusive
marketing rights to all non-dialysis indications in the U.S. and
all indications outside the U.S. except in China and Japan. A
decision by the panel of arbitrators is expected early next year.
While Ortho believes its position correctly reflects the intent
of the parties to the license, it is not possible to predict with
certainty the outcome of the arbitration, or the impact on
Ortho's business if the outcome is adverse to its position.
The Company believes that the above proceedings in the
aggregate would not have a material adverse effect on its results
of operations, cash flows or financial position.
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NOTE 10 - SUBSEQUENT EVENTS
On July 21, 1998, Johnson & Johnson and DePuy, Inc. announced
the signing of a definitive agreement under which Johnson &
Johnson would acquire DePuy for $35.00 per share, for an
aggregate transaction value of $3.5 billion.
Pursuant to the agreement, Johnson & Johnson began a cash
tender offer for all outstanding shares of DePuy for $35.00 per
share. DePuy has approximately 99,000,000 shares outstanding.
The offer commenced on July 27, 1998 and expired on October 29,
1998. Approximately 98.6 million DePuy shares, representing 99.7
percent of the outstanding DePuy shares were tendered and paid
for. On November 4, 1998 the remaining shares of DePuy were
acquired by merger. The Company anticipates that there will be a
one-time charge against earnings for in-process R&D and
restructuring expenses, as a result of the acquisition.
DePuy is one of the world's leading orthopaedic products
companies. The company's products are used by orthopaedic
surgeons and medical specialists to reconstruct damaged or
diseased joints, to facilitate fusion of elements of the spine
and correct spinal deformities, to repair bone fractures, and to
rehabilitate sports-related injuries.
NOTE 11 - NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities
(FAS 133). FAS 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999.
FAS 133 requires that all derivative instruments be recorded on
the balance sheet at their respective fair values. Changes in
the fair values of derivatives are recorded each period in
current earnings or other comprehensive income, depending on
whether a derivative is
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designated as part of a hedge transaction and, if it is, the type
of hedge transaction. For fair-value hedge transactions in which
the Company is hedging changes in an asset's, liability's, or
firm commitment's fair value, changes in the fair value of the
derivative instrument will generally be offset by changes in the
hedged item's fair value. For cash-flow hedge transactions, in
which the Company is hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted
transaction, changes in the fair value of the derivative
instrument will be reported in other comprehensive income. The
gains and losses on the derivative instrument that are reported
in other comprehensive income will be recognized in earnings in
the periods in which earnings are impacted by the variability of
the cash flows of the hedged item.
The Company is in the process of evaluating the new standard
and does not expect it to have a material effect on the Company's
results of operations, cash flow or financial position.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALES AND EARNINGS
Consolidated sales for the first nine months of 1998 were
$17,290 million, which exceeded sales of $16,999 million for the
first nine months of 1997 by 1.7%. The strength of the U.S.
dollar relative to the foreign currencies decreased sales for the
first nine months of 1998 by 3.4%. Excluding the effect of the
stronger U.S. dollar relative to foreign currencies, sales
increased 5.1% on an operational basis for the first nine months
of 1998. Consolidated net earnings for the first nine months of
1998 were $2,976 million, compared with net earnings of $2,673
million for the first nine months of 1997. Worldwide basic net
earnings per share for the first nine months of 1998 were $2.21,
compared with $2.00 for the same period in 1997, an increase of
10.5%. Worldwide diluted net earnings per share for the first
nine months of 1998 were $2.17, compared with $1.96 for the same
period in 1997, an increase of 10.7%
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Consolidated sales for the third quarter of 1998 were $5,724
million, an increase of 2.5% over 1997 third quarter sales of
$5,586 million. The effect of the stronger U.S. dollar relative
to foreign currencies decreased third quarter sales by 2.3%.
Consolidated net earnings for the third quarter of 1998 were $961
million, compared with $855 million for the same period a year
ago, an increase of 12.4%. Worldwide basic net earnings per share
for the third quarter of 1998 rose 10.9% to $.71, compared with
$.64 in the 1997 period. Worldwide diluted net earnings per
share for the third quarter of 1998 rose 11.1% to $.70, compared
with $.63 in 1997.
Domestic sales for the first nine months of 1998 were $9,173
million, an increase of 4.4% over 1997 domestic sales of $8,790
million for the same period a year ago. Sales by international
subsidiaries were $8,117 million for the first nine months of
1998 compared with $8,209 million for the same period a year ago,
a decrease of 1.1%. Excluding the impact of the stronger value
of the dollar, international sales increased by 6.0%.
Worldwide Consumer segment sales for the third quarter were
essentially unchanged versus the same period a year ago.
Domestic sales increased by .6% in the quarter while
international sales declined by .3%. International sales gains
in local currency of 6.5% were offset by a negative currency
impact of 6.8%. Consumer sales were led by continued strength in
the skin care franchise, which includes the NEUTROGENA, RoC and
CLEAN & CLEAR product lines, as well as strong performances from
the adult and children's MOTRIN line of analgesic products. At
the end of the quarter, the Johnson & Johnson Merck joint
venture introduced a new chewable form of PEPCID AC.
Worldwide Pharmaceutical sales of $2.1 billion for the quarter
increased 9.4% versus the same period in 1997, including 16.1%
growth in domestic sales. International sales increased by 2.2%.
Sales gains in local currency of 6.0% were partially offset by a
negative currency impact of 3.8%. Worldwide growth reflects the
strong performance of RISPERDAL, an antipsychotic medication;
PROCRIT, for the treatment of anemia; DURAGESIC, a transdermal
patch for chronic pain, and the oral contraceptive line of
products. Recently PARIET/ACIPHEX (rabeprazole), a proton pump
inhibitor for duodenal and gastric ulcers, gastroesophageal
reflux disease (GERD) and GERD maintenance received European
Union approval.
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Worldwide sales of $2.0 billion in the Professional segment
declined by 2.2% versus the third quarter of 1997. Domestic
sales were down 4.4% in the quarter while international sales
gains in local currency of 4.8% were largely offset by the
strength of the U.S. dollar. Strong sales growth of Ethicon Endo-
Surgery's laparoscopy and mechanical closure products, Ethicon's
Mitek suture anchors and Gynecare's women's health products,
LifeScan's blood glucose monitoring systems and Johsnon & Johnson
Professional's orthopaedic products were offset by a decline in
sales of Cordis' coronary stents.
Average shares of common stock outstanding in the first nine
months of 1998 were 1,345.0 million, compared with 1,333.7
million for the same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Cash and current marketable securities increased $927 million
during the first nine months of 1998 to $3,826 million at
September 27, 1998. Total borrowings decreased $148 million
during the first nine months of 1998 to $1,692 million. Net cash
(cash and current securities net of borrowings) was $2,134
million at September 27, 1998 compared with $1,059 million at the
end of 1997. Total debt represented 10.8% of total capital
(shareowners' equity and total borrowings) at quarter end
compared with 13.0% at the end of 1997.
Additions to property, plant and equipment were $848 million
for the first nine months of 1998, compared with $761 million for
the same period in 1997.
On October 19, 1998, the Board of Directors approved a regular
quarterly dividend rate of 25 cents per share payable on December
8, 1998 to shareowners of record as of November 17, 1998.
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YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
The "Year 2000" issue relates to potential problems resulting
from a practice of computer programmers. For some time, calendar
years have frequently been represented in computer programs by
their last two digits. Thus, "1998" would be rendered "98". The
logic of the programs frequently assumes that the first two
digits of a year given in this format are "19". It is unclear
what would happen with respect to such computer programs upon the
change in calendar year from 1999 to 2000. The program might
interpret "00" as "2000", "1900", an error or some other input.
In such a case, the computer program might cease to function,
function improperly, provide an erroneous result or act in some
unpredictable manner.
The Company has had a program in place since the fourth quarter
of 1996 to address Year 2000 issues in critical business areas
related to its products, information management systems, non-
information systems with embedded technology, suppliers and
customers. A report on the progress of this program has been
provided to the Audit Committee of the Company's Board of
Directors. The Company has completed its review of its critical
automated information systems and is currently in the remediation
phase with respect to such critical systems. It is anticipated
that this remediation will be substantially complete by the
second quarter of 1999.
The Company is also in the process of reviewing and
remediating, where necessary, its other automated systems. The
Company estimates that it will complete assessment and
remediation of substantially all such other automated systems by
the end of the second quarter of 1999.
The Company has a plan for assessment and testing of all of its
products and has made substantial progress toward completion of
such assessment and testing. It anticipates substantial
completion of assessment, testing and remediation, if required,
for most products by December 1998 with full completion by the
third quarter of 1999.
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The Company plans to engage additional outside consultants to
examine selected critical areas in certain of its major
franchises and anticipates that this work will begin in the
fourth quarter of 1998.
The total costs of addressing the Company's Year 2000 readiness
issues are not expected to be material to the Company's financial
condition or results of operations. Since initiation of its
program in 1996, the Company estimates that it has expensed
approximately $120 million in internal and external costs on a
pre-tax basis to address its Year 2000 readiness issues. The
Company currently estimates that the total of such costs for
addressing its internal Year 2000 readiness will not exceed $250
million in the aggregate on a pre-tax basis. These costs are
being expensed as they are incurred and are being funded through
operating cash flows. No projects material to the financial
condition or results of operations of the Company have been
deferred or delayed as a result of this project.
The ability of the Company to implement and effect its Year
2000 readiness program and the related costs or the costs of non-
implementation, cannot be accurately determined at this time.
The Company's automated systems (both information technology and
non-information systems) are generally complex but are
decentralized. Although a failure to complete remediation of one
system may adversely effect other systems, the Company does not
currently believe that such effects are likely. If, however, a
significant number of such failures should occur, some of such
systems might be rendered inoperable and would require manual
back-up methods or other alternatives, where available. In such
a case, the speed of processing business transactions,
manufacturing and otherwise conducting business would likely
decrease significantly and the cost of such activities would
increase, if they could be carried on at all. That could have a
material adverse effect on the financial condition and results of
operations of the business.
- 18 -
The Company has highly integrated relationships with certain of
its suppliers and customers. These include among others
providers of energy, telecommunications, and raw materials and
components, financial institutions, managed care organizations
and large retail establishments. The Company has been reviewing,
and continues to review, with its critical suppliers and major
customers the status of their year 2000 readiness. The Company
has in place a program of requesting assurances of Year 2000
readiness from such suppliers. However, many critical suppliers
have either declined to provide the requested assurances or have
limited the scope of assurances to which they are willing to
commit. The Company has established a plan for ongoing
monitoring of critical suppliers during 1999.
The Year 2000 readiness of certain major customers is unclear.
The Company has established a program to contact major customers
to assess their readiness to deal with Year 2000 issues. If a
significant number of such suppliers and customers were to
experience business disruptions as a result of their lack of Year
2000 readiness, their problems could have a material adverse
effect on the financial position and results of operations of the
Company.
In order to address this situation, the Company is formulating
contingency plans intended to deal with the impact on the Company
of Year 2000 problems that may be experienced by such critical
suppliers and major customers. With respect to critical
suppliers, these plans may include, among others, arranging
availability of substitute sources of utilities, increasing
levels of inventory and identifying alternate sources of supply
of raw materials. The Company is also alerting customers to
their need to address these problems, but the Company has few
alternatives available, other than reversion to manual methods,
for avoiding or mitigating the effects of lack of Year 2000
readiness by major customers. In any event, even where the
Company has contingency plans, there can be no assurance that
such plans will address all the problems that may arise, or that
such plans, even if implemented, will be successful.
- 19 -
Notwithstanding the foregoing, the Company has no reason to
believe that its exposure to the risks of lack of supplier and
customer Year 2000 readiness is any greater than the exposure to
such risk that affects its competitors generally. Further, the
Company believes that its programs for Year 2000 readiness will
significantly improve its ability to deal with its own Year 2000
readiness issues and those of suppliers and customers over what
would have occurred in the absence of such a program. That does
not, however, guarantee that some material adverse effects will
not occur.
The descriptions of Year 2000 issues set forth in this section
is subject to the qualifications set forth under the heading
"Cautionary Statement Pursuant to Private Securities Litigation
Reform Act of 1995 - `Safe Harbor' for Forward-Looking
Statements".
CAUTIONARY STATEMENT PURSUANT TO PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 - "SAFE HARBOR" FOR FORWARD-LOOKING STATEMENTS
The Company may from time to time make certain forward-looking
statements in publicly-released materials, both written and oral.
Forward-looking statements do not relate strictly to historical
or current facts and may be identified by their use of words like
"plans," "expects," "will," "anticipates," "estimates" and other
words of similar meaning. Such statements may address, among
other things, the Company's strategy for growth, product
development, regulatory approvals, market position, expenditures,
financial results and the effect of Year 2000 readiness issues.
Forward-looking statements are based on current expectations of
future events. The Company cannot guarantee that expectations
expressed in forward-looking statements will be realized. Some
important factors that could cause the Company's actual results
to differ materially from those projected in any such forward-
looking statements are as follows:
- 20 -
Economic factors, including inflation and fluctuations in
interest rates and foreign currency exchange rates and the
potential effect of such fluctuations on revenues, expenses and
resulting margins;
Competitive factors, including technological advances achieved
and patents attained by competitors and generic competition as
patents on the Company's products expire;
Domestic and foreign healthcare reforms resulting in pricing
pressures, including the continued consolidation among healthcare
providers, trends toward managed care and healthcare cost
containment and government laws and regulations relating to
pharmaceutical reimbursement and pricing generally;
Government laws and regulations, affecting domestic and foreign
operations, including those relating to trade, monetary and
fiscal policies, taxes, price controls, regulatory approval of
new products and licensing;
Difficulties inherent in product development, including the
potential inability to successfully continue technological
innovation, complete clinical trials, obtain regulatory approvals
in the United States and abroad, gain and maintain market
approval of products and the possibility of encountering
infringement claims by competitors with respect to patent or
other intellectual property rights which can prelude or delay
commercialization of a product;
Significant litigation adverse to the Company including product
liability claims, patent infringement claims, and antitrust
claims;
Product efficacy or safety concerns resulting in product
recalls or declining sales;
The impact of business combinations, including acquisitions and
divestitures, and organizational restructuring consistent with
evolving business strategies;
Issuance of new or revised accounting standards by the American
Institute of Certified Public Accountants, the Financial
Accounting Standards Board or the Securities and Exchange
Commission;
- 21 -
The dates for completion of specified tasks in the Company Year
2000 readiness program and the assessment of future costs are
based upon, among other things, assumptions of the lack of
complicating factors that could cause delay, the availability of
adequate resources, including appropriately skilled third
parties, and the availability of substitute or alternate products
or services, where required;
The assessments of the Year 2000 readiness of others and of the
effects of lack of such readiness are highly uncertain. The
impact of a failure of readiness by critical suppliers or major
customers or both cannot be estimated with confidence. The
effectiveness of contingency plans to mitigate the effects of any
such failures is largely untested.
The Company has employed its standard internal procedures to
assess the reasonableness of its estimates of costs, timing and
effectiveness of remediation of Year 2000 readiness issues.
While the Company believes such an approach is adequate, it
should be noted that no external or independent audit or
verification of such estimates has been completed nor have
extraordinary means been undertaken to verify their
reasonableness.
Even though the Company expects an increased ability to avoid
significant disruptions of its business as a result of its Year
2000 readiness program, management cannot provide an assurance
that there will be no material adverse effects to the financial
condition or results of operations of the Company as a result of
Year 2000 issues.
The Company may not successfully identify all systems and
products that present Year 2000 readiness issues. Even if the
Company successfully identifies all such systems and products, it
may not be successful in remedying the problems presented.
The foregoing list sets forth many, but not all, of the factors
that could impact upon the Company's ability to achieve results
described in any forward-looking statements. Investors are
cautioned not to place undue reliance on such statements which
speak only as of the date made. The Company undertakes no
obligation to update any forward-looking statements as a result
of future events or developments.
- 22 -
Part II - Other Information
Item 5. Other Information
Under rules recently adopted by the Securities and Exchange
Commission, if a shareowner notifies the Company after January
26, 1999 of an intent to present a proposal at the Company's 1999
Annual Meeting, the Company may have the right to exercise its
discretionary voting authority with respect to such proposal, if
presented at the meeting, without including information regarding
such proposal in its proxy materials. Shareowner proposals to be
presented at the 1999 Annual Meeting must be received by the
Company on or before November 10, 1998 for inclusion in the proxy
statement and proxy card relating to that meeting.
Item 6. Exhibits and Reports on Form 8-K
(a)
Exhibit Numbers
(1) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K
during the three month period ended September 27,
1998.
- 23 -
SIGNATURES
Pursuant to the requirements 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.
JOHNSON & JOHNSON
(Registrant)
Date: November 6, 1998 By /s/ R. J. DARRETTA
R. J. DARRETTA
(Vice President, Finance)
Date: November 6, 1998 By /s/ C. E. LOCKETT
C. E. LOCKETT
(Corporate Controller)
- 24 -
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