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 October 3, 1999
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.)
One Johnson & Johnson Plaza 08933
New Brunswick, New Jersey (Zip code)
(Address of principal executive offices)
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 29, 1999, 1,390,555,974 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.
Item 1. Financial Statements
Consolidated Balance Sheet -
October 3, 1999 and January 3, 1999 3
Consolidated Statement of Earnings for the
Fiscal Quarter Ended October 3, 1999 and
September 27, 1998 5
Consolidated Statement of Earnings for the
Fiscal Nine Months Ended October 3, 1999 and
September 27, 1998 6
Consolidated Statement of Cash Flows for the
Fiscal Nine Months Ended October 3, 1999 and
September 27, 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 25
Part II - Other Information
Item 1 - Legal Proceedings 25
Item 5 - Other Information 26
Item 6 - Exhibits and Reports on Form 8-K 26
Signatures 27
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Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited; Dollars in Millions)
ASSETS
October 3, January
3,
1999 1999
Current Assets:
Cash and cash equivalents $ 2,617 1,927
Marketable securities, at cost 976 651
Accounts receivable, trade, less
allowances $331 (1998 - $385) 4,187 3,661
Inventories (Note 3) 3,091 2,853
Deferred taxes on income 1,065 1,180
Prepaid expenses and other
receivables 921 860
Total current assets 12,857 11,132
Marketable securities, non-current 399 416
Property, plant and equipment, at cost 10,754 10,024
Less accumulated depreciation and
amortization 4,543 3,784
6,211 6,240
Intangible assets, net (Note 4) 7,295 7,209
Deferred taxes on income 289 102
Other assets 1,057 1,112
Total assets $ 28,108 26,211
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
October 3, January
3,
1999 1999
Current Liabilities:
Loans and notes payable $ 1,456 2,747
Accounts payable 1,576 1,861
Accrued liabilities 2,701 2,920
Accrued salaries, wages and commissions621 428
Taxes on income 626 206
Total current liabilities 6,980 8,162
Long-term debt 1,992 1,269
Deferred tax liability 594 578
Employee related obligations 1,912 1,738
Other liabilities 1,246 874
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 1,534,865,000 shares and
1,534,824,000 shares) 1,535 1,535
Note receivable from employee stock
ownership plan (41) (44)
Accumulated other comprehensive
income (Note 7) (481) (328)
Retained earnings 15,892 13,928
16,905
15,091
Less common stock held in treasury,
at cost (190,631,000 & 190,773,000
shares) 1,521 1,501
Total shareowners' equity 15,384 13,590
Total liabilities and shareowners'
equity $28,108 26,211
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
Oct 3, Percent Sept 27,
Percent
1999 to Sales 1998 to
Sales
Sales to customers (Note 5) $6,749 100.0 5,724 100.0
Cost of products sold 2,030 30.1 1,758 30.7
Gross profit 4,719 69.9 3,966 69.3
Selling, marketing and
administrative expenses 2,564 38.0 2,151 37.6
Research expense 613 9.1 511 8.9
Interest income (61) (.9) (67) (1.2)
Interest expense, net of
portion capitalized 42 .6 26 .5
Other (income)expense, net 50 .7 28 .5
3,208 47.5 2,649 46.3
Earnings before provision
for taxes on income 1,511 22.4 1,317 23.0
Provision for taxes on
income (Note 2) 412 6.1 356 6.2
NET EARNINGS $1,099 16.3 961 16.8
NET EARNINGS PER SHARE (Note 6)
Basic $ .82 .71
Diluted $ .80 .70
CASH DIVIDENDS PER SHARE $ .28 .25
AVG. SHARES OUTSTANDING
Basic 1,344.5 1,344.9
Diluted 1,373.6 1,373.0
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
______
Oct 3, Percent Sept 27,
Percent
1999 to Sales 1998 to
Sales
Sales to customers (Note 5)$20,241 100.0 17,290 100.0
Cost of products sold 6,154 30.4 5,338 30.9
Gross profit 14,087 69.6 11,952 69.1
Selling, marketing and
administrative expenses 7,516 37.1 6,365 36.8
Research expense 1,723 8.5 1,537 8.9
Interest income (164) (.8) (192) (1.1)
Interest expense, net of
portion capitalized 139 .7 80 .5
Other (income)expense, net 143 .7 40 .2
9,357 46.2 7,830 45.3
Earnings before provision
for taxes on income 4,730 23.4 4,122 23.8
Provision for taxes on
income (Note 2) 1,348 6.7 1,146 6.6
NET EARNINGS $ 3,382 16.7 2,976 17.2
NET EARNINGS PER SHARE (Note 6)
Basic $ 2.52 2.21
Diluted $ 2.46 2.17
CASH DIVIDENDS PER SHARE $ .81 .72
AVG. SHARES OUTSTANDING
Basic 1,344.7 1,345.0
Diluted 1,372.8 1,371.4
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
Oct 3,
Sept 27,
1999
1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $3,382 2,976
Adjustments to reconcile net earnings to
cash flows:
Depreciation and amortization of
property and intangibles 1,099 906
Increase in accounts receivable, trade,
less allowances (641) (345)
Increase in inventories (321) (358)
Changes in other assets and liabilities 850 350
NET CASH FLOWS FROM OPERATING ACTIVITIES 4,369 3,529
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment(1,007) (848)
Proceeds from the disposal of assets 18 20
Acquisition of businesses, net of cash
acquired (228) (78)
Other, principally marketable securities (380) (96)
NET CASH USED BY INVESTING ACTIVITIES (1,597) (1,002)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to shareowners (1,090) (969)
Repurchase of common stock (547) (653)
Proceeds from short-term debt 7,253 174
Retirement of short-term debt (8,468) (193)
Proceeds from long-term debt 776
Retirement of long-term debt (145) (142)
Proceeds from the exercise of stock
options 183 223
NET CASH USED BY FINANCING
ACTIVITIES (2,038) (1,560)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (44) 22
INCREASE IN CASH AND CASH EQUIVALENTS 690 989
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,927 2,753
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,617 3,742
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 January 3, 1999. 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.
NOTE 2 - INCOME TAXES
The effective income tax rates for 1999 and 1998 are as follows:
1999 1998
First Quarter 29.7% 29.6%
First Half 29.1 28.2
Nine Months 28.5 27.8
The effective income tax rates for the first nine months of 1999
and 1998 are 28.5% and 27.8%, respectively, as compared to the
U.S. federal statutory rate of 35%. The difference from the
statutory rate is primarily 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 21,
2010.
NOTE 3 - INVENTORIES
(Dollars in Millions) Oct. 3, 1999 Jan. 3,
1999
Raw materials and supplies $ 863 770
Goods in process 494 489
Finished goods 1,734 1,594
$ 3,091 2,853
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NOTE 4 - INTANGIBLE ASSETS
(Dollars in Millions) Oct. 3, 1999 January 3,
1999
Intangible assets $ 8,373 8,042
Less accumulated amortization 1,078 833
$ 7,295 7,209
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 up to 40 years.
The cost of other acquired intangibles is amortized on a
straight-line basis over their estimated useful lives.
NOTE 5 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
(Dollars in Millions)
SALES BY SEGMENT OF BUSINESS
Third Quarter Nine Months
Percent Percent
1999 1998 Increase 1999 1998 Increase
Consumer
Domestic $ 921 806 14.3 2,722 2,398 13.5
International 783 781 .3 2,398 2,398 -
1,704 1,587 7.4% 5,120 4,796 6.8%
Pharmaceutical
Domestic 1,565 1,153 35.7 4,622 3,500 32.1
International 1,035 945 9.5 3,167 2,852 11.0
2,600 2,098 23.9% 7,789 6,352 22.6%
Professional
Domestic 1,331 1,117 19.2 3,935 3,275 20.2
International 1,114 922 20.8 3,397 2,867 18.5
2,445 2,039 19.9% 7,332 6,142 19.4%
Domestic 3,817 3,076 24.1 11,279 9,173 23.0
International 2,932 2,648 10.7 8,962 8,117 10.4
Worldwide $6,749 5,724 17.9% 20,241 17,290 17.1%
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NOTE 5 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
(Dollars in Millions)
OPERATING PROFIT BY SEGMENT OF BUSINESS
Third Quarter Nine Months
Percent Percent
1999 1998 Increase 1999 1998 Increase
Consumer 206 155 32.9 583 526 10.8
Pharmaceutical 954 843 13.2 3,003 2,567 17.0
Professional 385 338 13.9 1,268 1,078 17.6
Segments total 1,545 1,336 15.6 4,854 4,171 16.4
Expenses not allocated
to segments (34) (19) (124) (49)
Worldwide total$1,5111,317 14.7 4,730 4,122 14.8
SALES BY GEOGRAPHIC AREA
Third Quarter Nine Months
Percent Percent
Increase/ Increase/
1999 1998(Decrease) 1999 1998 (Decrease)
U.S. $3,817 3,076 24.1 11,279 9,173 23.0
Europe 1,564 1,482 5.5 4,992 4,607 8.4
Western Hemisphere
excluding U.S. 510 520 (1.9) 1,491 1,560 (4.4)
Asia-Pacific,
Africa 858 646 32.8 2,479 1,950 27.1
Worldwide $6,749 5,724 17.9% 20,241 17,290 17.1%
NOTE 6 - EARNINGS PER SHARE
The following is a reconciliation of basic net earnings per
share to diluted net earnings per share for the nine months ended
October 3, 1999 and September 27, 1998:
Fiscal Fiscal
Quarter Ended Nine
Months Ended
Oct 3, Sept 27, Oct 3, Sept 27,
1999 1998 1999
1998
Basic net earnings per share$ .82 .71 2.52 2.21
Average shares outstanding
- basic 1,344.5 1,344.9 1,344.7 1,345.0
Potential shares exercisable
under stock option plans 67.9 68.3 67.9 68.0
Less: shares which could be
repurchased under treasury
stock method (38.8) (40.2) (39.8) (41.6)
Adjusted averages shares
outstanding - diluted 1,373.6 1,373.0 1,372.8 1,371.4
Diluted earnings per share $ .80 .70 2.46 2.17
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NOTE 7 - ACCUMULATED OTHER COMPREHENSIVE INCOME
During 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 statement 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 October 3, 1999 is $3,247 million, compared
with $2,957 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 available for sale securities.
NOTE 8 - ACQUISITIONS
During the first quarter, the Company completed the acquisition
of the dermatological skin care business of S.C. Johnson & Son,
Inc. The S.C. Johnson dermatological business is composed of
specialty brands marketed in the U.S., Canada and Western Europe.
The primary brand involved in the transaction, AVEENO, is a line
of skin care products including specialty soaps, bath, and anti-
itch treatments.
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.
NOTE 9 - 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"
("SFAS 133"). This standard, as amended, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000.
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NOTE 9 - NEW ACCOUNTING PRONOUNCEMENT (Continued)
SFAS 133 requires that all derivative instruments be recorded
on the balance sheet at their respective fair values. Changes in
the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on the
designation of the hedge transaction. For fair-value hedge
transactions in which the Company is hedging changes in the fair
value of an asset, liability or firm commitment, changes in the
fair value of the derivative instrument will generally be offset
by changes in the fair value of the hedged item. For cash flow
hedge transactions in which the Company is hedging the
variability of cash flows related to a variable rate asset,
liability or 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 will adopt SFAS 133 in the first quarter of 2001
and does not expect it to have a material effect on the Company's
results of operations, cash flows or financial position.
NOTE 10 - RESTRUCTURING AND SPECIAL CHARGES
In the fourth quarter of 1998, the Company approved a plan to
reconfigure its global network of manufacturing and operating
facilities with the objective of enhancing operating
efficiencies. It is expected that the plan will be completed
over the next twelve months. Among the initiatives supporting
this plan were the closures of inefficient manufacturing
facilities, exiting certain businesses which were not providing
an acceptable return and related employee separations.
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NOTE 10 - RESTRUCTURING AND SPECIAL CHARGES (Continued)
The estimated cost of this plan is $613 million. The charge
consisted of employee separation costs of $161 million, asset
impairments of $322 million, impairments of intangibles of $52
million, and other exit costs of $78 million. Employee
separations will occur primarily in manufacturing and operations
facilities affected by the plan. The decision to exit certain
facilities and businesses decreased expected future cash flows
triggering the asset impairment. The amount of impairment of
such assets was calculated using discounted cash flows or
appraisals.
The components of the asset impairments and the impairments of
intangibles are as follows:
Value @
January 3, 1999
Assets:
Machinery & equipment $215
Inventory 60*
Buildings 32
Leasehold improvements 15
Total asset impairments $322
*Included in cost of products sold at year-end 1998
Value @
January 3, 1999
Intangible assets:
Menlo Care $ 26
Innotech 20
Other 6
Total intangible assets $ 52
These intangible assets relate to products that were abandoned
due to the low margin and lack of strategic fit.
The restructuring plan consisted of the reduction of
manufacturing facilities around the world by 36, from 159 to 123
plants. None of the assets affected by this plan were held for
disposal.
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NOTE 10 - RESTRUCTURING AND SPECIAL CHARGES (Continued)
Severance and other exit costs were accrued at year-end 1998
and payments made through nine months ended October 3, 1999 are
as follows:
Beginning Cash Remaining
Accrual Outlays
Accrual
Employee Separations $ 158 25 133
Other exit costs:
Distributor terminations 17 6 11
Dismantle/disposal costs 15 4 11
Lease termination 21 12 9
Customer compensation 11 5 6
Other 14 7 7
Total other costs 78 34 44
$ 236 59 177
Changes in estimates to date have been immaterial. The $161
million ($3 million was paid at year-end 1998) for employee
separations reflects the termination of approximately 5,100
employees of which 1,500 have been separated as of October 3,
1999.
NOTE 11 - PENDING LEGAL PROCEEDINGS
The information called for by this footnote is incorporated
herein by reference to Item 1 ("Legal Proceedings") included in
Part II of this Report on Form 10-Q.
NOTE 12 - SUBSEQUENT EVENT
On October 6, 1999 Johnson & Johnson and Centocor, Inc.
announced the completion of their previously announced merger,
valued at approximately $5 billion. This transaction will be
accounted for as a pooling of interests. The transaction was
completed after Centocor shareholders voted to approve the merger
agreement with Johnson & Johnson. Centocor had approximately 71
million shares outstanding on October 6th (83 million shares on a
fully diluted basis) which were exchanged for approximately 45
million shares of Johnson & Johnson common stock. On a diluted
basis when adjusted for stock options outstanding and convertible
debt, the total number of Johnson & Johnson shares issued will be
approximately 53 million. Holders of Centocor common stock
received .6390 of a share of Johnson & Johnson common stock for
each share of Centocor common stock that they own, valued at
$95.47 per share.
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Centocor is a leading biopharmaceutical company that creates,
acquires and markets cost-effective therapies that yield long
term benefits for patients and the health care community. Its
products, developed primarily through monoclonal antibody
technology, help physicians deliver innovative treatments to
improve human health and restore patients' quality of life.
On November 8, 1999, Johnson & Johnson announced a definitive
merger agreement pursuant to which Johnson & Johnson will acquire
Innovasive Devices, Inc. The transaction will be accounted for
under the purchase method and is valued at approximately $85
million. The merger is subject to customary conditions,
including approval by a majority of the shareholders of
Innovasive Devices and Hart-Scott Rodino clearance.
Innovasive Devices manufactures and sells devices for sports
medicine surgery, an area addressing soft tissue injuries in the
knee, shoulder and other small joints.
- 15 -
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 1999 were
$20.24 billion, which exceeded sales of $17.29 billion for the
first nine months of 1998 by 17.1%. The strength of the U.S.
dollar relative to the foreign currencies decreased sales for the
first nine months of 1999 by 1.3%. Excluding the effect of the
stronger U.S. dollar relative to foreign currencies, sales
increased 18.4% on an operational basis for the first nine months
of 1999. Consolidated net earnings for the first nine months of
1999 were $3.38 billion, compared with net earnings of $2.98
billion for the first nine months of 1998. Worldwide basic net
earnings per share for the first nine months of 1999 were $2.52,
compared with $2.21 for the same period in 1998, an increase of
14.0%. Worldwide diluted net earnings per share for the first
nine months of 1999 were $2.46, compared with $2.17 for the same
period in 1998, an increase of 13.4%
Consolidated sales for the third quarter of 1999 were $6.75
billion, an increase of 17.9% over 1998 third quarter sales of
$5.72 billion. The effect of the stronger U.S. dollar relative
to foreign currencies decreased third quarter sales by 1.3%.
Consolidated net earnings for the third quarter of 1999 were
$1.10 billion, compared with $.96 billion for the same period a
year ago, an increase of 14.4%. Worldwide basic net earnings per
share for the third quarter of 1999 rose 15.5% to $.82, compared
with $.71 in the 1998 period. Worldwide diluted net earnings per
share for the third quarter of 1999 rose 14.3% to $.80, compared
with $.70 in 1998.
Domestic sales for the first nine months of 1999 were $11.28
billion, an increase of 23.0% over 1998 domestic sales of $9.17
billion for the same period a year ago. Sales by international
subsidiaries were $8.96 billion for the first nine months of 1999
compared with $8.12 billion for the same period a year ago, an
increase of 10.4%. Excluding the impact of the stronger value of
the dollar, international sales increased by 13.3%.
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Worldwide Consumer segment sales for the third quarter of 1999
were $1.7 billion, an increase of 7.4% versus the same period a
year ago. Domestic sales were up 14.3% while international sales
gains in local currency of 7.0% were almost entirely offset by a
negative currency impact of 6.7%. 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 solid
results from McNeil Consumer Healthcare, which markets the
TYLENOL family of products, BENECOL and other over-the-counter
pharmaceuticals.
During the quarter, the Company launched BENECOL dressings,
margarine spread in tubs and snack bars in the United States.
BENECOL contains the dietary ingredient stanol ester, which is
patented for use in reducing cholesterol.
Worldwide pharmaceutical sales of $2.6 billion for the quarter
increased 23.9% over the same period in 1998, including 35.7%
growth in domestic sales and a 9.5% increase in international
sales. International sales gains in local currency of 12.6% were
offset by a negative currency impact of 3.1%. Sales growth
reflects the strong performance of PROCRIT/EPREX, for the
treatment of anemia; RISPERDAL, an antipsychotic medication;
DURAGESIC, a transdermal patch for chronic pain; LEVAQUIN, an
anti-infective; ULTRAM, an analgesic, and the oral contraceptive
line of products.
During the quarter, the company announced a definitive
agreement for a stock-for-stock merger with Centocor, Inc., a
leader in monoclonal antibody technology and acute vascular care
and immunology products. The merger, valued at approximately $5
billion, was completed on October 6, 1999.
- 17 -
Also in the quarter Eisai, Inc. received approval from the FDA
for ACIPHEX (rabeprazole), a proton pump inhibitor for
gastroesophageal reflux disease (GERD), GERD maintenance,
duodenal ulcers and treatment of pathological hypersecretory
conditions, including Zollinger-Ellison syndrome. Janssen
Pharmaceutica, a wholly-owned subsidiary of Johnson & Johnson,
and Eisai have entered into a strategic alliance to market
rabeprazole worldwide with the exception of Japan and certain
other territories.
Additional positive news in the quarter was the FDA approval
for new indications of TOPAMAX (topiramate), an anti-epileptic
drug. Approval was received for adjunctive therapy for partial
onset seizures in pediatric patients and primary generalized
tonic-clonic seizures in adults and pediatric patients.
Worldwide sales of $2.4 billion in the Professional segment
represented an increase of 19.9% over the third quarter of 1998.
Domestic sales were up 19.2% while international sales were up
20.8%. The 1998 acquisition of DePuy Inc., a leading orthopaedic
products manufacturer, contributed to the strong sales growth in
the Professional segment. In addition, strong sales performance
was achieved by Ethicon Endo-Surgery's laparoscopy and wound
closure products; Ethicon's Mitek suture anchors and Gynecare
women's health products, and Vistakon's disposable contact lens
products.
During the quarter, the Company received FDA approval to market
its new CrossFlexTLC coronary stent, a laser-cut stainless steel
stent designed to be a true workhorse stent that combines
exceptional deliverability with excellent scaffolding and high
radial strength. The CrossFlexTLC delivery system, which
incorporates Cordis' latest balloon catheter technology, is
specifically engineered to minimize the risk of stent
embolization through the use of Cordis' proprietary NestingT
technology. This technology helps to secure the stent to the
delivery balloon until he moment of deployment.
- 18 -
Basic average shares of common stock outstanding in the first
nine months of 1999 were 1,344.7 million, compared with 1,345.0
million for the same period a year ago. Diluted average shares
of common stock outstanding in the first nine months of 1999 were
1,372.8 million, compared with 1,371.4 million for the same
period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Cash and current marketable securities increased $1,015 million
during the first nine months of 1999 to $3,593 million at October
3, 1999. Total borrowings decreased $568 million during the
first nine months of 1999 to $3,448 million. Net cash (cash and
current securities net of borrowings) was $145 million at October
3, 1999 compared with $1,438 million net debt (debt net of cash
and current securities) at the end of 1998. Total debt
represented 18.3% of total capital (shareowners' equity and total
borrowings) at quarter end compared with 22.8% at the end of
1998. For the period ended October 3, 1999, there were no
material cash commitments.
Additions to property, plant and equipment were $1,007 million
for the first nine months of 1999, compared with $848 million for
the same period in 1998.
On October 18, 1999, the Board of Directors approved a regular
quarterly dividend rate of 28 cents per share, payable on
December 7, 1999 to shareowners of record as of November 16,
1999.
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 or device
might interpret "00" as "2000", "1900", an error or some other
input. In such a case, the computer program or device might
cease to function, function improperly, provide an erroneous
result or act in some unpredictable manner.
- 19 -
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 the remediation phase with
respect to such critical systems is substantially complete. Full
completion is expected during the fourth quarter of 1999.
The Company is also in the process of reviewing and
remediating, where necessary, its other automated systems. The
Company has substantially completed the assessment and
remediation of all such other automated systems and full
completion is expected during the fourth 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. All current products are Year 2000
ready. There are a few remaining units that require field
updates at customer sites. These updates will be completed
during the fourth quarter of 1999.
The Company has engaged additional outside consultants to
examine selected critical areas in certain of it major
franchises. In addition, the Company has contracted with an
independent third party to conduct audits of critical sites
worldwide to evaluate our programs, processes and progress and to
identify any remaining areas of effort required to achieve
compliance.
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 $195 million, on a worldwide basis, in internal and
external costs on a pre-tax basis to address its Year 2000
readiness issues.
- 20 -
These expenditures include information system replacement and
embedded technology upgrade costs of $111 million, supplier and
customer compliance costs of $15 million and all other costs of
$69 million. The Company currently estimates that the total of
such costs for addressing its internal Year 2000 readiness, on a
worldwide basis, will approximate
$200 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 affect 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.
- 21 -
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 completed its plan for monitoring of
critical suppliers.
The Company has contacted 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.
This analysis of potential exposures includes both the domestic
and international operations of the Company.
The Company believes that its most reasonably likely "worst
case scenario" would occur if a significant number of its key
suppliers or customers were not fully Year 2000 functional, in
which case the Company estimates that up to a 10 business day
disruption in business operations could occur. In order to
address this situation, the Company has formulated 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.
- 22 -
With respect to critical suppliers, these plans may include,
among others, arranging availability of substitute sources of
utilities, closely managing appropriate 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.
Notwithstanding the foregoing, the Company has no reason to
believe that its exposure to the risks 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 herein under the
heading "Cautionary Factors that May Affect Future Results".
- 23 -
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q contains "forward-looking statements" that
anticipate results based on management's plans that are subject
to uncertainty. 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.
These 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 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 differ materially from our projections. The
Company assumes no obligation to update any forward-looking
statements as a result of new information or future events or
developments.
The Company's Annual Report on Form 10-K for the fiscal year
ended January 3, 1999 contains, in Exhibit 99(b), a discussion of
various factors that could cause actual results to differ from
expectations. That Exhibit from the Form 10-K is incorporated in
this filing by reference. The Company notes these factors as
permitted by the Private Securities Litigation Reform Act of
1995. Investors are cautioned not to place undue reliance on any
forward-looking statements. Investors also should understand
that it is not possible to predict or identify all such factors
and should not consider this list to be a complete statement of
all potential risks and uncertainties.
- 24 -
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
There has been no material change in the Company's assessment of
its sensitivity to market risk since its presentation set forth
in Item 7A, "Quantitative and Qualitative Disclosures About
Market Risk," in its Annual Report on Form 10-K for the fiscal
year ended January 3, 1999.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in numerous product liability cases in
the United States, many of which concern adverse reactions to
drugs and medical devices. The damages claimed are substantial,
and while the Company is confident of the adequacy of the
warnings 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 reserves established under its self-
insurance program and by commercially available excess liability
insurance.
The Company, along with numerous other pharmaceutical
manufacturers and distributors, is a defendant in 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.
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.
- 25 -
The Company's Ortho Biotech subsidiary is party to an
arbitration proceeding filed against it by Amgen, Ortho's
licensor of U.S. non-dialysis rights to EPO, in which Amgen seeks
to terminate Ortho's U.S. license rights based on alleged
deliberate EPO sales by Ortho during the early 1990's into
Amgen's reserved dialysis market. The Company believes no basis
exists for terminating Ortho's U.S. license rights and is
vigorously contesting Amgen's claims. However, Ortho's U.S.
license rights to EPO are material to the Company; thus, an
unfavorable outcome could have a material adverse effect on the
Company's consolidated financial position, liquidity or results
of operations.
The Company is also involved in a number of patent, trademark
and other lawsuits incidental to its business.
The Company believes that the above proceedings, except as
noted above, would not have a material adverse effect on its
results of operations, cash flows or financial position.
Item 5. Other Information
On July 19, 1999, Leo F. Mullin was elected to the Board of
Directors of Johnson & Johnson. Mr. Mullin is president, chief
executive officer and a director of Delta Air lLines.
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 October 3, 1999.
- 26 -
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 12, 1999 By R. J. DARRETTA
R. J. DARRETTA
Vice President, Finance
Date: November 12, 1999 By C. E. LOCKETT
C. E. LOCKETT
Controller
(Chief Accounting Officer)
- 27 -
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