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 April 4, 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
New Brunswick, New Jersey
08933
(Address of principal executive offices) (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 April 30, 1999, 1,345,200,546 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 -
April 4, 1999 and January 3, 1999 3
Consolidated Statement of Earnings for the
Three Months Ended April 4, 1999 and
March 29, 1998 5
Consolidated Statement of Cash Flows for the
Three Months Ended April 4, 1999 and
March 29, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 23
Part II - Other Information
Item 1 - Legal Proceedings 23
Item 6 - Exhibits and Reports on Form 8-K 23
Signatures 24
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Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited; Dollars in Millions)
ASSETS
April 4, January
3,
1999
1999
Current Assets:
Cash and cash equivalents $ 1,780 1,927
Marketable securities, at cost 805 651
Accounts receivable, trade, less
allowances $385 (1998 - $385) 3,935 3,661
Inventories (Note 3) 2,963 2,853
Deferred taxes on income 1,111 1,180
Prepaid expenses and other
receivables 1,024 860
Total current assets 11,618 11,132
Marketable securities, non-current 418 416
Property, plant and equipment, at cost 10,238 10,024
Less accumulated depreciation and
amortization 4,166 3,784
6,072 6,240
Intangible assets, net (Note 4) 7,489 7,209
Deferred taxes on income 76 102
Other assets 1,073 1,112
Total assets $26,746 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
April 4, January
3,
1999 1999
Current Liabilities:
Loans and notes payable $ 2,489 2,747
Accounts payable 1,587 1,861
Accrued liabilities 2,930 2,920
Accrued salaries, wages and commissions446 428
Taxes on income 414 206
Total current liabilities 7,866 8,162
Long-term debt 1,346 1,269
Deferred tax liability 571 578
Employee related obligations 1,719 1,738
Other liabilities 1,022 874
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 1,534,842,000 and
1,534,824,000 shares) 1,535 1,535
Note receivable from employee stock
ownership plan (41) (44)
Accumulated other comprehensive income(467) (328)
(Note 7)
Retained earnings 14,565 13,928
15,592
15,091
Less common stock held in treasury,
at cost (189,081,000 & 190,773,000
shares) 1,370 1,501
Total shareowners' equity 14,222 13,590
Total liabilities and shareowners'
equity $26,746 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
April 4, Percent March 29,
Percent
1999 to Sales 1998 to
Sales
Sales to customers (Note 5) $6,638 100.0 5,783 100.0
Cost of products sold 2,038 30.7 1,777 30.7
Gross Profit 4,600 69.3 4,006
69.3
Selling, marketing and
administrative expenses 2,403 36.2 2,100 36.3
Research expense 536 8.1 494 8.5
Interest income (52) (.8) (61) (1.0)
Interest expense, net of
portion capitalized 49 .7 28 .5
Other (income)expense, net 59 .9 11 .2
2,995 45.1 2,572 44.5
Earnings before provision
for taxes on income 1,605 24.2 1,434 24.8
Provision for taxes on
income (Note 2) 477 7.2 424 7.3
NET EARNINGS $1,128 17.0 1,010 17.5
NET EARNINGS PER SHARE (Note 6)
Basic $ .84 .75
Diluted $ .82 .73
CASH DIVIDENDS PER SHARE $ .25 .22
AVG. SHARES OUTSTANDING
Basic 1,344.9 1,345.3
Diluted 1,373.4 1,374.7
See Notes to Consolidated Financial Statements
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JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited; Dollars in Millions)
Fiscal Quarter
Ended
April 4, March
29,
1999
1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $1,128 1,010
Adjustments to reconcile net earnings to
cash flows:
Depreciation and amortization of
property and intangibles 408 294
Increase in accounts receivable, trade,
less allowances (426) (195)
Increase in inventories (208) (221)
Changes in other assets and liabilities 223 311
NET CASH FLOWS FROM OPERATING ACTIVITIES 1,125 1,199
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment(298) (215)
Proceeds from the disposal of assets 2 8
Acquisition of businesses, net of cash
acquired (188) (78)
Other, principally marketable securities (215) (85)
NET CASH USED BY INVESTING ACTIVITIES (699) (370)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to shareowners (336) (296)
Repurchase of common stock (131) (347)
Proceeds from short-term debt 92 76
Retirement of short-term debt (249) (120)
Proceeds from long-term debt 9 -
Retirement of long-term debt (6) (104)
Proceeds from the exercise of stock
options 99 111
NET CASH USED BY FINANCING
ACTIVITIES (522) (680)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (51) (9)
(DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS(147) 140
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD1,927 2,753
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,780 2,893
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 the first three months of 1999
and 1998 are 29.7% and 29.6%, 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) April 4, 1999 January 3,
1999
Raw materials and supplies $ 767 770
Goods in process 476 489
Finished goods 1,720 1,594
$ 2,963 2,853
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NOTE 4 - INTANGIBLE ASSETS
(Dollars in Millions) April 4, 1999 January 3,
1999
Intangible assets $ 8,401 8,042
Less accumulated amortization 912 833
$ 7,489 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
First Quarter
Percent
1999 1998 Increase
Consumer
Domestic $ 927 840 10.4
International 801 799 .3
1,728 1,639 5.4%
Pharmaceutical
Domestic $ 1,441 1,169 23.3
International 1,035 923 12.1
2,476 2,092 18.4%
Professional
Domestic $ 1,289 1,086 18.7
International 1,145 966 18.5
2,434 2,052 18.6%
Domestic $ 3,657 3,095 18.2
International 2,981 2,688 10.9
Worldwide $ 6,638 5,783 14.8%
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NOTE 5 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
(Dollars in Millions)
OPERATING PROFIT BY SEGMENT OF BUSINESS
First Quarter
Percent
1999 1998 Change
Consumer $ 223 194 14.9
Pharmaceutical 967 827 16.9
Professional 455 431 5.6
Segments total 1,645 1,452 13.3
Expenses not allocated
to segments (40) (18)
Worldwide total $ 1,605 1,434 11.9%
SALES BY GEOGRAPHIC AREA
First Quarter
Percent
Increase
1999 1998 (Decrease)
U.S. $ 3,657 3,095 18.2
Europe 1,773 1,539 15.2
Western Hemisphere
Excluding U.S. 478 507 (5.7)
Asia-Pacific, Africa 730 642 13.7
Total $ 6,638 5,783 14.8%
NOTE 6 - EARNINGS PER SHARE
The following is a reconciliation of basic net earnings per share
to diluted net earnings per share for the three months ended April
4, 1999 and March 29, 1998:
(Shares in Millions) April 4, March 29,
1999 1998
Basic net earnings per share $ .84 .75
Average shares outstanding - basic 1,344.9 1,345.3
Potential shares exercisable under
stock option plans 71.3 73.2
Less: shares which could be repurchased
under treasury stock method (42.8) (43.8)
Adjusted average shares outstanding - diluted1,373.4 1,374.7
Diluted earnings per share $ .82 .73
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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 measurement and its components (revenue,
expenses, gains and losses) in a full set of general purpose
financial statements. The total comprehensive income for the three
months ended April 4, 1999 is $1,007 million, compared with $961
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 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.
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NOTE 9 - PENDING 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 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.
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.
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NOTE 9 - PENDING LEGAL PROCEEDINGS - Continued
The Company is involved in a number of patent, trademark and
other lawsuits incidental to its business. On April 1, 1999, the
Company announced that all pending patent litigation between U.S.
Surgical Corporation and the Company's Ethicon Endo-Surgery unit
had been settled. No money will change hands in the settlement,
which included immunity from patent suit with respect to nearly all
Ethicon Endo-Surgery and U.S. Surgical products currently on the
market, as well as current suture products of the Company's Ethicon
subsidiary and U.S. Surgical's Davis & Geck unit.
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 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.
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NOTE 10 - 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). This standard is effective for all fiscal quarters of 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 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 FAS 133 in the first quarter of 2000 and
does not expect it to have a material effect on the Company's
results of operations, cash flows or financial position.
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NOTE 11 - RESTRUCTURING AND SPECIAL CHARGES
In 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 fifteen months. Among the
initiatives supporting this plan were the closure of inefficient
manufacturing facilities, exiting certain businesses which were not
providing an acceptable return and related employee separations.
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 status of the remaining accruals is summarized as follows:
1999
Beginning Cash
Remaining
(Dollars in Millions) Accrual Outlays
Accrual
Restructuring charges:
Employee separations $ 158 8 150
Other exit costs 78 9 69
$ 236 17 219
The $161 million for employee separations reflects the
termination of approximately 5,100 employees of which 750 have been
separated as of April 4, 1999.
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Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALES AND EARNINGS
Consolidated sales for the first quarter of 1999 were $6.64
billion, an increase of 14.8% over 1998 first quarter sales of
$5.78 billion. The effect of the stronger dollar relative to
foreign currencies decreased first quarter sales by .6%. The sales
increase of 15.4% due to operations included a positive price
change effect of 1.0%.
Consolidated net earnings for the first quarter of 1999 were
$1.13 billion, compared with $1.01 billion for the same period a
year ago, an increase of 11.7%. Worldwide basic net earnings per
share for the period were $.84, compared with $.75 for the same
period in 1999, an increase of 12.0%. Worldwide diluted net
earnings per share for the period were $.82, compared with $.73 for
the same period in 1998, an increase of 12.3%.
Domestic sales for the first three months of 1999 were $3.66
billion, an increase of 18.2% over 1998 domestic sales of $3.10
billion for the same period. Sales by international subsidiaries
were $2.98 billion for the first quarter of 1999 compared with
$2.69 billion for the same period a year ago, an increase of 10.9%.
Excluding the impact of the higher value of the dollar,
international sales increased by 12.2% for the quarter.
Worldwide Consumer segment sales for the first quarter of 1999
were $1.73 billion, an increase of 5.4% versus the same period a
year ago. Domestic sales were up 10.4% while international sales
gains in local currency of 5.0% were almost entirely offset by a
negative currency impact of 4.7%. 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 strong
performances from TYLENOL Arthritis, TYLENOL PM, and TYLENOL COLD.
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During the quarter, the Company launched its NEUTROGENA line of
cosmetics. NEUTROGENA Cosmetics combine beauty and skin benefits.
In addition, the Company launched BENECOL in the United Kingdom in
both a margarine spread and a cream-cheese style product. BENECOL
contains the dietary ingredient stanol ester, which is patented for
use in reducing cholesterol. The Company has a licensing agreement
with Raisio Group of Finland for the worldwide marketing rights (ex-
Finland) to BENECOL.
The Company also completed the acquisition of the dermatological
skin care business of S.C. Johnson & Son, Inc., which includes the
AVEENO brand specialty soaps, bath, anti-itch and moisturizing
cream and lotion products.
Worldwide pharmaceutical sales of $2.48 billion for the quarter
increased 18.4% over the same period in 1998, including 23.3%
growth in domestic sales. International sales increased 12.1%.
Sales gains in local currency of 13.0% were modestly offset by a
negative currency impact of .9% This growth reflects the strong
performance of PROCRIT, for the treatment of anemia; RISPERDAL, an
antipsychotic medication; DURAGESIC, a transdermal patch for
chronic pain; LEVAQUIN, an anti-infective, and ULTRAM, an
analgesic. During the quarter, the company received European and
Canadian approval for REGRANEX, the first biologic treatment proven
to increase the incidence of healing in diabetic foot ulcers. In
the United States, the Company received FDA approval for SPORANOX
Injection, an intravenous treatment for several difficult to treat,
potentially life-threatening fungal infections.
Also in the quarter, an approvable letter was received from the
FDA for ACIPHEX (rabeprazole), a proton pump inhibitor for
gastroesophageal reflux disease (GERD), GERD maintenance and
duodenal and gastric ulcers. Eisai and Janssen Pharmaceutica, a
wholly-owned subsidiary of Johnson & Johnson, have entered into a
co-promotion alliance to market rabeprazole worldwide with the
exception of Japan and certain other territories.
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Worldwide sales of $2.43 billion in the Professional segment
represented an increase of 18.6% over the first quarter of 1998.
In local currency, worldwide sales increased 18.1% before adjusting
for a .5% positive currency impact. The 1998 acquisition of DePuy,
Inc., a leading orthopaedic products manufacturer, contributed to
the strong sales growth in the Professional segment. In addition,
strong performance was achieved by Ethicon Endo-Surgery's
laparoscopy and wound closure products; LifeScan's blood glucose
monitoring systems, and Ethicon's Mitek suture anchors and Gynecare
women's health products.
During the quarter, the Company received FDA approval to market
the Lumbar I/F Cage with VSP Spine System, an implant used to treat
degenerative disc disease by facilitating interbody fusion of the
lumbar spine. The I/F Cage represents a significant improvement
over current technology and is hailed by the surgical spine
community as truly innovative. In addition to providing anterior
column support with secure posterior fixation, it uses a unique
carbon fiber reinforced polymer material, the first of its kind to
be used in a device approved in the United States for an
orthopaedic application.
Average shares of common stock outstanding in the first three
months of 1999 were 1,344.9 million, compared with 1,345.3 million
for the same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Cash and current marketable securities increased $7 million
during the first three months of 1999 to $2,585 million at April 4,
1999. Total borrowings decreased $181 million during the first
three months of 1999 to $3,835 million. Net debt (debt net of cash
and current marketable securities) as of April 4, 1999 was 8.1% of
net capital (shareowners' equity and net debt) compared with 9.6%
at the end of 1998. Total debt represented 21.2% of total capital
(shareowners' equity and total borrowings) at quarter end compared
with 22.8% at the end of 1998.
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Additions to property, plant and equipment were $298 million for
the first three months of 1999, compared with $215 million for the
same period in 1998.
On April 22, 1999, the Board of Directors approved a 12.0%
increase in the quarterly dividend rate from 25 cents per share to
28 cents per share. The dividend is payable on June 8, 1999 to
shareowners of record as of May 18, 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.
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.
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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. The Company has substantially
completed this plan and full completion is expected by the third
quarter of 1999.
The Company has engaged additional outside consultants to examine
selected critical areas in certain of its major franchises. In
addition, the Company has contracted with independent third party
consultants 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 $144 million, on a worldwide basis, in internal and
external costs on a pre-tax basis to address its Year 2000
readiness issues. These expenditures include information system
replacement and embedded technology upgrade costs of $82 million,
supplier and customer compliance costs of $13 million and all other
costs of $49 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.
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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.
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.
This analysis of potential exposures includes both the domestic and
international operations of the Company.
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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 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,
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 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 herein under the heading
"Cautionary Factors that May Affect Future Results".
- 21 -
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 maybe 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.
- 22 -
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 information called for by this item is
incorporated herein by reference to Note 9 in the
"Notes to Consolidated Financial Statements" included
in Part I of this Report on Form 10-Q.
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 April 4, 1999.
- 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: May 14, 1999 By /s/ R. J. DARRETTA
R. J. DARRETTA
(Vice President, Finance)
Date: May 14, 1999 By /s/ C. E. LOCKETT
C. E. LOCKETT
(Corporate Controller)
- 24 -
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