1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 6, 1999
JOHNSON & JOHNSON
(Exact name of registrant as specified in its charter)
New Jersey 1-3215 22-
1024240
(State or other (Commission (I.R.S.
Employer
jurisdiction File Number)
Identification No.)
of incorporation)
One Johnson & Johnson Plaza, New Brunswick, New Jersey 08933
(Address of principal executive offices) (zip code)
Registrant's telephone number including area code: (732) 524-0400
Item 5. Other Events.
As previously reported in Registrant's Form 10-Q for the quarterly
period ended October 3, 1999, on October 6, 1999, Johnson &
Johnson ("J&J") and Centocor, Inc. ("Centocor") completed their
merger (the "Merger"), pursuant to which Centocor merged with and
into a wholly owned subsidiary of J&J. In connection with the
Merger, J&J is filing herewith certain supplemental financial
information, including the restated audited consolidated financial
statements of J&J and its subsidiaries as of January 3, 1999 and
December 27, 1997 and for each of the years in the three-year
period ended January 3, 1999, together with the related
Management's Discussion and Analysis of Financial Condition and
Results of Operations of J&J, which are being filed as Exhibit 99.2
to this Form 8-K and are incorporated herein by reference. Also
incorporated herein by reference is the independent auditors'
report filed as Exhibit 99.1 herewith.
The supplemental financial statements give retroactive effect to
the Merger, which has been accounted for as a pooling of interests
as described in Note 1 to the supplemental consolidated financial
statements. Generally accepted accounting principles do not permit
giving effect to a consummated business combination accounted for
by the pooling of interests method in financial statements that do
not include the date of consummation. The supplemental financial
statements do not extend through the date of consummation. However,
they will become the historical consolidated financial statements
of J&J after financial statements covering the date of consummation
of the Merger are issued.
The unaudited supplemental condensed consolidated financial
statements of J&J and its subsidiaries for the three months and
nine months ended October 3, 1999, including the related
Management's Discussion and Analysis of Financial Condition and
Results of Operations of J&J, are being filed as Exhibit 99.2 to
this Form 8-K and are incorporated herein by reference.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
(c) Exhibits
Exhibit No. Description of Exhibit
99.1 Form 10K for the period ended January 3, 1999
27.1 Financial Data Schedule as of January
3, 1999
99.2 Form 10Q for the period ended October 3, 1999
27.2 Financial Data Schedule as of October
3, 1999
23 Consent of Independent Accountants
SIGNATURE
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 hereunto
duly authorized.
JOHNSON & JOHNSON
Date: December 13, 1999 By: /s/ Clarence
E. Lockett
Clarence E.
Lockett
Controller
1
Overview
Record 1998 sales of $24.0 billion, an increase over 1997 of 5.1%, marked
the sixty-sixth consecutive year of positive sales growth. The Company
achieved this increase despite the impact of the stronger dollar that
depressed sales by 2.5%. During 1998, the Company completed the
acquisition of DePuy, Inc. and approved a reconfiguration plan for its
manufacturing facilities worldwide. As a result, net earnings include a
special charge of $697 million for the cost of purchased in-process
research and development (IPR&D) related to acquisitions as well as
restructuring costs related to the reconfiguration plan. The objective
of the reconfiguration plan was to enhance worldwide operating
efficiencies. For detailed discussion of this plan and IPR&D, see Notes
15 and 17. Reported net earnings decreased by 9.3% to $3.0 billion.
Prior to the effect of the special charges, net earnings increased 11.7%
over 1997 and the net income margin for 1998 was a record high of 15.4%.
The Company's investment in research and development continues to
drive sales of innovative products. In 1998, $2.34 billion or 9.7% of
sales was invested in research and development. This level of
investment, the highest in the Company's history, reflects the Company's
continued commitment in achieving significant advances in health care
through the discovery and development of innovative, knowledge based,
cost effective products that prolong and enhance the quality of life.
In 1998, the Company continued to improve operating margins. The
gross profit margin, excluding special charges, improved from 68.3% to
68.6% while selling, marketing and administrative expenses as a percent
to sales dropped from 38.4% to 37.6%.
Cash from operations in 1998 was $4.90 billion and served as the
primary source of funding to finance the capital investments of $1.55
billion, dividend distribution of $1.31 billion and the purchase of
treasury stock of $0.9 billion with the remaining cash used to partially
fund the DePuy acquisition. Cash dividends paid to shareowners in 1998
increased by 14.1% over 1997 and represented the thirty-sixth consecutive
year of dividend increases.
Total equity market capitalization was $116.6 billion or an increase
of 29.3% over 1997 while the percentage return on average shareowners'
equity, excluding the impact of special charges, was 26.8% in 1998.
The worldwide health care market continues to be transformed as
customers have become more knowledgeable and demand even greater value.
Simultaneously, the market place has become increasingly more
competitive. The Company believes that it is well positioned to meet
these challenges by providing innovative products as demonstrated by the
Company's commitment to research and development. In addition, dedicated
employees along with strong Credo values and decentralized management
structure enable the Company to provide its customers with value
creating, innovative products and services.
Sales and Earnings
In 1998, worldwide sales increased 5.1% to $24.0 billion compared to
increases of 4.9% in 1997 and 15.0% in 1996. Excluding the impact of
foreign currencies, worldwide sales increased 7.6% in 1998, 8.9% in 1997
and 16.8% in 1996.
Worldwide net earnings for 1998 including the impact of the
Restructuring and In-Process Research and Development charge were $3.0
billion, reflecting an 9.3% decrease over 1997. Worldwide net earnings
per share for 1998 equaled $2.12 per share, a decrease of 9.4% from the $
2.34 net earnings per share in 1997.
Worldwide net earnings for 1998 excluding the impact of the
Restructuring and In-Process Research and Development charges were $3.7
billion, reflecting an 11.7% increase over 1997. Excluding the impact of
these charges, worldwide net earnings per share for 1998 equaled $2.61
per share, an increase of 11.5% over the $2.34 net earnings per share in
1997. The income margin for 1998, excluding the impact of these charges
was a record 15.4%, up from 14.5% in 1997.
Worldwide net earnings for 1997 were $3.31 billion, or net earnings
per share of $2.34, representing an increase over 1996 of 14.1%. In 1996,
worldwide net earnings were $2.88 billion, or net earnings per share of
$2.05 on a split-adjusted basis, representing an increase over 1995 of
14.5%.
Average diluted shares of common stock outstanding in 1998 and 1997
were 1.41 billion compared with 1.40 billion in 1996.
Sales by domestic companies were $12.85 billion in 1998, $11.90
billion in 1997 and $10.99 billion in 1996. This represents an increase
of 8.0% in 1998, 8.3% in 1997 and 19.0% in 1996. The strong performance
of products introduced in the past few years and the continued expansion
of base businesses resulted in the sales increase in 1998.
Sales by international companies were $11.15 billion in 1998, $10.94
billion in 1997 and $10.77 billion in 1996. This represents an increase
of 1.9% in 1998, 1.5% in 1997 and 11.0% in 1996. Excluding the impact of
the foreign currency fluctuations over the past three years,
international company sales increased 7.1% in 1998, 9.6% in 1997 and
14.5% in 1996.
All geographic areas throughout the world posted solid operational
gains during 1998. Excluding the effect of exchange rate fluctuations of
U.S. dollar on foreign currencies, sales increased 10.0% in Europe, 5.9%
in the Western Hemisphere (excluding the U.S.) and 8.8% in the Asia-
Pacific, Africa regions.
The Company achieved an annual compound growth rate of 10.2% for
worldwide sales for the ten-year period since 1988 with domestic sales
growing at a rate of 10.8% and international sales growing at a rate of
9.7%. For the same ten-year period, excluding the impact of special
charges in 1998, worldwide net earnings achieved an annual growth rate of
14.2%, while earnings per share grew at a rate of 14.1%. For the last
five years, the annual compound growth rate for sales was 11.0%.
Excluding the special charges, the annual compound growth rate for net
earnings was 16.3% and the annual compound growth rate for earnings per
share was 15.0%.
Common Stock Market Prices
The Company's common stock is listed on the New York Stock Exchange under
the symbol JNJ. The approximate number of shareowners of record at year-
end 1998 was 168,900. The composite market price ranges for Johnson &
Johnson common stock during 1998 and 1997 were:
1998 1997
High Low High
Low
First quarter 76 1/2 63
3/8 62 _ 48 5/8
Second quarter 77 7/8 67
66 7/8 51 1/8
Third quarter 80 _ 68 1/4
65 7/8 55 1/8
Fourth quarter 89 _ 72 5/8
67 5/16 52 5/8
Year-end close 83 7/8 64 7/8
Cash Dividends Paid
The Company increased its dividends in 1998 for the thirty-sixth
consecutive year. Cash dividends paid were $.97 per share in 1998
compared with dividends of $.85 per share in 1997 and $.735 per share in
1996. The dividends were distributed as follows:
1998 1997 1996
First quarter $ .22 .19
.165
Second quarter .25 .22 .19
Third quarter .25 .22
.19
Fourth quarter .25 .22
.19
Total $. 97 .85
.735
On December 3, 1998, the Board of Directors declared a regular cash
dividend of $.25 per share, paid on March 9, 1999 to shareowners of
record on February 11, 1999.
The Company expects to continue the practice of paying regular cash
dividends.
Cost and Expenses
Research activities represent a significant part of the Company's
business. These expenditures relate to the development of new products,
improvement of existing products, technical support of products and
compliance with governmental regulations for the protection of the
consumer.
Worldwide costs of research activities, excluding the write-off of IPR&D,
were as follows:
(Millions of Dollars) 1998 1997 1996
Research expense $2,336 2,209 1,962
Percent increase over
prior year 5.7% 12.6% 15.4%
Percent of sales 9.7 9.7 9.0
Research expense as a percent of sales for the Pharmaceutical segment was
15.9% for 1998, 17.1% for 1997, and 15.7% for 1996 while averaging 6.1%,
5.7% and 5.6% in the other two segments.
Advertising expenses, which are comprised of television, radio and
print media, were $1.19 billion in 1998, $1.26 billion in 1997 and 1996.
Additionally, significant expenditures were incurred for promotional
activities such as couponing and performance allowances.
The Company believes that its operations comply in all material
respects with applicable environmental laws and regulations. The Company
or its subsidiaries are parties to a number of proceedings brought under
the Comprehensive Environmental Response, Compensation, and Liability
Act, commonly known as Superfund, and comparable state laws, in which
primary relief sought is the cost of past and future remediation. While
it is not feasible to predict or determine the outcome of these
proceedings, in the opinion of the Company, such proceedings would not
have a material adverse effect on the results of operations, cash flows
or financial position of the Company.
Worldwide sales do not reflect any significant degree of
seasonality; however, spending has been heavier in the fourth quarter of
each year than in other quarters. This reflects increased spending
decisions, principally for advertising and research grants.
The worldwide effective income tax rate was 28.2% in 1998, 27.8% in
1997 and 28.3% in 1996. The increase in the 1998 worldwide effective tax
rate was primarily due to the Company's charge for In-Process Research
and Development in 1998, primarily related to DePuy, which is not tax
deductible. Refer to Note 6 of the Notes to Consolidated Financial
Statements for additional information.
Distribution of Sales Revenues
The distribution of sales revenues for 1998, 1997 and 1996 were:
1998 1997 1996
Employment costs 24.0% 23.9%
24.5%
Costs of materials
and services 48.9 50.8
51.9
Depreciation and
amortization of
property and intangibles 5.4 4.7
4.7
Taxes other than payroll 6.3 6.1
5.7
Earnings reinvested
in business 7.1 9.5
8.7
Cash dividends paid 5.4 5.0
4.5
Restructuring/IPR&D 2.9 -
- -
Liquidity and Capital Resources
Cash generated from operations and selected borrowings provide the major
sources of funds for the growth of the business, including working
capital, additions to property, plant and equipment and acquisitions.
Cash and current marketable securities totaled $2.78 billion at the end
of 1998 as compared with $3.09 billion at the end of 1997.
Total unused credit available to the Company approximates $3.2
billion, including $1.2 billion of credit commitments with various
worldwide banks, $0.8 billion of which expires on October 1, 1999 and
$0.4 billion on October 6, 2003.
In 1998 the Company issued $60 million of 5.12% notes due 2003, the
proceeds of which were used for general corporate purposes. Long-term
debt includes convertible subordinated debentures issued by Centocor in
1991 and 1998. Debentures issued by Centocor in 1991 were fully retired
in April 1998. Under the terms of the 4.75% Indenture issued in February
1998 due February 2005 and following the merger with Johnson & Johnson,
bondholders are entitled to convert their debentures into approximately
5,967,000 shares of Johnson & Johnson stock at a price of $77.091per
share. After February 21, 2001 the debentures will be redeemable at the
option of the Company. The Company issued no medium term notes during
1998. At January 3, 1999, the Company had $2.29 billion remaining on its
shelf registration of $2.59 billion. A summary of borrowings can be
found in Note 4.
Total borrowings at the end of 1998 and 1997 were $4.48 billion and
$1.90 billion, respectively. The increase in borrowings was attributable
to financing the acquisition of DePuy and RETAVASE. In 1998 net debt
(debt net of cash and current marketable securities) was 10.8% of net
capital (shareowners' equity and net debt). In 1997 net cash (cash and
current marketable securities net of debt) was $1.19 billion. Total debt
represented 24.2% of total capital (shareowners' equity and total debt)
in 1998 and 12.9% of total capital in 1997. Shareowners' equity per
share at the end of 1998 was $10.13 compared with $9.25 at year-end 1997,
an increase of 9.5%. For the period ended January 3, 1999, there were no
material cash commitments.
Financial Instruments
The Company uses financial instruments to manage the impact of interest
rate and foreign exchange rate changes on earnings and cash flows.
Accordingly, the Company enters into forward foreign exchange contracts
to protect the value of existing foreign currency assets and liabilities
and to hedge future foreign currency product costs. Gains or losses on
these contracts are offset by the gain or loss on the underlying
transaction. A 10% appreciation of the U.S. Dollar from January 3, 1999
market rates would increase the unrealized value of the Company's forward
contracts by $225 million. Conversely, a 10.0% depreciation of the U.S.
Dollar from January 3, 1999 market rates would decrease the unrealized
value of the Company's forward contracts by $259 million. In either
scenario, the gain or loss on the forward contract is offset by the gain
or loss on the underlying transaction and therefore has no impact on
future earnings and cash flows.
The Company enters into interest rate and currency swap contracts to
manage the Company's exposure to interest rate changes and hedge foreign
currency denominated debt. The impact of a 1% change in interest rates
on the Company's interest rate sensitive financial instruments is
immaterial.
The Company does not enter into financial instruments for trading or
speculative purposes. Further, the Company has a policy of only entering
into contracts with parties that have at least an "A" (or equivalent)
credit rating. The counterparties to these contracts are major financial
institutions and the Company does not have significant exposure to any
one counterparty. Management believes the risk of loss is remote and in
any event would be immaterial.
Changing Prices and Inflation
Johnson & Johnson is aware that its products are used in a setting where,
for more than a decade, policymakers, consumers, and businesses have
expressed concern about the rising cost of health care. In response to
these concerns, Johnson & Johnson has a long standing policy of pricing
products responsibly. For the period 1980-1998, in the United States,
the weighted average compound annual growth rate of Johnson & Johnson
price increases for health care products (prescription and over-the-
counter drugs, hospital and professional products) was below the U.S.
Consumer Price Index (CPI) for the period.
Inflation rates, even though moderate in many parts of the world
during 1998, continue to have an effect on worldwide economies and,
consequently, on the way companies operate. In the face of increasing
costs, the Company strives to maintain its profit margins through cost
reduction programs, productivity improvements and periodic price
increases.
YEAR 2000
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 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 $125 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
$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.
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.
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".
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board 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 transaction 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 transaction 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 2001 and does
not expect it to have a material effect on the Company's results of
operations, cash flows or financial position.
Segments of Business
Financial information for the Company's three worldwide business segments
is summarized below. See Note 12 for additional information on segments
of business.
Sales Increase
(Millions of Dollars) 1998 1997 Amount Percent
Consumer $ 6,526 6,498 28 0.4%
Pharmaceutical 8,900 7,897 1,003 12.7%
Professional 8,569 8,435 134 1.6%
Worldwide total $23,995 22,830 1,165 5.1%
Operating Profit Percent of Sales
(Millions of Dollars) 1998 1998(1) 1997 1998
1997
Consumer $ 414 658 551 6.3%
8.5%
Pharmaceutical 2,933 3,132 2,572 33.0 32.6
Professional 941 1,409 1,543 11.0 18.3
Worldwide total $4,288 5,199 4,666 17.9 20.4
Expenses not
allocated to
segments (106) (106) (79) (.4) ( .3)
Earnings before taxes
on income $ 4,182 5,093 4,587 17.4% 20.1%
(1) 1998 results excluding Restructuring and In-Process Research and
Development charges.
Excluding these charges, operating profits as a percent of sales by
segment was: Consumer
10.1%, Pharmaceutical 35.2% and Professional 16.4%
(2) Prior year restated to conform to 1998 presentation according to SFAS
No. 131.
Consumer
The Consumer segment's principal products are personal care and hygienic
products, including oral and baby care products, first aid products,
nonprescription drugs, sanitary protection products and adult skin and
hair care products. Major brands include ACT Fluoride Rinse; BAND-AID
Brand Adhesive Bandages; CAREFREE Panty Shields; JOHNSON'S CLEAN & CLEAR
skin care products; IMODIUM A-D, an antidiarrheal; JOHNSON'S Baby line of
products; JOHNSON's pH 5.5 skin and hair care products; MONISTAT, a
remedy for vaginal yeast infections; MYLANTA gastrointestinal products
and PEPCID AC Acid Controller from the Johnson & Johnson Merck Consumer
Pharmaceuticals Co.; NEUTROGENA skin and hair care products; NICOTROL
smoking cessation products; o.b. Tampons; PENATEN and NATUSAN baby care
products; PIZ BUIN and SUNDOWN sun care products; REACH toothbrushes; RoC
skin care products; SHOWER TO SHOWER personal care products; STAYFREE and
SURE & NATURAL sanitary protection products; and the broad family of
TYLENOL acetaminophen products. These products are marketed principally
to the general public and distributed both to wholesalers and directly to
independent and chain retail outlets.
Consumer segment sales in 1998 were $6.53 billion, an increase of
.4% over 1997. Domestic sales increased by 2.6% while international
sales declined by 1.7%. International sales gains in local currency of
5.2% were offset by a negative currency impact of 6.9%. Consumer sales
were led by continued strength in the skin care franchise that 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. During the fourth quarter, the Company announced the signing
of a definitive agreement to acquire the dermatological skin care
business of S.C. Johnson & Son, Inc., including the AVEENO brand
specialty soaps, bath, anti-itch and moisturizing cream and lotion
products.
The 1998 special pre-tax charge for the Consumer segment was $244
million. See Note 15 for detailed discussion on the Restructuring
charges.
Consumer segment sales in 1997 were $6.50 billion, an increase of
2.1% over 1996. Sales by domestic companies accounted for 49.9% of the
total segment, while international companies accounted for 50.1%. During
1997, the Company announced a licensing agreement with Raisio Group of
Finland for the North American marketing rights (as well as a letter of
intent for the worldwide marketing rights) to a dietary ingredient,
stanol ester, which is patented for use in reducing cholesterol. The
Company also established an alliance with Takeda Chemical Industries in
Japan for the sale and distribution of OTC products beginning with
several forms of TYLENOL brand acetaminophen products.
Consumer segment sales in 1996 were $6.36 billion, an increase of
9.1% over 1995. Sales by domestic companies accounted for 49.7% of the
total segment, while international companies accounted for 50.3%. The
sales growth was led by the strong performance of TYLENOL brand products,
despite heavy competition.
Pharmaceutical
The Pharmaceutical segment represents over 50% of operating profit for
all segments.
The Pharmaceutical segment's principal worldwide franchises are in
the allergy, anti-infective, antifungal, antianemia, central nervous
system, contraceptive, dermatology, gastrointestinal, and pain management
fields. These products are distributed both directly and through
wholesalers for use by health care professionals and the general public.
Prescription drugs include DURAGESIC, (fentanyl transdermal system
sold abroad as DUROGESIC), a transdermal patch for chronic pain; EPREX
(Epoetin alfa sold in the U.S. as PROCRIT), a biotechnology derived
version of the human hormone erythropoietin that stimulates red blood
cell production; ERGAMISOL (levamisole hydrochloride), a colon cancer
drug; FLOXIN (ofloxacin) and LEVAQUIN (levofloxacin), both anti-
infectives; IMODIUM (loperamide HC1), an antidiarrheal; LEUSTATIN
(cladribine), for hairy cell leukemia; MOTILIUM (domperdone), a
gastrointestinal mobilizer; NIZORAL (ketoconazole), SPORANOX
(itraconazole) and TERAZOL (terconazole), antifungals; ORTHOCLONE OKT-3
(muromonab-CD3), for reversing the rejection of kidney, heart and liver
transplants, ORTHO-NOVUM (norethindrone/mestranol) group of oral
contraceptives; PREPULSID ( cisapride sold in the U.S. as PROPULSID), a
gastrointestinal prokinetic; REMICADE (infliximab), a novel monoclonal
antibody for treatment of certain Crohn's disease patients; RETAVASE
(reteplase), a recombinant biologic cardiology care product for the
treatment of acute myocardial infarction to improve blood flow to the
heart; RETIN-A (tretinoin), a dermatological cream for acne; RISPERDAL
(risperidone), an antipsychotic drug; and ULTRAM (tramadol
hydrochloride), a centrally acting prescription analgesic for moderate to
moderately severe pain.
Johnson & Johnson markets more than 90 prescription drugs around the
world, with 43.9% of the sales generated outside the United States.
Twenty-nine drugs sold by the Company had 1998 sales in excess of $50
million, with 18 of them in excess of $100 million.
Pharmaceutical segment sales in 1998 were $8.90 billion, an increase
of 12.7% over 1997 including 24.3% growth in domestic sales.
International sales increased .6% as sales gains in local currency of
5.4% were offset by a negative currency impact of 4.8%. Worldwide growth
reflects the strong performance of RISPERDAL, PROCRIT, DURAGESIC,
LEVAQUIN, and the oral contraceptive line of products. At year-end 1998,
the Company received approval from the FDA for LEVAQUIN (levocabastine)
for the indication of uncomplicated urinary tract infection.
Additionally, the Company completed the acquisition of the U.S. and
Canadian product rights for RETAVASE, an acute-care cardiovascular drug,
from Roche Healthcare. RETAVASE is a recombinant biologic cardiology
care product administered for the treatment of acute myocardial
infarction (heart attack) to improve blood flow to the heart.
The 1998 special pre-tax charge for the Pharmaceutical segment was
$65 million. See Note 15 for detailed discussion on the Restructuring
and IPR&D charges.
Pharmaceutical segment sales in 1997 were $7.90 billion, an increase
of 7.8% over 1996. This growth reflects the strong performance of
RISPERDAL, PROCRIT, PROPULSID, ULTRAM, DURAGESIC, and LEVAQUIN, a new
anti-infective launched in 1997. At year-end 1997, the Company received
approval from the FDA for REGRANEX (becaplermin), the first biologic
treatment proven to increase the incidence of healing in diabetic foot
ulcers.
Pharmaceutical segment sales in 1996 were $7.32 billion, an increase
of 15.2% over 1995. Domestic sales advanced 25.9% while international
sales advanced 7.2%. The worldwide growth was a result of the
outstanding performances of PROCRIT, RISPERDAL, SPORANOX, PROPULSID,
ULTRAM, and DURAGESIC.
Significant research activities continued in the Pharmaceutical
segment, increasing to $1.42 billion in 1998, or $66 million over 1997.
This represents 15.9% of 1998 Pharmaceutical sales and a compound annual
growth rate of approximately 13.6% for the five-year period since 1993.
Pharmaceutical research is led by two worldwide organizations,
Janssen Research Foundation, headquartered in Belgium and the R.W.
Johnson Pharmaceutical Research Institute, headquartered in the United
States. Additional research is conducted through collaboration with the
James Black Foundation in London, England.
Professional
The Professional segment includes suture and mechanical wound closure
products, minimally invasive surgical instruments, diagnostic products,
cardiology products, disposable contact lenses, surgical instruments,
orthopaedic joint replacement, products for wound management and
infection prevention and other medical equipment and devices. These
products are used principally in the professional fields by physicians,
nurses, therapists, hospitals, diagnostic laboratories and clinics.
Distribution to these markets is done both directly and through surgical
supply and other dealers.
Worldwide sales of $8.57 billion in the Professional segment
represented an increase of 1.6% over 1997. Domestic sales were decreased
2.4% while international sales gains in local currency of 10.7% were
partially offset by the strength of the U.S. dollar. Strong sales growth
from Ethicon Endo-Surgery's laparoscopy and mechanical closure products,
Ethicon's Mitek suture anchors and Gynecare's women's health products and
the acquisition of DePuy's orthopaedic products were offset by a decline
in sales of Cordis' coronary stents.
During the fourth quarter, the Company completed the acquisition of
DePuy, one of the world's leading orthopaedic products companies with
products in reconstructive, spinal, trauma and sports medicine for $3.7
billion. The Company also completed the acquisition of FemRx, a leader
in the development of proprietary surgical systems that enable surgeons
to perform less invasive alternatives to hysterectomy.
At year-end 1998, two new Cordis products were approved for
marketing by the FDA. The S.M.A.R.T. stent, a self-expanding, crush-
recoverable nitinol stent was approved for use in treating biliary
obstructions. Its nitinol alloy design allows for precise placement and
flexibility in reaching lesions, even through very tortuous vessels. In
addition, the NINJA balloon was approved in the U.S. for use in
angioplasty procedures.
The 1998 special pre-tax charge for the Professional segment for
restructuring was $304 million. See Notes 15 and 17 for detailed
discussion on Restructuring and IPR&D charges and Acquisitions.
Worldwide sales of $8.44 billion in 1997 in the Professional segment
represented an increase of 4.5 % over 1996. Sales growth continued to be
fueled by the excellent performance of Ethicon Endo-Surgery's minimally
invasive surgical instruments, Johnson & Johnson's orthopaedics business,
Vistakon's disposable contact lenses and LifeScan's blood glucose
monitoring systems. The Asia-Pacific and Central Europe regions
contributed significantly to the overall increase in the Professional
segment. There were also several business combinations in the
Professional segment during 1997. These included Biopsys Medical, Inc.,
a maker of products for the diagnosis and management of breast cancer;
Biosense, Inc., a leader in medical sensor technology for use in
diagnostic and therapeutic interventional procedures; Gynecare, Inc., a
maker of minimally invasive medical devices for the treatment of uterine
disorders, and Innotech, Inc., a manufacturer of equipment for high
quality prescription eyeglass lenses.
In 1996, Professional segment sales increased 19.8% over 1995, to
$8.07 billion. The sales growth included the full year impact of the
merger with Cordis Corporation in early 1996. Strong growth in the Asia-
Pacific region also contributed to the increase in the Professional
segment, as did excellent performances by LifeScan's blood glucose
monitors, Vistakon's disposable contact lenses, Ethicon Endo-Surgery's
minimally invasive surgical instruments and Johnson & Johnson
Professional's orthopaedic business.
Acquisitions and divestitures during 1998 and 1997 are described in
more detail in Note 17.
Geographic Areas
The Company further categorizes its sales by major geographic area as
presented for the years 1998 and 1997:
Sales Increase
(Millions of Dollars) 1998 1997 Amount Percent
United States $12,848 11,895 953 8.0%
Europe 6,354 5,995 359 6.0
Western Hemisphere
excluding U.S. 2,105 2,044 61 3.0
Asia-Pacific. Africa 2,688 2,896 (208) (7.2)
Worldwide total $23,995 22,830 1,165
5.1%
International sales were once again negatively impacted by the
translation of local currency operating results into U.S dollars.
Average exchange rates to the dollar have declined each year since 1995.
See Note 12 for additional information on geographic areas.
Description of Business
The Company, which employs 94,300 employees worldwide, is engaged in
the manufacture and sale of a broad range of products in the health care
field. It conducts business in virtually all countries of the world. The
Company's primary interest, both historically and currently, has been in
products related to health and well being.
The Company is organized on the principle of decentralized
management. The Executive Committee of Johnson & Johnson is the
principal management group responsible for the operations and allocation
of the resources of the Company. In addition, several Executive
Committee members serve as Chairmen of Group Operating Committees, which
are comprised of managers who represent key operations within the group,
as well as management expertise in other specialized functions. The
composition of these Committees can change over time in response to
business needs. These Committees oversee and coordinate the activities of
domestic and international companies related to each of the Consumer,
Pharmaceutical and Professional businesses. Operating management is
headed by a Chairman, President, General Manager or Managing Director who
reports directly, or through a line executive to a Group Operating
Committee.
In line with this policy of decentralization, each international
subsidiary is, with some exceptions, managed by citizens of the country
where it is located. The Company's international business is conducted by
subsidiaries manufacturing in 36 countries outside the United States and
selling in over 175 countries throughout the world.
In all its product lines, the Company competes with companies both
large and small, located in the United States and abroad. Competition is
strong in all lines without regard to the number and size of the
competing companies involved. Competition in research, involving the
development and the improvement of new and existing products and
processes, is particularly significant and results from time to time in
product and process obsolescence. The development of new and improved
products is important to the Company's success in all areas of its
business. This competitive environment requires substantial investments
in continuing research and in multiple sales forces. In addition, the
winning and retention of customer acceptance of the Company's consumer
products involves heavy expenditures for advertising, promotion, and
selling.
Five Year Summary:
(Dollars in millions except per share amounts)
Fiscal Year Ended
Jan 1, Dec 31, Dec 29, Dec 28, Jan 3,
*Jan 3,
1995 1995 1996 1997 1999 1999
EARNINGS DATA
Sales $ 15,801 18,921 21,755
22,830 23,995 23,995
Cost and expenses 13,247 15,661 17,735
18,243 19,813 18,902
Earnings before taxes 2,554 3,260
4,020 4,587 4,182 5,093
Net earnings 1,923 2,367 2,881
3,311 3,003 3,700
Earnings per diluted share $ 1.45 1.75
2.05 2.34 2.12 2.61
Cash dividends per share 0.565 0.64
0.735 0.85 0.97 0.97
BALANCE SHEET DATA
Assets $ 16,201 18,379 20,603
22,108 27,292 27,292
Long-term debt 2,431 2,339 1,465
1,181 1,729 1,729
Shareowners' equity 7,356 9,260 11,324
12,866 14,077 14,077
* Excludes IPR&D & Restructuring charges
Cautionary Factors That May Affect Future Results
This filing may contain forward-looking statements that anticipate
results based on management's plans that are subject to uncertainty. The
use of the words "expects," "plans, " "anticipates" and other similar
words in conjunction with discussions of future operations or financial
performance identifies these statements.
Forward-looking statements are based on current expectations of
future events. The Company cannot ensure that any forward-looking
statement will be accurate, although the Company believes that it has
been reasonable in its expectations and assumptions. Investors should
realize that if underlying assumptions prove inaccurate or that unknown
risks or uncertainties materialize, actual results could vary materially
from our projections. The Company assumes no obligation to update any
forward-looking statements as a result of future events or developments.
In this filing, the Company discusses in more detail various factors that
could cause actual results to differ from expectations. The Company
notes these factors as permitted by the Private Securities Litigation
Reform Act of 1995. Investors are cautioned not to place undue reliance
on such statements that speak only as of the date made. 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.
Consolidated Balance Sheet Johnson & Johnson
and Subsidiaries
At January 3, 1999 and December 28, 1997 (Dollars in Millions) (Note 1)
1998 1997
Assets
Current assets
Cash and cash equivalents (Notes 1 and 16) $ 1,994
2,839
Marketable securities (Note 1) 789
255
Accounts receivable trade, less allowances $388 (1997, $358)
3,752 3,355
Inventories (Notes 1 and 2) 2,898
2,544
Deferred taxes on income (Note 6) 1,183
833
Prepaid expenses and other receivables 870
993
Total current assets $ 11,486
10,819
Marketable securities, non-current (Note 16) 437
397
Property, plant and equipment, net (Notes 1, 3, and 15)
6,395 5,887
Intangible assets, net (Notes 1, 5 and 15) 7,364
3,266
Deferred taxes on income (Note 6) 411
581
Other assets 1,199
1,158
Total assets $ 27,292
22,108
Liabilities and Shareowners' Equity
Current liabilities
Loans and notes payable (Note 4) $ 2,753
720
Accounts payable 1,877
1,769
Accrued liabilities 3,012
2,318
Accrued salaries, wages and commissions 445
342
Taxes on income 206 226
Total current liabilities
8,293 5,375
Long-term debt (Note 4) 1,729
1,181
Deferred tax liability (Note 6) 578
175
Employee related obligations (Note 11)
1,738 1,562
Other Liabilities 877
949
Shareowners' equity
Preferred stock-without par value -
- -
(authorized and unissued 2,000,000 shares)
Common stock-par value $1.00 per share (Note 20)
1,535 1,535
(authorized 2,160,000,000 shares; issued 1,534,824,000 shares)
Note receivable from employee stock ownership plan (Note 14)
(44) (51)
Accumulated other comprehensive income (Note 8)
(322) (370)
Retained earnings 13,968
12,747
15,137
13,861
Less: common stock held in treasury, at cost (Note 20)
1,060 995
(145,560,000 and 144,864,000)
Total shareowners' equity 14,077
12,866
Total liabilities and shareowners' equity $ 27,292
22,108
See Notes to Consolidated Financial Statements
Amounts have been restated under the pooling of interests method of
accounting to include the financial results of Centocor, Inc. acquired on
October 6,1999, see Note 1.
Consolidated Statement of Earnings Johnson & Johnson and
Subsidiaries
(Dollars in Millions Except Per Share Figures) (Note 1) 1998
1997 1996
Sales to customers $23,995 22,830 21,755
Cost of products sold (1998 includes $60 of inventory write-offs
for restructuring) 7,604 7,230
7,079
Gross profit 16,391 15,600
14,676
Selling, marketing and administrative expenses 9,027 8,756
8,427
Research expense 2,336 2,209
1,962
Purchased in-process research and
development (Notes 15 and 17) 298 -
- -
Interest income (277) (213)
(149)
Interest expense, net of portion capitalized (Note 3) 129
124 133
Other expense, net 143 137
283
Restructuring charge (Note 15) 553 -
- -
12,209 11,013
10,656
Earnings before provision for taxes on income 4,182 4,587
4,020
Provision for taxes on income (Note 6) 1,179 1,276
1,138
Net earnings $ 3,003 3,311
2,882
Basic net earnings per share (Notes 1 and 19) $ 2.16 2.40
2.10
Diluted net earnings per share (Notes 1 and 19) $ 2.12
2.34 2.05
See Notes to Consolidated Financial Statements
Amounts have been restated under the pooling of interests method of
accounting to include the financial results of Centocor, Inc. acquired on
October 6,1999, see Note 1.
Consolidated Statement of Equity Johnson & Johnson
and Subsidiaries
Note Receivable
Accumulated Common
From Employee
Other Stock Treasury
Comprehensive Retained Stock Ownership
Comprehensive Issued Stock
(Dollars in Millions) (Note 1) Total Income
Earnings Plan (ESOP) Income
Amount Amount
Balance, December 31,1995 $ 9,261
9,707 (64) 198
1,535 (2,115)
Net earnings 2,882 2,882
2,882
Cash dividends paid (974) (974)
Employee compensation
and stock option plans 225 (218)
443
Repurchase of common stock (412)
(412)
Issued upon stock offering 126 70
56
Issued upon conversion of debt 106 53
53
Amendment to Sales and
Distribution Agreement (Lilly) 26 13
13
Business combinations 318 (490)
808
Other comprehensive income,
net of tax:
Currency translation
adjustment (272) (272)
Unrealized gains on securities 31 31
Other comprehensive income (241)
(241)
Total comprehensive income 2,641
Note receivable from ESOP 7 7
Balance, December 29, 1996 $11,324
11,043 (57) (43) 1,535
(1,154)
Net earnings 3,311 3,311
3,311
Cash dividends paid (1,137) (1,137)
Employee compensation
and stock option plans 300 (358)
658
Repurchase of common stock (628)
(628)
Business combinations 17 (112)
129
Other comprehensive income,
net of tax:
Currency translation
adjustment (294)
(294)
Unrealized gains (losses)
on securities (33)
(33)
Other comprehensive income (327)
(327)
Total comprehensive income 2,984
Note receivable from ESOP 6
6
Balance, December 28, 1997 $12,866 12,747 (51)
(370) 1,535 (995)
Net earnings 3,003 3,003
3,003
Cash dividends paid (1,305) (1,305)
Employee compensation
and stock option plans 378 (484)
862
Repurchase of common stock (930)
(930)
Business combinations 10 7
3
Other comprehensive income,
net of tax:
Currency translation
adjustment 89 89
Unrealized gains (losses)
on securities (41) (41)
Other comprehensive income 48
48
Total comprehensive income 3,051
Note receivable from ESOP 7
7
Balance, January 3, 1999 $14,077 13,968
(44) (322) 1,535 (1,060)
Amounts have been restated under the pooling of interests method of
accounting to include the financial results of Centocor, Inc. acquired on
October 6,1999, see Note 1.
Consolidated Statement of Cash Flows Johnson & Johnson and
Subsidiaries
(Dollars in Millions) (Note 1) 1998 1997 1996
Cash flows from operating activities
Net earnings $3,003 3,311
2,882
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization of property and intangibles
1,285 1,082 1,023
Increase in deferred taxes (272) (118)
(10)
Accounts receivable reserves 24 61
53
Purchased in-process research and development 298
- - -
Changes in assets and liabilities, net of effects from
acquisition of businesses:
Increase in accounts receivable (163) (380)
(375)
Increase in inventories (100) (180)
(246)
Increase in accounts payable and accrued liabilities 646
487 257
Decrease/(Increase) in other current and non-current assets
117 12 (46)
Increase in other current and non-current liabilities 57
121 340
Net cash flows from operating activities 4,895 4,396 3,878
Cash flows from investing activities
Additions to property, plant and equipment (1,545) (1,415)
(1,378)
Proceeds from the disposal of assets 108 72
37
Acquisition of businesses, net of cash acquired (Note 17) (3,818)
(180) (233)
Other, principally marketable securities (810) (122)
(127)
Net cash used by investing activities (6,065) (1,645)
(1,701)
Cash flows from financing activities
Dividends to shareowners (1,305) (1,137)
(974)
Repurchase of common stock (930) (628)
(412)
Proceeds from short-term debt 2,424 300
282
Retirement of short-term debt (226) (182)
(128)
Proceeds from long-term debt 535 7
126
Retirement of long-term debt (471) (504)
(496)
Proceeds from issuance of common stock - -
126
Proceeds from the exercise of stock options 274
234 170
Net cash provided by (used by) financing activities 301
(1,910) (1,306)
Effect of exchange rate changes on cash and cash equivalents
24 (69) (21)
(Decrease) increase in cash and cash equivalents (845)
772 850
Cash and cash equivalents, beginning of year (Note 1) 2,839
2,067 1,217
Cash and cash equivalents, end of year (Note 1) 1,994
2,839 2,067
Consolidated Statement of Cash Flows (con't) Johnson & Johnson and
Subsidiaries
(Dollars in Millions) (Note 1) 1998 1997 1996
Supplemental cash flow data
Cash paid during the year for:
Interest, net of portion capitalized 102 95
126
Income taxes 1,310 1,431
1,210
Supplemental schedule of noncash investing
and financing activities
Treasury stock issued for employee compensation
and stock option plans, net of cash proceeds 621
451 285
Acquisitions of businesses
Fair value of assets acquired 4,659 184
237
Fair value of liabilities assumed (including
$296 of assumed debt) (545) (4)
(4)
Net purchase price 4,114 180 233
See Notes to Consolidated Financial Statements
Amounts have been restated under the pooling of interests method of
accounting to include the financial results of Centocor, Inc. acquired on
October 6,1999, see Note 1.
1
Summary of Significant Accounting Principles
Basis of Presentation
The supplemental consolidated financial statements of Johnson & Johnson
have been prepared to give retroactive effect to the merger with Centocor
on October 6, 1999. Under the terms of the merger agreement, Centocor
shareholders received 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 to be issued total approximately 53 million shares. Generally
accepted accounting principles require giving effect to a consummated
business combination accounted for under the pooling-of-interests method
in financial statements that do not include the date of the consummation.
These financial statements do not extend through the date of the
consummation; however, they will become the historical consolidated
financial statements of Johnson & Johnson after the financial statements
covering the date of consummation of the business combination are issued.
The supplemental consolidated financial statements (the "financial
statements") reflect the combination of the historical consolidated
financial statements of Johnson & Johnson for the fiscal years ended
January 3, 1999, December 28, 1997, and December 29, 1996 with the
historical consolidated financial statements of Centocor for the fiscal
years ended December 31, 1998, 1997, and 1996 respectively.
Principles of Consolidation
The financial statements include the accounts of Johnson & Johnson and
subsidiaries. Intercompany accounts and transactions are eliminated.
Cash Equivalents
The Company considers securities with maturities of three months or less,
when purchased, to be cash equivalents.
Investments
Short-term marketable securities are carried at cost, which approximates
market value. Long-term debt securities that the Company has the ability
and intent to hold until maturity are carried at amortized cost. The
equity investments classified as available for sale are carried at
estimated fair value with unrealized gains and losses recorded as a
component of shareowners' equity. The Company also classifies certain
investments as trading securities which are carried at fair value with
the unrealized gains and losses reported in earnings. Management
determines the appropriate classification of its investments in debt and
equity securities at the time of purchase and reevaluates such
determination at each balance sheet date.
Property, Plant, and Equipment and Depreciation
Property, plant, and equipment are stated at cost. The Company utilizes
the straight-line method of depreciation over the estimated useful lives
of the assets:
Building and building equipment 20-40 years
Land and land improvements 10-20 years
Machinery and equipment 2.5-13 years
Revenue Recognition
The Company recognizes revenue from product sales when the goods are
shipped and title passes to the customer.
Inventories
Inventories are stated at the lower of cost or market determined by the
first-in, first-out method.
Intangible Assets
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. The Company continually evaluates the carrying value of
goodwill and other intangible assets. Any impairments would be
recognized when the expected future operating cash flows derived from
such intangible assets is less than their carrying value.
Financial Instruments
Gains and losses on foreign currency hedges of existing assets or
liabilities, or hedges of firm commitments, are deferred and recognized
in income as part of the related transaction.
Unrealized gains and losses on currency swaps which hedge third party
debt are classified in the balance sheet as other assets or liabilities.
Interest expense under these agreements, and the respective debt
instrument that they hedge, are recorded at the net effective interest
rate of the hedge transaction.
In the event of early termination of a currency swap contract that
hedges third party debt, the gain or loss on the swap contract is
amortized over the remaining life of the related transaction. If the
underlying transaction associated with a swap, or other derivative
contract, is accounted for as a hedge and is terminated early, the
related derivative contract is terminated simultaneously and any gains or
losses would be included in income immediately.
Advertising
Costs associated with advertising are expensed in the year incurred.
Advertising expenses worldwide, which are comprised of television, radio
and print media, were $1.19 billion in 1998, $1.26 billion in 1997 and
1996 respectively.
Income Taxes
The Company intends to continue to reinvest its undistributed
international earnings to expand its international operations; therefore
no tax has been provided to cover the repatriation of such undistributed
earnings. At January 3, 1999, and December 28,1997 the cumulative amount
of undistributed international earnings was approximately $7.0 billion
and $5.9 billion, respectively.
Net 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.
Risk and Uncertainties
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported. Actual
results are not expected to differ materially from those estimates.
Annual Closing Date
The Company follows the concept of fiscal year which ends on the Sunday
nearest to the end of the month of December. Normally each fiscal year
consists of 52 weeks, but every five or six years, as in 1998, the fiscal
year consists of 53 weeks.
Reclassification
Certain prior year amounts have been reclassified to conform with current
year presentation.
2 Inventories
At the end of 1998 and 1997, inventories were comprised of:
(Dollars in Millions) 1998 1997
Raw materials and supplies $ 776 660
Goods in process 510 430
Finished goods 1,612 1,454
$ 2,898 2,544
3 Property, Plant and Equipment
At the end of 1998 and 1997, property, plant and equipment at cost and
accumulated depreciation were:
(Dollars in Millions) 1998 1997
Land and land improvements $ 466 413
Buildings and building equipment 2,991
2,958
Machinery and equipment 5,686 5,287
Construction in progress 1,126 943
10,269 9,601
Less accumulated depreciation 3,874 3,714
$ 6,395 5,887
The Company capitalizes interest expense as part of the cost of
construction of facilities and equipment. Interest expense capitalized
in 1998, 1997 and 1996 was $72, $40 and $55 million, respectively.
Upon retirement or other disposal of fixed assets, the cost and
related amount of accumulated depreciation or amortization are eliminated
from the asset and reserve accounts, respectively. The difference, if
any, between the net asset value and the proceeds is adjusted to income.
For additional discussion on property, plant and equipment, see Note 15.
4 Borrowings
The components of long-term debt are as follows:
Eff.
Eff.
(Dollars in Millions) 1998 Rate % 1997 Rate %
4.75% Convertible Subordinated
Debentures due 2005 (5) $ 460 4.75% -
- -
8.72% Debentures due 2024 300 8.72
300 8.72% Debentures due 2023
250 6.73 250 6.73
7 3/8% Notes due 2002 199 7.49
199 7.49
8.25% Euro Notes due 2004 199 8.37
199 8.37
6.75% Convertible Subordinated
Debentures due 2001 - -
55 6.75
11 1/4% Italian Lire Notes
due 1998 (1) - -
115 4.88
5% Deutsche Mark Notes
due 2001 (3) 107 1.98 101
1.98
5.12% Notes due 2003 (4) 60 0.82
- - -
4 1/2% Currency Indexed Notes
due 1998 (1) - -
72 5.26
8.18% to 8.25% Medium
Term Notes due 1998 - -
65 8.23
Industrial Revenue Bonds 50 5.28
57 5.77
Other, principally international 139
- - 36 -
1,764 6.25 (2) 1,449
6.96 (2)
Less current portion 35 268
$ 1,729 1,181
The Company has access to substantial sources of funds at numerous banks
worldwide. Total unused credit available to the Company approximates
$3.2 billion, including $1.2 billion of credit commitments with various
worldwide banks, $800 million of which expire on October 1, 1999 and $400
million on October 6, 2003. Interest charged on borrowings under the
credit line agreements is based on either bids provided by the banks, the
prime rate or London Interbank Offered Rates (LIBOR), plus applicable
margins. Commitment fees under the agreement are not material.
The Company's shelf registration filed with the Securities and
Exchange Commission enables the Company to issue up to $2.59 billion of
unsecured debt securities, and warrants to purchase debt securities,
under its medium term note (MTN) program. No MTN's were issued during
1998. At January 3, 1999 the Company had $2.29 billion remaining on its
shelf registration.
In 1998 the Company issued $60 million of 5.12% notes due 2003, the
proceeds of which were used for general corporate purposes. Long-term
debt includes convertible subordinated debentures issued by Centocor in
1991 and 1998. Debentures issued by Centocor in 1991 were fully retired
in April, 1998. Under the terms of the 4.75% Indenture issued in
February 1998 due February 2005 and following the merger with Johnson &
Johnson, bondholders are entitled to convert their debentures into
approximately 5,967,000 shares of Johnson & Johnson stock at a price of
$77.091per share. After February 21, 2001 the debentures will be
redeemable at the option of the Company.
Short-term borrowings and current portion of long-term debt amounted
to $2.7 billion at the end of 1998. These borrowings are composed of
$2.2 billion U.S. commercial paper, at an average rate of 5.0% and $0.5
billion of local borrowings, principally by international subsidiaries.
Aggregate maturities of long-term obligations for each of the next
five years commencing in 1999 are:
After
(Dollars in million) 1999 2000 2001 2002 2003 2003
$35 31 137 214 80 1267
(1) The principal amounts of these debts issues include the effect of
foreign currency movements. Such debt was converted to fixed or floating
rate U.S. dollar liabilities via interest rate and currency swaps.
Unrealized currency gains (losses) on currency swaps are not included in
the basis of the related debt transactions and are classified in the
balance sheet as other assets (liabilities).
(2) Weighted average effective rate.
(3) Represents 5% Deutsche Mark notes due 2001 issued by a Japanese
subsidiary and converted to a 1.98% fixed rate yen note via an interest
rate and currency swap.
(4) Represents 5.12% U.S. Dollar notes due 2003 issued by a Japanese
subsidiary and converted to a 0.82% fixed rate yen note via an interest
rate and currency swap.
(5) Represents 4.75% convertible subordinated debt issued by Centocor
prior to the merger with Johnson & Johnson. The debentures are
convertible by the holders into approximately 5,967,000 shares of Johnson
& Johnson stock at a conversion price of $77.091 per share. After
February 21, 2001 the debentures will be redeemable at the option of the
Company. These bonds are due February 2005.
5 Intangible Assets
At the end of 1998 and 1997, the gross and net amounts of intangible
assets were:
(Dollars in Millions) 1998 1997
Goodwill - gross $4,151 2,198
Less accumulated amortization 331 241
Goodwill - Net $3,820 1,957
Patents and trademarks - gross 1,760 1,079
Less accumulated amortization 351 262
Patents & trademarks - Net $1,409 817
Other Intangibles - gross $2,296 613
Less accumulated amortization 161 121
Other Intangibles - Net $2,135 492
Total Intangible assets - gross $8,207 3,890
Less accumulated amortization 843 624
Total intangible assets - net $7,364 3,266
The weighted average amortization periods for goodwill, patents and
trademarks and other intangibles are 32 years, 21 years and 18 years,
respectively. For additional discussion on intangible assets, see Note
15.
6 Income Taxes
The provision for taxes on income consists of:
(Dollars in Millions) 1998 1997 1996
Currently payable:
U.S. taxes $ 991 953 674
International taxes 485 455 487
1,476 1,408
1,161
Deferred:
U.S. taxes (180) (126) 8
International taxes (117) (6) (31)
(297) (132) (23)
$1,179 1,276 1,138
Deferred income taxes are recognized for tax consequences of "temporary
differences" by applying enacted statutory tax rates, applicable to
future years, to differences between the financial reporting and the tax
basis of existing assets and liabilities.
Temporary differences and carryforwards for 1998 are as follows:
Deferred Tax
(Dollars in Millions) Asset Liability
Employee benefit obligations $ 546
- -
Depreciation - (329)
Non-deductible intangibles - (851)
International R&D capitalized for tax 150 -
Reserves & liabilities 609 -
Income reported for tax purposes 231 -
Miscellaneous international 168 (276)
Loss carryforwards 250 -
Miscellaneous U.S. 439 -
Total deferred income taxes $2,393 (1,456)
The difference between the net Deferred Tax on income per the balance
sheet and the net Deferred Tax above is reflected in Taxes on Income. A
comparison of income tax expense at the federal statutory rate of 35% in
1998, 1997 and 1996, to the Company's effective tax rate is as follows:
(Dollars in Millions) 1998 1997 1996
U.S. $2,522 2,853 2,232
International 1,660 1,734 1,788
Earnings before taxes on income: $4,182 4,587
4,020
Statutory taxes 1,464 1,605
1,407
Tax rates:
Statutory 35.0% 35.0% 35.0%
Puerto Rico and Ireland operations (5.5) (5.7)
(6.3)
Research tax credits (0.3) (0.3) (0.3)
Domestic state and local 1.0 1.0 1.6
International subsidiaries excluding Ireland (3.3) (2.7)
(2.0)
IPR&D 1.3 - -
All other 0.1 0.5 0.3
Effective tax rate 28.2% 27.8% 28.3%
The increase in the 1998 worldwide effective tax rate was primarily due
to the Company's purchased IPR&D charge. During 1998, the Company had
subsidiaries operating in Puerto Rico under a tax incentive grant
expiring December 31, 2007. In addition, the Company has subsidiaries
manufacturing in Ireland under an incentive tax rate effective through
the year 2010.
7 International Currency Translation
For translation of its international currencies, the Company has
determined that the local currencies of its international subsidiaries
are the functional currencies except those in highly inflationary
economies, which are defined as those which have had compound cumulative
rates of inflation of 100% or more during the past three years.
In consolidating international subsidiaries, balance sheet currency
effects are recorded as a separate component of shareholders' equity.
This equity account includes the results of translating all balance sheet
assets and liabilities at current exchange rates, except for those
located in highly inflationary economies, principally Latin America,
which are reflected in operating results.
An analysis of the changes during 1998 and 1997 for cumulative currency
translation adjustments is included in Note 8.
Net currency transaction and translation gains and losses included in
other expense were after-tax losses of $15 million in 1998, after-tax
losses of $27 million in 1997 and after-tax gains of $2 million in 1996.
8 Accumulated Other Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" that the Company adopted in the first quarter of 1998. SFAS 130
requires presentation of comprehensive income and its components in the
financial statements.
Components of other comprehensive income/(loss) consist of the
following:
Accumulated
Foreign Unrealized Other
Currency Gains/(Losses) Comprehensive
(Dollars in millions) Translation on Securities
Income/(Loss)
December 31, 1995 $ 155 43 198
1996 change (272) 31 (241)
December 29, 1996 (117) 74 (43)
1997 change (294) (33) (327)
December 28, 1997 (411) 41 (370)
1998 change 89 (41) 48
January 3, 1999 $ (322) -
(322)
The change in unrealized gains/(losses) on marketable securities
during 1998 includes reclassification adjustments of $48 million of
losses realized from the write down of marketable securities and the
associated tax benefit was $15 million. The tax effect on the components
of other comprehensive income are benefits of $19 million and $21 million
in 1998 and 1997, respectively and expense of $16 million in 1996 related
to unrealized gains (losses) on Securities.
The currency translation adjustments are not currently adjusted for
income taxes as they relate to indefinite investments in non-US
subsidiaries.
9 Rental Expense and Lease Commitments
Rentals of space, vehicles, manufacturing equipment and office and data
processing equipment under operating leases amounted to approximately
$243 million in 1998, $238 million in 1997 and $240 million in 1996.
The approximate minimum rental payments required under operating leases
that have initial or remaining noncancellable lease terms in excess of
one year at January 3, 1999 are:
After
(Dollars in Millions) 1999 2000 2001 2002 2003 2003
Total
$82 66 47 39 33 87 354
Commitments under capital leases are not significant.
10 Common Stock, Stock Options Plans and Stock Compensation Agreements
At January 3, 1999 the Company had twelve stock-based compensation plans.
Under the 1995 Employee Stock Option Plan, the Company may grant options
to its employees for up to 56 million shares of common stock. The shares
outstanding are for contracts under the Company's 1986, 1991 and 1995
Employee Stock Option Plans, the 1997 Non-Employee Director's Plan and
the Mitek, Cordis, Biosense, Gynecare and Centocor Stock Option plans.
Stock options expire ten years from the date they are granted and vest
over service periods that range from one to six years. Shares available
for future grants amounted to 15.0 million, 22.7 million and 32.9 million
in 1998, 1997 and 1996, respectively.
A summary of the status of the Company's stock option plans as of
January 3, 1999, December 28, 1997and December 29,1996 and changes during
the years ending on those dates, is presented below:
Options Weighted Average
(Shares in Thousands) Outstanding* Exercise Price
Balance at December 31, 1995 81,600
24.72
Options granted 10,599 44.27
Options exercised (8,185)
16.12
Options cancelled/forfeited (2,409)
29.30
Balance at December 29, 1996 81,605
27.99
Options granted 13,053 60.40
Options exercised (11,157)
16.76
Options cancelled/forfeited (2,240)
36.44
Balance at December 28, 1997 81,261
34.51
Options granted 10,852
78.20
Options exercised (11,414)
18.65
Options cancelled/forfeited (2,304)
44.92
Balance at January 3, 1999 78,395
42.55
* Adjusted to reflect the 1996 two-for-one split
The Company applies the provision of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," that calls for
companies to measure employee stock compensation expense based on the
fair value method of accounting. However, as allowed by the Statement,
the Company elected continued use of Accounting Principle Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," with pro
forma disclosure of net income and earnings per share determined as if
the fair value method had been applied in measuring compensation cost.
Had the fair value method been applied, net income would have been
reduced by $77 million or $.05 per share in 1998 and $35 million or $.02
per share in 1997. In 1996, net income would have been reduced by $21
million or $.01 earnings per share. These calculations only take into
account the options issued since January 1, 1995. The average fair value
of options granted was $19.62 in 1998, $17.50 in 1997 and $13.37 in 1996.
The fair value was estimated using the Black-Scholes option pricing
model based on the weighted average assumptions of:
1998 1997 1996
Risk-free rate 4.52% 5.89% 6.11%
Volatility 22.0% 21.5% 18.2%
Expected life 5 yrs 5.3 yrs 7yrs
Dividend yield 1.30% 1.43% 1.48%
The following table summarizes stock options outstanding and exercisable
at January 3, 1999:
(Shares in Thousands) Outstanding
Exercisable
Average Average
Exercise Average Exercise Exercise
Price Range Options Life (a) Price Options
Price
$8.00-$22.28 12,928 3.2 $ 18.64
11,494 $18.23
$22.32-$42.86 22,850 4.7 24.96
18,123 24.66
$43.13-$59.88 21,635 7.3 46.87
7,508 45.27
$60.13-$83.72 20,982 9.3 71.92
184 71.89
$8.00-$83.72 78,395 6.4 $ 42.55
37,309 $27.06
(a) Average contractual life remaining in years
11 Employee Related Obligations
At the end of 1998 and 1997, employee related obligations were:
(Dollars in Millions) 1998 1997
Post retirement benefits $767 753
Post employment benefits 144 166
Unfunded pension liabilities 677 517
Certificates of extra compensation 150 126
Employee related obligations $1,738 1,562
12 Segments of Business and Geographic Areas
Segments of Business (1)
Sales to Customers (2)
(Dollars in Millions) 1998 1997
1996
Consumer - Domestic $ 3,325 3,240
3,166
International 3,201 3,258 3,198
Total 6,526 6,498
6,364
Pharmaceutical - Domestic 4,993 4,015
3,442
International 3,907 3,882 3,881
Total 8,900 7,897
7,323
Professional - Domestic 4,530 4,640
4,378
International 4,039 3,795 3,690
Total 8,569 8,435
8,068
Worldwide total $23,995 22,830
21,755
Operating Profit (3) Identifiable
Assets
(Dollars in Millions) 1998 1997(5) 1996 1998
1997 1996
Consumer $ 414 551 346
4,645 4,745 4,874
Pharmaceutical 2,933 2,572 2,426 7,523
6,324 5,922
Professional 941 1,543 1,406
12,856 7,773 7,505
Segments total 4,288 4,666 4,178
25,024 18,842 18,301
Expenses not allocated
to segments (4) (106) (79) (158)
General corporate 2,268
3,266 2,050
Worldwide total $ 4,182 4,587 4,020
27,292 22,108 20,351
Additions to Property, Depreciation
and
Plant & Equipment Amortization
(Dollars in Millions) 1998 1997 1996
1998 1997 1996
Consumer $ 268 267 294 273 265
257
Pharmaceutical 600 484 450 352
282 279
Professional 627 573 594 629
495 446
Segments total 1,495 1,324 1,338
1,254 1,042 982
General corporate 50 91 40 31
40 41
Worldwide total $ 1,545 1,415 1,378
1,285 1,082 1,023
Geographic Areas [2]
Sales to Customers (2) Long-Lived
Assets (3)
(Dollars in Millions) 1998 1997 1996 1998
1997 1996
United States $12,848 11,895 10,986
8,619 5,728 5,268
Europe 6,354 5,995 6,187
4,135 2,390 2,480
Western Hemisphere
excluding U.S. 2,105 2,044 1,926
429 457 441
Asia-Pacific, Africa 2,688 2,896 2,656
402 384 435
Segments total 23,995 22,830 21,755
13,585 8,959 8,624
General corporate 262
250 230
Other non long-lived assets
13,445 12,899 11,497
Worldwide total $23,995 22,830 21,755
27,292 22,108 20,351
[1] See Management's Discussion and Analysis for a description of the
segments in which the Company does business.
[2] Export sales and intersegment sales are not significant. No single
customer or country represents 10% or more of total sales.
[3] Prior years restated to conform to 1998 presentation according to
SFAS No. 131.
[4] Amounts not allocated to segments incude interest income/expense,
minority intersts and general corporate income and expense.
[5] 1998 results excluding Restructuring and In-Process Research and
Development charges: Consumer $658, Pharmaceutical $3,132 and
Professional $1,409. See Note 15 for details of Restructuring and IPR&D
charges by segment.
13 Retirement and Pension PlansThe Company sponsors various retirement
and pension plans, including defined benefit, defined contribution and
termination indemnity plans, which cover most employees worldwide. The
Company also provides postretirement benefits, primarily health care to
all domestic retired employees and their dependents.
Most international employees are covered by government-sponsored programs
and the cost to the company is not significant.
Retirement plan benefits are primarily based on the employee's
compensation during the last three to five years before retirement and
the number of years of service. The Company's objective in funding its
domestic plans is to accumulate funds sufficient to provide for all
accrued benefits. International subsidiaries have plans under which funds
are deposited with trustees, annuities are purchased under group
contracts, or reserves are provided.
In certain countries other than the United States, the funding of
pension plans is not a common practice as funding provides no economic
benefit. Consequently, the Company has several
pension plans which are not funded.
The Company does not fund retiree health care benefits in advance
and has the right to modify these plans in the future.
Effective December 29, 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures
about Pensions and Postretirement Benefits" which standardizes the
disclosure
requirements for pensions and other postretirement benefits. The
Statement addresses disclosure only. It does not address liability
measurement or expense recognition. There was no effect on financial
position or net income as a result of adopting SFAS No. 132.
Net periodic benefit costs for the Company's defined benefit retirement
plans and other benefit plans for 1998, 1997 and 1996 include the
following components:
Retirement Plans Other
Benefit Plans
(Dollars in Millions) 1998 1997 1996 1998 1997 1996
Service cost $185 166 159 20
17 16
Interest cost 254 239 230 50
46 46
Expected return on plan assets (291) (256) (231)
(14) (3) (3)
Amortization of prior service cost 17 16 14
2 1 1
Amortization of net transition asset (14) (13) (13)
- - - -
Recognized actuarial (gain) / loss (24) (19) 2
8 (6) (1)
Curtailments and settlements 2 1 -
- - - -
Net periodic benefit cost $129 134 161
66 55 59
The net periodic cost attributable to domestic retirement plans included
above was $40 million in 1998, $50 million in 1997, and $84 million in
1996.
The following tables provide the weighted-average assumptions used to
develop net periodic benefit cost and the actuarial present value of
projected benefit obligations:
Retirement Plans Other
Benefit Plans
Domestic Benefit Plans 1998 1997 1996 1998 1997 1996
Weighted average discount rate 6.75% 7.25% 7.75% 6.75%
7.25% 7.75%
Expected long-term rate of
return on plan assets 9.0 9.0 9.0
9.0 9.0 9.0
Rate of increase in
compensation levels 5.0 5.0 5.5 5.0
5.0 5.5
Retirement Plans Other
Benefit Plans
International Benefit Plans 1998 1997 1996 1998 1997
1996
Weighted average discount rate 5.50% 6.25% 6.50% 6.00%
7.00% 7.25%
Expected long-term rate of
return on plan assets 7.75 7.75 7.75 -
- - -
Rate of increase in
compensation levels 3.50 4.25 4.75 4.25
5.00 5.00
Health care cost trends are projected at annual rates grading from 10%
for employees under age 65 and 7% for employees over age 65 down to 5%
for both groups by the year 2008 and beyond. The effect of a 1% change in
these assumed cost trends on the accumulated postretirement benefit
obligation at the end of 1998 would be a $99 million increase or an $88
million decrease and the effect on the service and interest cost
components of the net periodic postretirement benefit cost for 1998 would
be a $12 million increase or a $10 million decrease.
The following tables set forth the change in benefit obligations and
change in plan assets at year-end 1998 and 1997 for the Company's defined
benefit retirement plans and other postretirement plans:
(Dollars in Millions) Retirement Plans Other
Benefit Plans
1998 1997 1998 1997
Change in Benefit Obligation:
Benefit obligation - beginning of year $3,704 3,412
691 591
Service cost 185 166 20
17
Interest cost 254 239 50
46
Plan participant contributions 11 10
- - -
Amendments 13 27 -
- -
Actuarial loss (gain) 325 123 -
66
Curtailments & settlements (7) 1
- - -
Total benefits paid (203) (175)
(33) (28)
Effect of exchange rates 33 (99)
(2) (1)
Benefit obligation - end of year $4,315 3,704
726 691
Change in Plan Assets:
Plan assets at fair value - beginning of year $3,694 3,330
46 41
Actual return on plan assets 606 547
14 8
Company contributions 45 35
29 24
Plan participant contributions 11 10
- - -
Acquisitions (4) - -
- -
Benefits paid from plan assets (193) (158)
(32) (27)
Effect of exchange rates 14 (70)
- - -
Plan assets at fair value - end of year $4,173 3,694
57 46
Amounts recognized in the Company's balance sheet consist of the
following:
Retirement Plans Other
Benefit Plans
(Dollars in Millions) 1998 1997 1998 1997
Plan assets less than projected
benefit obligation $(142) (10) (668)
(645)
Unrecognized actuarial gains (511) (543)
(117) (107)
Unrecognized prior service cost 98 102
(11) (8)
Unrecognized net transition asset (37) (51) -
- -
Total recognized in the consolidated
balance sheet $(592) (502) (796)
(760)
Retirement Plans Other Benefit
Plans
(Dollars in Millions) 1998 1997 1998 1997
Book reserves $(726) (592) (796)
(760)
Prepaid benefits 109 75
- - -
Intangible assets 25 15 -
- -
Total recognized in consolidated
balance sheet $(592) (502) (796)
(760)
Plans with accumulated benefit obligations in excess of plan assets
consist of the following:
Retirement Plans Other
Benefit Plans
(Dollars in Millions) 1998 1997 1998 1997
Accumulated benefit obligation $(558) (435)
(696) (691)
Projected benefit obligation $(723) (566)
- - -
Plan assets at fair value $ 162 126
57 46
14 Savings Plan
The Company has voluntary 401(k) savings plans designed to enhance the
existing retirement programs covering eligible employees. The Company
matches a percentage of each employee's contributions consistent with the
provisions of the plan for which he/she is eligible.
In the U.S. salaried plan, one-third of the Company match is paid in
Company stock under an employee stock ownership plan (ESOP) except for
Centocor employees for which the match for 1998 was 100% of Company
stock. In 1990, to establish the ESOP, the Company loaned $100 million to
the ESOP Trust to purchase shares of the Company stock on the open
market. In exchange, the Company received a note, the balance of which
is recorded as a reduction of shareowners' equity.
Total Company contributions to the plans were $65 million in 1998, $59
million in 1997, and $51 million in 1996.
15 Restructuring and In-Process Research and Development 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 eighteen 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
closure of these facilities represented approximately 10% of the
Company's manufacturing capacity.
The estimated cost of this plan is $613 million which has been
reflected in cost of sales ($60 million) and restructuring charge ($553
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 cash flows triggering the asset impairment. The amount of
impairment of such assets was calculated using discounted cash flows or
appraisals.
Special charges recorded during 1998 were as follows:
Beginning 1998 Remaining
(Dollars in Millions) Accrual Cash
Outlays Accrual
Restructuring charges:
Employee separations $ 161 3
158
Other exit costs:
Distributor terminations 17
17
Dismantle/disposal costs 15
15
Lease terminations 21
21
Customer compensation 11
11
Other costs 14 14
Total other costs 78 -
78
$ 239 3
236
Assets:
Machinery & equipment $ 215
Inventory 60
Buildings 32
Leasehold improvements 15
Total asset impairments $ 322
Intangible assets:
Menlo Care $ 26
Innotech 20
Other 6
Total intangible assets $ 52
Total restructuring plan $ 613
In process R&D 298
Total special charges $ 911
The Menlo Care intangible asset was related to the Aquavene biomaterial
technology that was no longer in use with all other intangible assets
related to products that were abandoned by the Company due to the low
margin and/or 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. The headcount
reduction for the year ended January 3, 1999 was approximately 225
employees.
In connection with the businesses acquired in 1998, the Company
recognized charges for in-process research and development (IPR&D) in the
amount of $298 million related primarily to the DePuy and RETAVASE
acquisitions. The value of the IPR&D projects was calculated with the
assistance of third party appraisers and was based on the estimated
percentage completion of the various research and development projects
being pursued using cash flow projections discounted for the risk
inherent in such projects. For additional discussion on acquisitions, see
Note 17.
The special charges impacted the business segments as follows: the
special pre-tax charge for the Consumer segment was $244 million. This
charge reflects $85 million for severance costs associated with the
termination of approximately 2,550 employees; $133 million for the write-
down of impaired assets and $26 million for other exit costs.
Acquisitions within the Pharmaceutical business segment resulted in a
$134 million write-off of purchased IPR&D. Additionally, the
Pharmaceutical business segment recorded $65 million of the special
charge representing $18 million for severance costs associated with the
termination of approximately 250 employees and $47 million for the write-
down of impaired assets. Acquisitions within the Professional business
segment resulted in a $164 million write-off of purchased IPR&D.
Additionally, the Professional business segment recorded other special
charges of $304 million. This charge included $58 million for severance
costs associated with the termination of approximately 2,300 employees;
$194 million for the write-down of impaired assets and $52 million for
other exit costs.
16 Financial Instruments
Derivative Financial Instrument Risk
The Company uses derivative financial instruments to manage the impact of
interest rate and foreign exchange rate changes on earnings and cash
flows. The Company does not enter into financial instruments for trading
or speculative purposes.
The Company has a policy of only entering into contracts with
parties that have at least an "A" (or equivalent) credit rating. The
counterparties to these contracts are major financial institutions and
the Company does not have significant exposure to any one counterparty.
Management believes the risk of loss is remote and in any event would be
immaterial.
Interest Rate and Foreign Exchange Risk Management
The Company uses interest rate and currency swaps to manage interest rate
and currency risk primarily related to borrowings. Interest rate and
currency swap agreements that hedge third party debt mature with these
borrowings and are described in Note 4.
The Company enters into forward foreign exchange contracts maturing
within five years to protect the value of existing foreign currency
assets and liabilities and to hedge future foreign currency product
costs. The Company has forward exchange contracts outstanding at year-
end in various currencies, principally in U.S. Dollars, Belgian Francs
and Swiss Francs. In addition, the Company has currency swaps
outstanding, principally in U.S. Dollars, Belgian Francs and French
Francs. Unrealized gains and losses, based on dealer quoted market
prices, are presented in the following table:
1998
Notional
(Dollars in Millions) Amounts Gains Losses
Forwards $6,848 94 227
Currency swaps 3,422 25 89
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents and current and non-
current marketable securities approximates fair value of these
instruments. In addition the carrying amount of long-term investments,
long-term debt, interest rate and currency swaps (used to hedge third
party debt) approximates fair value of these instruments for 1998 and
1997.
The fair value of current and non-current marketable securities,
long-term debt and interest rate and currency swap agreements was
estimated based on quotes obtained from brokers for those or similar
instruments. The fair value of long-term investments was estimated based
on quoted market prices at year-end.
Concentration of Credit Risk
The Company invests its excess cash in both deposits with major banks
throughout the world and other high quality short-term liquid money
market instruments (commercial paper, government and government agency
notes and bills, etc.). The Company has a policy of making investments
only with commercial institutions that have at least an "A" (or
equivalent) credit rating. These investments generally mature within six
months and the Company has not incurred any related losses.
The Company sells a broad range of products in the health care field
in most countries of the world. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base. Ongoing credit
evaluations of customers' financial condition are performed and,
generally, no collateral is required. The Company maintains reserves for
potential credit losses and such losses, in the aggregate, have not
exceeded management's expectations.
17 Mergers & Acquisitions
On October 6, 1999, Johnson & Johnson and Centocor, Inc. completed the
merger between the two companies. This transaction was accounted for as
a pooling of interests. Centocor had approximately 71 million shares
outstanding (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
total approximately 53 million shares. Holders of Centocor common stock
received 0.6390 of a share of Johnson & Johnson common stock for each
share of Centocor common stock, valued at $95.47 per share.
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.
As described in Note 1, these financial statements have been
restated to give effect to Johnson & Johnson's merger with Centocor. The
only adjustment to Centocor's historical financial statements has been
the reflection of income tax expense as if the companies had been
combined for all periods presented. For 1998, 1997 and 1996, the revenue
and net earnings/(losses) of Centocor combined with Johnson & Johnson are
$338, $201 and $135 million respectively, for revenue and ($56), $8 and
($5) million respectively, of (losses)/earnings.
During 1998, certain businesses were acquired for $4.1 billion and
the purchase method of accounting was employed. The most significant
1998 acquisition was DePuy, Inc., a leading orthopaedics company.
DePuy's product lines include reconstructive products (implants for hips,
knees and extremities), spinal implants, trauma repair and sports-related
injury products. Additionally, the Company completed the acquisition of
the U.S. and Canadian product rights for RETAVASE, an acute-care
cardiovascular drug, from Roche Healthcare. RETAVASE is a recombinant
biologic cardiology care product administered for the treatment of acute
myocardial infarction (heart attack) to improve blood flow to the heart.
It is among the class of fibrinolytic drugs known as "clot busters."
RETAVASE received marketing authorization from the FDA in October 1996
and was launched in January 1997.
The excess of purchase price over the estimated fair value amounted
to $3.3 billion. This amount has been allocated to identifiable
intangibles and goodwill. Approximately $298 million has been identified
as the value of IPR&D associated with the acquisitions. The majority of
the value is associated with DePuy and RETAVASE projects. The DePuy
projects focus on spinal and hip implants, which were near regulatory
approval as of the acquisition date. The RETAVASE project represents
planned development of a combination cardiovascular therapy employing the
fibrinolytic drug RETAVASE in combination with REOPRO. The remaining
effort to complete these projects is not expected to be material.
The value of the IPR&D projects was calculated with the assistance
of third party appraisers and was based on the estimated percentage
completion of the various research and development projects being pursued
using cash flow projections discounted for the risk inherent in such
projects. The discount rates used ranged between 13% and 20%.
Management is primarily responsible for estimating the fair value of
the IPR&D.
The Company is in the process of finalizing a plan to reconfigure
and integrate DePuy's operations, which will be completed within one year
of acquisition. This effort is expected to result in employee
termination, facility closures and other related costs, which will be
recorded as an adjustment to the opening balance sheet and is not
expected to be material. Pro forma information is not provided since the
impact of the acquisition does not have a material effect on the
Company's results of operations, cash flows or financial position.
During 1997, certain businesses were merged with Johnson & Johnson
at a value, net of cash, of $737 million. The mergers have been
accounted for as a pooling of interests; prior period financial
statements have not been restated since the effect of these mergers would
not materially effect previously issued financial statements. The 1997
mergers included Biopsys Medical, Inc., Biosense, Inc. and Gynecare, Inc.
Biopsys Medical Inc. is an innovator and marketer of the MAMMOTOME Breast
Biopsy System. Biosense, Inc. is a leader in developing medical sensor
technology and is developing several applications that will facilitate a
variety of diagnostic and therapeutic interventional and cardiovascular
procedures. Gynecare, Inc. is the developer and marketer of innovative,
minimally invasive medical devices utilized in the treatment of uterine
disorders.
Certain businesses were acquired for $180 million during 1997 and
the purchase method of accounting was employed. The most significant
1997 acquisition was Innotech, Inc., a developer and marketer of eyeglass
lens products.
The excess of purchase price over the estimated fair value of 1997
acquisitions amounted to $157 million. This amount has been allocated to
identifiable intangibles and goodwill. Pro forma information is not
provided for in 1997, as the impact of the acquisition does not have a
material effect on the Company's results of operations, cash flows or
financial position.
Divestitures in 1998 and 1997 did not have a material effect on the
Company's results of operations, cash flows or financial position.
18 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.
The Company is involved in a number of patent, trademark and other
lawsuits incidental to its business. Among those is a patent
infringement action in which U.S. Surgical Corporation seeks substantial
damages and an injunction based on what it alleges are infringing trocar
surgical instrument sales by the Company's Ethicon Endo-Surgery unit.
The Company disputes infringement as well as the validity and
enforceability of the asserted patents and is vigorously contesting the
claims. This case was subsequently settled with no montary payment being
assessed or received.
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.
In December 1998, Ortho Biotech was found in a separate arbitration
not to have rights in what Amgen describes as its second-generation EPO
product, known as Novel Erythropoiesis Stimulating Protein, or NESP. The
effect of the ruling is to allow Amgen's NESP product, if approved, to
compete with Ortho's EPO product in the U.S. non-dialysis market and in
all markets overseas, except China and Japan, which are reserved to Kirin-
Amgen. Currently, Ortho is Amgen's exclusive licensee for EPO in U.S. non-
dialysis markets and in all ex-U.S. markets except China and Japan.
Because NESP is still in clinical trials, it is not possible to predict
the impact on Ortho's marketing of EPO.
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.
19 Earnings Per Share
The following is a reconciliation of basic net earnings per share to
diluted net earnings per share for the years ended January 3, 1999,
December 28, 1997 and December 29, 1996:
(Shares in Millions) 1998 (1) 1997
1996
Basic earnings per share $ 2.16 2.40
2.10
Average shares outstanding - basic 1,389.8 1,380.6
1,375.1
Potential shares exercisable
under stock option plans 68.8 70.5
74.2
Less: shares repurchased under
treasury stock method (41.4) (35.7)
(46.6)
Adjusted average shares
outstanding - diluted 1,417.2 1,415.4
1,402.7
Diluted earnings per share $ 2.12 2.34
2.05
This calculation does not include approximately 6 million shares related
to convertible debt as it would be anti-dilutive.
(1) 1998 results excluding Restructuring and In-Process Research &
Development charges are:
Basic EPS at $2.66 and diluted EPS at $2.61 (unaudited)
20 Capital and Treasury Stock
Changes in treasury stock were:
Treasury Stock
Amounts in millions except number of shares in Thousands Shares
Amount
Balance at December 31,1995 202,059 $ 2,115
Employee compensation and stock option plans (9,700) (443)
Stock offering (2,572) (56)
Conversion of debt (2,448) (53)
Amendment to agreement with Lily (589) (13)
Repurchase of common stock 8,745 412
Business combinations (37,359) (808)
Balance at December 29, 1996 158,136 1,154
Employee compensation and stock option plans (11,794) (658)
Repurchase of common stock 10,520 628
Business combinations (11,998) (129)
Balance at December 28, 1997 144,864 995
Employee compensation and stock option plans (11,906) (862)
Repurchase of common stock 12,602 930
Business combinations - (3)
Balance at January 3, 1999 145,560 $ 1,060
Shares of common stock authorized and issued were 1,534,824,000 shares at
the end of 1998, 1997, 1996 and 1995.
21 Selected Quarterly Financial Data (Unaudited)
Selected unaudited quarterly financial data for the years 1998 and 1997
are summarized below:
1998 1997
(Dollars in Millions First Second Third
Fourth First Second Third Fourth
Except Per Share Amounts) Quarter(1) Quarter Quarter
Quarter(2) Quarter Quarter Quarter Quarter
Segment sales to customers
Consumer $1,639 1,571 1,587 1,731
1,683 1,612 1,585 1,618
Pharmaceutical 2,149 2,253 2,185
2,313 1,989 1,988 1,969 1,951
Professional 2,052 2,050 2,039 2,426
2,088 2,152 2,083 2,112
Total sales 5,840 5,874 5,811 6,470
5,760 5,752 5,637 5,681
Gross Profit 4,042 4,047 4,021 4,281
3,971 3,979 3,869 3,781
Earnings before provision
for taxes on income 1,294 1,391 1,321
176 1,305 1,295 1,201 786
Net earnings 919 1,018 964 102
911 910 858 632
Basic net earnings per share $0.66 0.73 0.69
0.07 0.66 0.66 0.62 0.45
Diluted net earnings per share $0.65 0.72 0.68 0.07
0.64 0.65 0.61 0.45
(1) 1998 Q1 results excluding In-Process Research & Development charges:
Earnings before taxes $1,428; Net earnings $1,006; basic EPS $.72 and
Diluted EPS $.71.
(2) 1998 Q4 results excluding Restructuring and In-Process Research &
Development charges:
Earnings before taxes $953; Net earnings $712; basic EPS $.51 and Diluted
EPS $.50.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Board of Directors of Johnson & Johnson:
In our opinion, the accompanying supplemental consolidated balance sheets
and the related supplemental consolidated statements of earnings,
consolidated statements of equity, and consolidated statements of cash
flows present fairly, in all material respects, the financial position of
Johnson & Johnson and its subsidiaries at January 3, 1999 and December
28, 1997, and the results of their operations and their cash flows for
each of the three years in the period ended January 3, 1999, in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note 1, on October 6, 1999, Johnson & Johnson merged with
Centocor, Inc. in a transaction accounted for as a pooling of interests.
The accompanying supplemental consolidated financial statements give
retroactive effect to the merger of Johnson & Johnson with Centocor, Inc.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of
interests method in financial statements that do not include the date of
consummation. These financial statements do not extend through the date
of consummation; however, they will become the historical consolidated
financial statements of Johnson & Johnson after financial statements
covering the date of consummation of the business combination are issued.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
January 25, 1999,
except as to the pooling of interests with
Centocor, Inc. which is as of October 6, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-END> OCT-03-1999
<CASH> 2,673
<SECURITIES> 1,092
<RECEIVABLES> 4,618
<ALLOWANCES> 334
<INVENTORY> 3,161
<CURRENT-ASSETS> 13,207
<PP&E> 11,078
<DEPRECIATION> 4,636
<TOTAL-ASSETS> 29,241
<CURRENT-LIABILITIES> 7,129
<BONDS> 2,489
0
0
<COMMON> 1,535
<OTHER-SE> 14,370
<TOTAL-LIABILITY-AND-EQUITY> 29,241
<SALES> 20,594
<TOTAL-REVENUES> 20,594
<CGS> 6,261
<TOTAL-COSTS> 6,261
<OTHER-EXPENSES> 1,788
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 153
<INCOME-PRETAX> 4,782
<INCOME-TAX> 1,369
<INCOME-CONTINUING> 3,413
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,413
<EPS-BASIC> 2.46
<EPS-DILUTED> 2.41
</TABLE>
1
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited; Dollars in Millions)
ASSETS
October 3, January
3,
1999 1999
Current Assets:
Cash and cash equivalents $ 2,673 1,994
Marketable securities 1,092 789
Accounts receivable, trade, less
allowances $334 (1998 - $388) 4,284 3,752
Inventories (Note 3) 3,161 2,898
Deferred taxes on income 1,065 1,183
Prepaid expenses and other
receivables 932 870
Total current assets 13,207 11,486
Marketable securities, non-current 423 437
Property, plant and equipment, at cost 11,078 10,269
Less accumulated depreciation and
amortization 4,636 3,874
6,442 6,395
Intangible assets, net (Note 4) 7,456 7,364
Deferred taxes on income 582 411
Other assets 1,131 1,199
Total assets $ 29,241 27,292
See Notes to Consolidated Financial Statements
Amounts have been restated under the pooling of interests method
of accounting to include the financial results of Centocor, Inc.
acquired on October 6,1999, see Note 1.
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 $ 1,462 2,753
Accounts payable 1,601 1,877
Accrued liabilities 2,798 3,012
Accrued salaries, wages and commissions 642 445
Taxes on income 626 206
Total current liabilities 7,129 8,293
Long-term debt 2,452 1,729
Deferred tax liability 594 578
Employee related obligations 1,912 1,738
Other liabilities 1,249 877
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) (478) (322)
Retained earnings 15,969 13,968
16,985
15,137
Less common stock held in treasury,
at cost (145,201,000 & 145,560,000
shares) 1,080 1,060
Total shareowners' equity 15,905 14,077
Total liabilities and shareowners'
equity $29,241 27,292
See Notes to Consolidated Financial Statements
Amounts have been restated under the pooling of interests method
of accounting to include the financial results of Centocor, Inc.
acquired on October 6,1999, see Note 1.
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) $6,884 100.0 5,811 100.0
Cost of products sold 2,068 30.0 1,790 30.8
Gross profit 4,816 70.0 4,021 69.2
Selling, marketing and
administrative expenses 2,617 38.0 2,187 37.6
Research expense 635 9.2 524 9.0
Interest income (63) (.9) (70) (1.2)
Interest expense, net of
portion capitalized 46 .7 32 .6
Other (income)expense, net 50 .7 27 .5
3,285 47.7 2,700 46.5
Earnings before provision
for taxes on income 1,531 22.2 1,321 22.7
Provision for taxes on
income (Note 2) 420 6.1 357 6.1
NET EARNINGS $1,111 16.1 964 16.6
NET EARNINGS PER SHARE (Note 6)
Basic $ .80 .69
Diluted $ .78 .68
CASH DIVIDENDS PER SHARE $ .28 .25
AVG. SHARES OUTSTANDING
Basic 1,389.9 1,390.0
Diluted 1,419.0 1,419.0
See Notes to Consolidated Financial Statements
Amounts have been restated under the pooling of interests method
of accounting to include the financial results of Centocor, Inc.
acquired on October 6,1999, see Note 1.
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)$20,594 100.0 17,525 100.0
Cost of products sold 6,261 30.4 5,415 30.9
Gross profit 14,333 69.6 12,110 69.1
Selling, marketing and
administrative expenses 7,642 37.1 6,443 36.8
Research expense 1,788 8.7 1,586 9.0
Purchased in-process R&D 134
.8
Interest income (170) (.8) (203) (1.2)
Interest expense, net of
portion capitalized 153 .7 95 .5
Other (income)expense, net 138 .7 49 .3
9,551 46.4 8,104 46.2
Earnings before provision
for taxes on income 4,782 23.2 4,006 22.9
Provision for taxes on
income (Note 2) 1,369 6.6 1,105 6.3
NET EARNINGS $ 3,413 16.6 2,901 16.6
NET EARNINGS PER SHARE (Note 6)
Basic $ 2.46 2.09
Diluted $ 2.41 2.05
CASH DIVIDENDS PER SHARE $ .81 .72
AVG. SHARES OUTSTANDING
Basic 1,390.1 1,390.0
Diluted 1,418.6 1,416.4
See Notes to Consolidated Financial Statements
Amounts have been restated under the pooling of interests method
of accounting to include the financial results of Centocor, Inc.
acquired on October 6,1999, see Note 1.
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 $3,413 2,901
Adjustments to reconcile net earnings to
cash flows:
Depreciation and amortization of
property and intangibles 1,136 933
Purchased in-process R&D - 134
Accounts receivable reserves (46)
(4)
Increase in accounts receivable (607) (392)
Increase in inventories (351) (370)
Changes in other assets and liabilities 882 339
NET CASH FLOWS FROM OPERATING ACTIVITIES 4,427 3,541
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment(1,101) (908)
Proceeds from the disposal of assets 18 20
Acquisition of businesses, net of cash
acquired (228) (415)
Other, principally marketable securities (358) (112)
NET CASH USED BY INVESTING ACTIVITIES (1,669) (1,415)
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 776 449
Retirement of long-term debt (145) (197)
Proceeds from the exercise of stock
options 186 226
NET CASH USED BY FINANCING
ACTIVITIES (2,035) (1,163)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (44) 22
INCREASE IN CASH AND CASH EQUIVALENTS 679 985
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,994 2,839
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,673 3,824
See Notes to Consolidated Financial Statements
Amounts have been restated under the pooling of interests method
of accounting to include the financial results of Centocor, Inc.
acquired on October 6,1999, see Note 1.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - The accompanying unaudited condensed financial
statements have been prepared to give retroactive effect to the
merger with Centocor. The financial statements of Johnson &
Johnson for the nine month periods ended October 3, 1999 and
September 27, 1998, have been combined with the financial
statements of Centocor for the nine month periods ended September
30, 1999 and 1998, respectively.
The preparation of financial statements during the interim
periods requires management to make numerous estimates and
assumptions that impact the reported amounts of assets,
liabilities, revenues and expenses. Estimates and assumptions
are reviewed periodically and the effect of revisions is
reflected in the results of operations of the interim periods in
which changes are determined to be necessary.
The financial statement results for the interim periods are not
necessarily indicative of financial results for the full year.
These unaudited consolidated financial statements should be read
in conjunction with the audited consolidated financial statements
and notes thereto included in Exhibit 99.1 of this filing.
NOTE 2 - INCOME TAXES
The effective income tax rates for 1999 and 1998 are as follows:
1999 1998
First Quarter 29.8% 29.0%
First Half 29.2 27.9
Nine Months 28.6 27.6
The effective income tax rates for the first nine months of 1999
and 1998 are 28.6% and 27.6%, 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) Oct. 3, 1999 Jan. 3,
1999
Raw materials and supplies $ 870 776
Goods in process 544 510
Finished goods 1,747 1,612
$ 3,161 2,898
NOTE 4 - INTANGIBLE ASSETS
(Dollars in Millions) Oct. 3, 1999 January 3,
1999
Intangible assets $ 8,542 8,207
Less accumulated amortization 1,086 843
$ 7,456 7,364
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 1,684 1,226 37.4 4,927 3,694 33.4
International 1,051 959 9.6 3,215 2,893 11.1
2,735 2,185 25.2% 8,142 6,587 23.6%
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 3,936 3,149 25.0 11,584 9,367 23.7
International 2,948 2,662 10.7 9,010 8,158 10.4
Worldwide $6,884 5,811 18.5% 20,594 17,525 17.5%
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 976 850 14.8 3,063 2,455 24.8
Professional 385 338 13.9 1,268 1,078 17.6
Segments total 1,567 1,343 16.7 4,914 4,059 21.1
Expenses not allocated
to segments (36) (22) (132) (53)
Worldwide total$1,5311,321 15.9 4,782 4,006 19.4
SALES BY GEOGRAPHIC AREA
Third Quarter Nine Months
Percent Percent
Increase/ Increase/
1999 1998(Decrease) 1999 1998 (Decrease)
U.S. $3,935 3,149 25.0 11,584 9,367 23.7
Europe 1,577 1,496 5.4 5,028 4,644 8.3
Western Hemisphere
excluding U.S. 514 520 (1.2) 1,503 1,564 (3.9)
Asia-Pacific,
Africa 858 646 32.8 2,479 1,950 27.1
Worldwide $6,884 5,811 18.5% 20,594 17,525 17.5%
NOTE 6 - EARNINGS PER SHARE
The following is a reconciliation of basic net earnings per
share to diluted net earnings per share for the nine months ended
October 3, 1999 and September 27, 1998:
Fiscal Fiscal
Quarter Ended Nine
Months Ended
Oct 3, Sept 27, Oct 3, Sept 27,
1999 1998 1999
1998
Basic net earnings per share$ .80 .69 2.46 2.09
Average shares outstanding
- basic 1,389.9 1,390.0 1,390.1 1,390.0
Potential shares exercisable
under stock option plans 68.0 69.2 68.3 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 1,419.0 1,419.0 1,418.6 1,416.4
Diluted earnings per share $ .78 .68 2.41 2.05
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 $3,275 million, compared
with $2,880 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.
NOTE 9 - NEW ACCOUNTING PRONOUNCEMENT (con't)
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.
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,
NOTE 10 - RESTRUCTURING AND SPECIAL CHARGES (con't)
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
The Menlo Care intangible asset was related to the Aquavene
biomaterial technology that was no longer in use with all other
intangible assets related to products that were abandoned by the
Company due to the low margin and/or 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.
NOTE 10 - RESTRUCTURING AND SPECIAL CHARGES (con't)
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 filing.
NOTE 12 - SUBSEQUENT EVENT
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
NOTE 12 - SUBSEQUENT EVENT (con't)
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.
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
$20.59 billion, which exceeded sales of $17.53 billion for the
first nine months of 1998 by 17.5%. 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 18.8% on an operational basis for the first nine months
of 1999. Consolidated net earnings for the first nine months of
1999 were $3.41 billion, compared with net earnings of $2.90
billion for the first nine months of 1998. Worldwide basic net
earnings per share for the first nine months of 1999 were $2.46,
compared with $2.09 for the same period in 1998. Worldwide
diluted net earnings per share for the first nine months of 1999
were $2.41, compared with $2.05 for the same period in 1998.
Consolidated sales for the third quarter of 1999 were $6.88
billion, an increase of 18.5% over 1998 third quarter sales of
$5.81 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
$1.11 billion, compared with $.96 billion for the same period a
year ago, an increase of 15.2%. Worldwide basic net earnings per
share for the third quarter of 1999 rose 15.9% to $.80, compared
with $.69 in the 1998 period. Worldwide diluted net earnings per
share for the third quarter of 1999 rose 14.7% to $.78, compared
with $.68 in 1998.
SALES AND EARNINGS (con't)
Domestic sales for the first nine months of 1999 were $11.58
billion, an increase of 23.7% over 1998 domestic sales of $9.37
billion for the same period a year ago. Sales by international
subsidiaries were $9.01 billion for the first nine months of 1999
compared with $8.16 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%.
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 $2.74 billion for the quarter
increased 25.2% over the same period in 1998, including 37.4%
growth in domestic sales and a 9.6% increase in international
sales. International sales gains in local currency of 12.7% were
offset by a negative currency impact of 3.1%. Sales growth
reflects the strong
SALES AND EARNINGS (con't)
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.
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 $2.45 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
SALES AND EARNINGS (con't)
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 the moment of deployment.
Basic average shares of common stock outstanding in the first
nine months of 1999 were 1,390.1 million, compared with 1,390.0
million for the same period a year ago. Diluted average shares
of common stock outstanding in the first nine months of 1999 were
1,418.6 million, compared with 1,416.4 million for the same
period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Cash and current marketable securities increased $982 million
during the first nine months of 1999 to $3,765 million at October
3, 1999. Total borrowings decreased $568 million during the
first nine months of 1999 to $3,914 million. Net debt (debt net
of cash and current securities) was $149 million at October 3,
1999 compared with $1,699 million at the end of 1998. Total debt
represented 19.7% of total capital (shareowners' equity and total
borrowings) at quarter end compared with 24.2% at the end of
1998. For the period ended October 3, 1999, there were no
material cash commitments.
LIQUIDITY AND CAPITAL RESOURCES (con't)
Additions to property, plant and equipment were $1,101 million
for the first nine months of 1999, compared with $908 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.
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
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE (con't)
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. 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.
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE (con't)
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.
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
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE (con't)
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.
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
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE (con't)
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".
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 8-K 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.
In this filing, the Company discusses in more detail 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.
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
Item 1. Legal Proceedings (con't)
market. The Company believes that these actions are without
merit and is defending them vigorously.
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.
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EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements of Johnson & Johnson on Form S-8 (File
No. 33-52252, 33-40294, 33-40295, 33-32875, 33-7634, 033-59009,
333-38055, 333-40681, 333-26979 and 333-86611), Form S-3 (File
No. 33-55977 and 33-47424) and Form S-4 (File No. 33-57583, 333-
00391, 333-38097, 333-30081 and 333-86611) and related
Prospectuses, of our report dated January 25, 1999, except as to
the pooling of interests with Centocor, Inc. which is as of
October 6, 1999, relating to the supplemental consolidated
financial statements of Johnson & Johnson and subsidiaries as of
January 3, 1999 and December 28, 1997, and for each of the three
years in the period ended January 3, 1999, which report appears
in this Current Report on Form 8-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
December 13, 1999
