-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TQ9pqISiL8Pyc+yd3gQ0YB+fWxyng9F+yAZwZ5CxJUcB8tjyOpVzyPiAWQmJw7ao 5z72YYuN6sGWyg2SZa4sbw== 0000200406-99-000009.txt : 19991117 0000200406-99-000009.hdr.sgml : 19991117 ACCESSION NUMBER: 0000200406-99-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991003 FILED AS OF DATE: 19991116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JOHNSON & JOHNSON CENTRAL INDEX KEY: 0000200406 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 221024240 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03215 FILM NUMBER: 99758559 BUSINESS ADDRESS: STREET 1: ONE JOHNSON & JOHNSON PLZ CITY: NEW BRUNSWICK STATE: NJ ZIP: 08933 BUSINESS PHONE: 9085240400 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 3, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to - ----------------------------------------------------------------- Commission file number 1-3215 JOHNSON & JOHNSON (Exact name of registrant as specified in its charter) NEW JERSEY 22-1024240 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Johnson & Johnson Plaza 08933 New Brunswick, New Jersey (Zip code) (Address of principal executive offices) 732-524-0400 Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On October 29, 1999, 1,390,555,974 shares of Common Stock, $1.00 par value, were outstanding. - 1 - JOHNSON & JOHNSON AND SUBSIDIARIES TABLE OF CONTENTS Part I - Financial Information Page No. Item 1. Financial Statements Consolidated Balance Sheet - October 3, 1999 and January 3, 1999 3 Consolidated Statement of Earnings for the Fiscal Quarter Ended October 3, 1999 and September 27, 1998 5 Consolidated Statement of Earnings for the Fiscal Nine Months Ended October 3, 1999 and September 27, 1998 6 Consolidated Statement of Cash Flows for the Fiscal Nine Months Ended October 3, 1999 and September 27, 1998 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Part II - Other Information Item 1 - Legal Proceedings 25 Item 5 - Other Information 26 Item 6 - Exhibits and Reports on Form 8-K 26 Signatures 27 - 2 - Part I - FINANCIAL INFORMATION Item 1 - FINANCIAL STATEMENTS JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited; Dollars in Millions) ASSETS October 3, January 3, 1999 1999 Current Assets: Cash and cash equivalents $ 2,617 1,927 Marketable securities, at cost 976 651 Accounts receivable, trade, less allowances $331 (1998 - $385) 4,187 3,661 Inventories (Note 3) 3,091 2,853 Deferred taxes on income 1,065 1,180 Prepaid expenses and other receivables 921 860 Total current assets 12,857 11,132 Marketable securities, non-current 399 416 Property, plant and equipment, at cost 10,754 10,024 Less accumulated depreciation and amortization 4,543 3,784 6,211 6,240 Intangible assets, net (Note 4) 7,295 7,209 Deferred taxes on income 289 102 Other assets 1,057 1,112 Total assets $ 28,108 26,211 See Notes to Consolidated Financial Statements - 3 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited; Dollars in Millions) LIABILITIES AND SHAREOWNERS' EQUITY October 3, January 3, 1999 1999 Current Liabilities: Loans and notes payable $ 1,456 2,747 Accounts payable 1,576 1,861 Accrued liabilities 2,701 2,920 Accrued salaries, wages and commissions621 428 Taxes on income 626 206 Total current liabilities 6,980 8,162 Long-term debt 1,992 1,269 Deferred tax liability 594 578 Employee related obligations 1,912 1,738 Other liabilities 1,246 874 Shareowners' equity: Preferred stock - without par value (authorized and unissued 2,000,000 shares) - - Common stock - par value $1.00 per share (authorized 2,160,000,000 shares; issued 1,534,865,000 shares and 1,534,824,000 shares) 1,535 1,535 Note receivable from employee stock ownership plan (41) (44) Accumulated other comprehensive income (Note 7) (481) (328) Retained earnings 15,892 13,928 16,905 15,091 Less common stock held in treasury, at cost (190,631,000 & 190,773,000 shares) 1,521 1,501 Total shareowners' equity 15,384 13,590 Total liabilities and shareowners' equity $28,108 26,211 See Notes to Consolidated Financial Statements - 4 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (Unaudited; dollars & shares in millions except per share figures) Fiscal Quarter Ended Oct 3, Percent Sept 27, Percent 1999 to Sales 1998 to Sales Sales to customers (Note 5) $6,749 100.0 5,724 100.0 Cost of products sold 2,030 30.1 1,758 30.7 Gross profit 4,719 69.9 3,966 69.3 Selling, marketing and administrative expenses 2,564 38.0 2,151 37.6 Research expense 613 9.1 511 8.9 Interest income (61) (.9) (67) (1.2) Interest expense, net of portion capitalized 42 .6 26 .5 Other (income)expense, net 50 .7 28 .5 3,208 47.5 2,649 46.3 Earnings before provision for taxes on income 1,511 22.4 1,317 23.0 Provision for taxes on income (Note 2) 412 6.1 356 6.2 NET EARNINGS $1,099 16.3 961 16.8 NET EARNINGS PER SHARE (Note 6) Basic $ .82 .71 Diluted $ .80 .70 CASH DIVIDENDS PER SHARE $ .28 .25 AVG. SHARES OUTSTANDING Basic 1,344.5 1,344.9 Diluted 1,373.6 1,373.0 See Notes to Consolidated Financial Statements - 5 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (Unaudited; dollars & shares in millions except per share figures) Fiscal Nine Months Ended ______ Oct 3, Percent Sept 27, Percent 1999 to Sales 1998 to Sales Sales to customers (Note 5)$20,241 100.0 17,290 100.0 Cost of products sold 6,154 30.4 5,338 30.9 Gross profit 14,087 69.6 11,952 69.1 Selling, marketing and administrative expenses 7,516 37.1 6,365 36.8 Research expense 1,723 8.5 1,537 8.9 Interest income (164) (.8) (192) (1.1) Interest expense, net of portion capitalized 139 .7 80 .5 Other (income)expense, net 143 .7 40 .2 9,357 46.2 7,830 45.3 Earnings before provision for taxes on income 4,730 23.4 4,122 23.8 Provision for taxes on income (Note 2) 1,348 6.7 1,146 6.6 NET EARNINGS $ 3,382 16.7 2,976 17.2 NET EARNINGS PER SHARE (Note 6) Basic $ 2.52 2.21 Diluted $ 2.46 2.17 CASH DIVIDENDS PER SHARE $ .81 .72 AVG. SHARES OUTSTANDING Basic 1,344.7 1,345.0 Diluted 1,372.8 1,371.4 See Notes to Consolidated Financial Statements - 6 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited; Dollars in Millions) Fiscal Nine Months Ended Oct 3, Sept 27, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $3,382 2,976 Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles 1,099 906 Increase in accounts receivable, trade, less allowances (641) (345) Increase in inventories (321) (358) Changes in other assets and liabilities 850 350 NET CASH FLOWS FROM OPERATING ACTIVITIES 4,369 3,529 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment(1,007) (848) Proceeds from the disposal of assets 18 20 Acquisition of businesses, net of cash acquired (228) (78) Other, principally marketable securities (380) (96) NET CASH USED BY INVESTING ACTIVITIES (1,597) (1,002) CASH FLOWS FROM FINANCING ACTIVITIES Dividends to shareowners (1,090) (969) Repurchase of common stock (547) (653) Proceeds from short-term debt 7,253 174 Retirement of short-term debt (8,468) (193) Proceeds from long-term debt 776 Retirement of long-term debt (145) (142) Proceeds from the exercise of stock options 183 223 NET CASH USED BY FINANCING ACTIVITIES (2,038) (1,560) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (44) 22 INCREASE IN CASH AND CASH EQUIVALENTS 690 989 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,927 2,753 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,617 3,742 See Notes to Consolidated Financial Statements - 7 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - The accompanying interim financial statements and related notes should be read in conjunction with the Consolidated Financial Statements of Johnson & Johnson and Subsidiaries (the "Company") and related notes as contained in the Annual Report on Form 10-K for the fiscal year ended January 3, 1999. The interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair presentation of such statements. NOTE 2 - INCOME TAXES The effective income tax rates for 1999 and 1998 are as follows: 1999 1998 First Quarter 29.7% 29.6% First Half 29.1 28.2 Nine Months 28.5 27.8 The effective income tax rates for the first nine months of 1999 and 1998 are 28.5% and 27.8%, respectively, as compared to the U.S. federal statutory rate of 35%. The difference from the statutory rate is primarily the result of domestic subsidiaries operating in Puerto Rico under a grant for tax relief expiring on December 31, 2007 and the result of subsidiaries manufacturing in Ireland under an incentive tax rate expiring on December 21, 2010. NOTE 3 - INVENTORIES (Dollars in Millions) Oct. 3, 1999 Jan. 3, 1999 Raw materials and supplies $ 863 770 Goods in process 494 489 Finished goods 1,734 1,594 $ 3,091 2,853 - 8 - NOTE 4 - INTANGIBLE ASSETS (Dollars in Millions) Oct. 3, 1999 January 3, 1999 Intangible assets $ 8,373 8,042 Less accumulated amortization 1,078 833 $ 7,295 7,209 The excess of the cost over the fair value of net assets of purchased businesses is recorded as goodwill and is amortized on a straight-line basis over periods of up to 40 years. The cost of other acquired intangibles is amortized on a straight-line basis over their estimated useful lives. NOTE 5 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS (Dollars in Millions) SALES BY SEGMENT OF BUSINESS Third Quarter Nine Months Percent Percent 1999 1998 Increase 1999 1998 Increase Consumer Domestic $ 921 806 14.3 2,722 2,398 13.5 International 783 781 .3 2,398 2,398 - 1,704 1,587 7.4% 5,120 4,796 6.8% Pharmaceutical Domestic 1,565 1,153 35.7 4,622 3,500 32.1 International 1,035 945 9.5 3,167 2,852 11.0 2,600 2,098 23.9% 7,789 6,352 22.6% Professional Domestic 1,331 1,117 19.2 3,935 3,275 20.2 International 1,114 922 20.8 3,397 2,867 18.5 2,445 2,039 19.9% 7,332 6,142 19.4% Domestic 3,817 3,076 24.1 11,279 9,173 23.0 International 2,932 2,648 10.7 8,962 8,117 10.4 Worldwide $6,749 5,724 17.9% 20,241 17,290 17.1% - 9 - NOTE 5 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS (Dollars in Millions) OPERATING PROFIT BY SEGMENT OF BUSINESS Third Quarter Nine Months Percent Percent 1999 1998 Increase 1999 1998 Increase Consumer 206 155 32.9 583 526 10.8 Pharmaceutical 954 843 13.2 3,003 2,567 17.0 Professional 385 338 13.9 1,268 1,078 17.6 Segments total 1,545 1,336 15.6 4,854 4,171 16.4 Expenses not allocated to segments (34) (19) (124) (49) Worldwide total$1,5111,317 14.7 4,730 4,122 14.8 SALES BY GEOGRAPHIC AREA Third Quarter Nine Months Percent Percent Increase/ Increase/ 1999 1998(Decrease) 1999 1998 (Decrease) U.S. $3,817 3,076 24.1 11,279 9,173 23.0 Europe 1,564 1,482 5.5 4,992 4,607 8.4 Western Hemisphere excluding U.S. 510 520 (1.9) 1,491 1,560 (4.4) Asia-Pacific, Africa 858 646 32.8 2,479 1,950 27.1 Worldwide $6,749 5,724 17.9% 20,241 17,290 17.1% NOTE 6 - EARNINGS PER SHARE The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the nine months ended October 3, 1999 and September 27, 1998: Fiscal Fiscal Quarter Ended Nine Months Ended Oct 3, Sept 27, Oct 3, Sept 27, 1999 1998 1999 1998 Basic net earnings per share$ .82 .71 2.52 2.21 Average shares outstanding - basic 1,344.5 1,344.9 1,344.7 1,345.0 Potential shares exercisable under stock option plans 67.9 68.3 67.9 68.0 Less: shares which could be repurchased under treasury stock method (38.8) (40.2) (39.8) (41.6) Adjusted averages shares outstanding - diluted 1,373.6 1,373.0 1,372.8 1,371.4 Diluted earnings per share $ .80 .70 2.46 2.17 - 10 - NOTE 7 - ACCUMULATED OTHER COMPREHENSIVE INCOME During 1998, the Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of an alternative income statement and its components (revenue, expenses, gains and losses) in a full set of general purpose financial statements. The total comprehensive income for the nine months ended October 3, 1999 is $3,247 million, compared with $2,957 million for the same period a year ago. Total comprehensive income includes net earnings, net unrealized currency gains and losses on translation and net unrealized gains and losses on available for sale securities. NOTE 8 - ACQUISITIONS During the first quarter, the Company completed the acquisition of the dermatological skin care business of S.C. Johnson & Son, Inc. The S.C. Johnson dermatological business is composed of specialty brands marketed in the U.S., Canada and Western Europe. The primary brand involved in the transaction, AVEENO, is a line of skin care products including specialty soaps, bath, and anti- itch treatments. Pro forma results of the acquisition, assuming that the transaction was consummated at the beginning of each year presented, would not be materially different from the results reported. NOTE 9 - NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This standard, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. - 11 - NOTE 9 - NEW ACCOUNTING PRONOUNCEMENT (Continued) SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their respective fair values. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on the designation of the hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in the fair value of an asset, liability or firm commitment, changes in the fair value of the derivative instrument will generally be offset by changes in the fair value of the hedged item. For cash flow hedge transactions in which the Company is hedging the variability of cash flows related to a variable rate asset, liability or forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be recognized in earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The Company will adopt SFAS 133 in the first quarter of 2001 and does not expect it to have a material effect on the Company's results of operations, cash flows or financial position. NOTE 10 - RESTRUCTURING AND SPECIAL CHARGES In the fourth quarter of 1998, the Company approved a plan to reconfigure its global network of manufacturing and operating facilities with the objective of enhancing operating efficiencies. It is expected that the plan will be completed over the next twelve months. Among the initiatives supporting this plan were the closures of inefficient manufacturing facilities, exiting certain businesses which were not providing an acceptable return and related employee separations. -12- NOTE 10 - RESTRUCTURING AND SPECIAL CHARGES (Continued) The estimated cost of this plan is $613 million. The charge consisted of employee separation costs of $161 million, asset impairments of $322 million, impairments of intangibles of $52 million, and other exit costs of $78 million. Employee separations will occur primarily in manufacturing and operations facilities affected by the plan. The decision to exit certain facilities and businesses decreased expected future cash flows triggering the asset impairment. The amount of impairment of such assets was calculated using discounted cash flows or appraisals. The components of the asset impairments and the impairments of intangibles are as follows: Value @ January 3, 1999 Assets: Machinery & equipment $215 Inventory 60* Buildings 32 Leasehold improvements 15 Total asset impairments $322 *Included in cost of products sold at year-end 1998 Value @ January 3, 1999 Intangible assets: Menlo Care $ 26 Innotech 20 Other 6 Total intangible assets $ 52 These intangible assets relate to products that were abandoned due to the low margin and lack of strategic fit. The restructuring plan consisted of the reduction of manufacturing facilities around the world by 36, from 159 to 123 plants. None of the assets affected by this plan were held for disposal. - 13 - NOTE 10 - RESTRUCTURING AND SPECIAL CHARGES (Continued) Severance and other exit costs were accrued at year-end 1998 and payments made through nine months ended October 3, 1999 are as follows: Beginning Cash Remaining Accrual Outlays Accrual Employee Separations $ 158 25 133 Other exit costs: Distributor terminations 17 6 11 Dismantle/disposal costs 15 4 11 Lease termination 21 12 9 Customer compensation 11 5 6 Other 14 7 7 Total other costs 78 34 44 $ 236 59 177 Changes in estimates to date have been immaterial. The $161 million ($3 million was paid at year-end 1998) for employee separations reflects the termination of approximately 5,100 employees of which 1,500 have been separated as of October 3, 1999. NOTE 11 - PENDING LEGAL PROCEEDINGS The information called for by this footnote is incorporated herein by reference to Item 1 ("Legal Proceedings") included in Part II of this Report on Form 10-Q. NOTE 12 - SUBSEQUENT EVENT On October 6, 1999 Johnson & Johnson and Centocor, Inc. announced the completion of their previously announced merger, valued at approximately $5 billion. This transaction will be accounted for as a pooling of interests. The transaction was completed after Centocor shareholders voted to approve the merger agreement with Johnson & Johnson. Centocor had approximately 71 million shares outstanding on October 6th (83 million shares on a fully diluted basis) which were exchanged for approximately 45 million shares of Johnson & Johnson common stock. On a diluted basis when adjusted for stock options outstanding and convertible debt, the total number of Johnson & Johnson shares issued will be approximately 53 million. Holders of Centocor common stock received .6390 of a share of Johnson & Johnson common stock for each share of Centocor common stock that they own, valued at $95.47 per share. - 14 - Centocor is a leading biopharmaceutical company that creates, acquires and markets cost-effective therapies that yield long term benefits for patients and the health care community. Its products, developed primarily through monoclonal antibody technology, help physicians deliver innovative treatments to improve human health and restore patients' quality of life. On November 8, 1999, Johnson & Johnson announced a definitive merger agreement pursuant to which Johnson & Johnson will acquire Innovasive Devices, Inc. The transaction will be accounted for under the purchase method and is valued at approximately $85 million. The merger is subject to customary conditions, including approval by a majority of the shareholders of Innovasive Devices and Hart-Scott Rodino clearance. Innovasive Devices manufactures and sells devices for sports medicine surgery, an area addressing soft tissue injuries in the knee, shoulder and other small joints. - 15 - Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SALES AND EARNINGS Consolidated sales for the first nine months of 1999 were $20.24 billion, which exceeded sales of $17.29 billion for the first nine months of 1998 by 17.1%. The strength of the U.S. dollar relative to the foreign currencies decreased sales for the first nine months of 1999 by 1.3%. Excluding the effect of the stronger U.S. dollar relative to foreign currencies, sales increased 18.4% on an operational basis for the first nine months of 1999. Consolidated net earnings for the first nine months of 1999 were $3.38 billion, compared with net earnings of $2.98 billion for the first nine months of 1998. Worldwide basic net earnings per share for the first nine months of 1999 were $2.52, compared with $2.21 for the same period in 1998, an increase of 14.0%. Worldwide diluted net earnings per share for the first nine months of 1999 were $2.46, compared with $2.17 for the same period in 1998, an increase of 13.4% Consolidated sales for the third quarter of 1999 were $6.75 billion, an increase of 17.9% over 1998 third quarter sales of $5.72 billion. The effect of the stronger U.S. dollar relative to foreign currencies decreased third quarter sales by 1.3%. Consolidated net earnings for the third quarter of 1999 were $1.10 billion, compared with $.96 billion for the same period a year ago, an increase of 14.4%. Worldwide basic net earnings per share for the third quarter of 1999 rose 15.5% to $.82, compared with $.71 in the 1998 period. Worldwide diluted net earnings per share for the third quarter of 1999 rose 14.3% to $.80, compared with $.70 in 1998. Domestic sales for the first nine months of 1999 were $11.28 billion, an increase of 23.0% over 1998 domestic sales of $9.17 billion for the same period a year ago. Sales by international subsidiaries were $8.96 billion for the first nine months of 1999 compared with $8.12 billion for the same period a year ago, an increase of 10.4%. Excluding the impact of the stronger value of the dollar, international sales increased by 13.3%. - 16 - Worldwide Consumer segment sales for the third quarter of 1999 were $1.7 billion, an increase of 7.4% versus the same period a year ago. Domestic sales were up 14.3% while international sales gains in local currency of 7.0% were almost entirely offset by a negative currency impact of 6.7%. Consumer sales were led by continued strength in the skin care franchise, which includes the NEUTROGENA, RoC and CLEAN & CLEAR product lines, as well as solid results from McNeil Consumer Healthcare, which markets the TYLENOL family of products, BENECOL and other over-the-counter pharmaceuticals. During the quarter, the Company launched BENECOL dressings, margarine spread in tubs and snack bars in the United States. BENECOL contains the dietary ingredient stanol ester, which is patented for use in reducing cholesterol. Worldwide pharmaceutical sales of $2.6 billion for the quarter increased 23.9% over the same period in 1998, including 35.7% growth in domestic sales and a 9.5% increase in international sales. International sales gains in local currency of 12.6% were offset by a negative currency impact of 3.1%. Sales growth reflects the strong performance of PROCRIT/EPREX, for the treatment of anemia; RISPERDAL, an antipsychotic medication; DURAGESIC, a transdermal patch for chronic pain; LEVAQUIN, an anti-infective; ULTRAM, an analgesic, and the oral contraceptive line of products. During the quarter, the company announced a definitive agreement for a stock-for-stock merger with Centocor, Inc., a leader in monoclonal antibody technology and acute vascular care and immunology products. The merger, valued at approximately $5 billion, was completed on October 6, 1999. - 17 - Also in the quarter Eisai, Inc. received approval from the FDA for ACIPHEX (rabeprazole), a proton pump inhibitor for gastroesophageal reflux disease (GERD), GERD maintenance, duodenal ulcers and treatment of pathological hypersecretory conditions, including Zollinger-Ellison syndrome. Janssen Pharmaceutica, a wholly-owned subsidiary of Johnson & Johnson, and Eisai have entered into a strategic alliance to market rabeprazole worldwide with the exception of Japan and certain other territories. Additional positive news in the quarter was the FDA approval for new indications of TOPAMAX (topiramate), an anti-epileptic drug. Approval was received for adjunctive therapy for partial onset seizures in pediatric patients and primary generalized tonic-clonic seizures in adults and pediatric patients. Worldwide sales of $2.4 billion in the Professional segment represented an increase of 19.9% over the third quarter of 1998. Domestic sales were up 19.2% while international sales were up 20.8%. The 1998 acquisition of DePuy Inc., a leading orthopaedic products manufacturer, contributed to the strong sales growth in the Professional segment. In addition, strong sales performance was achieved by Ethicon Endo-Surgery's laparoscopy and wound closure products; Ethicon's Mitek suture anchors and Gynecare women's health products, and Vistakon's disposable contact lens products. During the quarter, the Company received FDA approval to market its new CrossFlexTLC coronary stent, a laser-cut stainless steel stent designed to be a true workhorse stent that combines exceptional deliverability with excellent scaffolding and high radial strength. The CrossFlexTLC delivery system, which incorporates Cordis' latest balloon catheter technology, is specifically engineered to minimize the risk of stent embolization through the use of Cordis' proprietary NestingT technology. This technology helps to secure the stent to the delivery balloon until he moment of deployment. - 18 - Basic average shares of common stock outstanding in the first nine months of 1999 were 1,344.7 million, compared with 1,345.0 million for the same period a year ago. Diluted average shares of common stock outstanding in the first nine months of 1999 were 1,372.8 million, compared with 1,371.4 million for the same period a year ago. LIQUIDITY AND CAPITAL RESOURCES Cash and current marketable securities increased $1,015 million during the first nine months of 1999 to $3,593 million at October 3, 1999. Total borrowings decreased $568 million during the first nine months of 1999 to $3,448 million. Net cash (cash and current securities net of borrowings) was $145 million at October 3, 1999 compared with $1,438 million net debt (debt net of cash and current securities) at the end of 1998. Total debt represented 18.3% of total capital (shareowners' equity and total borrowings) at quarter end compared with 22.8% at the end of 1998. For the period ended October 3, 1999, there were no material cash commitments. Additions to property, plant and equipment were $1,007 million for the first nine months of 1999, compared with $848 million for the same period in 1998. On October 18, 1999, the Board of Directors approved a regular quarterly dividend rate of 28 cents per share, payable on December 7, 1999 to shareowners of record as of November 16, 1999. YEAR 2000 COMPUTER SYSTEMS COMPLIANCE The "Year 2000" issue relates to potential problems resulting from a practice of computer programmers. For some time, calendar years have frequently been represented in computer programs by their last two digits. Thus, "1998" would be rendered "98". The logic of the programs frequently assumes that the first two digits of a year given in this format are "19". It is unclear what would happen with respect to such computer programs upon the change in calendar year from 1999 to 2000. The program or device might interpret "00" as "2000", "1900", an error or some other input. In such a case, the computer program or device might cease to function, function improperly, provide an erroneous result or act in some unpredictable manner. - 19 - The Company has had a program in place since the fourth quarter of 1996 to address Year 2000 issues in critical business areas related to its products, information management systems, non- information systems with embedded technology, suppliers and customers. A report on the progress of this program has been provided to the Audit Committee of the Company's Board of Directors. The Company has completed its review of its critical automated information systems and the remediation phase with respect to such critical systems is substantially complete. Full completion is expected during the fourth quarter of 1999. The Company is also in the process of reviewing and remediating, where necessary, its other automated systems. The Company has substantially completed the assessment and remediation of all such other automated systems and full completion is expected during the fourth quarter of 1999. The Company has a plan for assessment and testing of all of its products and has made substantial progress toward completion of such assessment and testing. All current products are Year 2000 ready. There are a few remaining units that require field updates at customer sites. These updates will be completed during the fourth quarter of 1999. The Company has engaged additional outside consultants to examine selected critical areas in certain of it major franchises. In addition, the Company has contracted with an independent third party to conduct audits of critical sites worldwide to evaluate our programs, processes and progress and to identify any remaining areas of effort required to achieve compliance. The total costs of addressing the Company's Year 2000 readiness issues are not expected to be material to the Company's financial condition or results of operations. Since initiation of its program in 1996, the Company estimates that it has expensed approximately $195 million, on a worldwide basis, in internal and external costs on a pre-tax basis to address its Year 2000 readiness issues. - 20 - These expenditures include information system replacement and embedded technology upgrade costs of $111 million, supplier and customer compliance costs of $15 million and all other costs of $69 million. The Company currently estimates that the total of such costs for addressing its internal Year 2000 readiness, on a worldwide basis, will approximate $200 million in the aggregate on a pre-tax basis. These costs are being expensed as they are incurred and are being funded through operating cash flows. No projects material to the financial condition or results of operations of the Company have been deferred or delayed as a result of this project. The ability of the Company to implement and effect its Year 2000 readiness program and the related costs or the costs of non- implementation, cannot be accurately determined at this time. The Company's automated systems (both information technology and non-information systems) are generally complex but are decentralized. Although a failure to complete remediation of one system may adversely affect other systems, the Company does not currently believe that such effects are likely. If, however, a significant number of such failures should occur, some of such systems might be rendered inoperable and would require manual back-up methods or other alternatives, where available. In such a case, the speed of processing business transactions, manufacturing and otherwise conducting business would likely decrease significantly and the cost of such activities would increase, if they could be carried on at all. That could have a material adverse effect on the financial condition and results of operations of the business. - 21 - The Company has highly integrated relationships with certain of its suppliers and customers. These include among others: providers of energy, telecommunications, and raw materials and components, financial institutions, managed care organizations and large retail establishments. The Company has been reviewing, and continues to review, with its critical suppliers and major customers the status of their Year 2000 readiness. The Company has in place a program of requesting assurances of Year 2000 readiness from such suppliers. However, many critical suppliers have either declined to provide the requested assurances or have limited the scope of assurances to which they are willing to commit. The Company has completed its plan for monitoring of critical suppliers. The Company has contacted major customers to assess their readiness to deal with Year 2000 issues. If a significant number of such suppliers and customers were to experience business disruptions as a result of their lack of Year 2000 readiness, their problems could have a material adverse effect on the financial position and results of operations of the Company. This analysis of potential exposures includes both the domestic and international operations of the Company. The Company believes that its most reasonably likely "worst case scenario" would occur if a significant number of its key suppliers or customers were not fully Year 2000 functional, in which case the Company estimates that up to a 10 business day disruption in business operations could occur. In order to address this situation, the Company has formulated contingency plans intended to deal with the impact on the Company of Year 2000 problems that may be experienced by such critical suppliers and major customers. - 22 - With respect to critical suppliers, these plans may include, among others, arranging availability of substitute sources of utilities, closely managing appropriate levels of inventory and identifying alternate sources of supply of raw materials. The Company is also alerting customers to their need to address these problems, but the Company has few alternatives available, other than reversion to manual methods, for avoiding or mitigating the effects of lack of Year 2000 readiness by major customers. In any event, even where the Company has contingency plans, there can be no assurance that such plans will address all the problems that may arise, or that such plans, even if implemented, will be successful. Notwithstanding the foregoing, the Company has no reason to believe that its exposure to the risks of supplier and customer Year 2000 readiness is any greater than the exposure to such risk that affects its competitors generally. Further, the Company believes that its programs for Year 2000 readiness will significantly improve its ability to deal with its own Year 2000 readiness issues and those of suppliers and customers over what would have occurred in the absence of such a program. That does not, however, guarantee that some material adverse effects will not occur. The descriptions of Year 2000 issues set forth in this section is subject to the qualifications set forth herein under the heading "Cautionary Factors that May Affect Future Results". - 23 - CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS This Form 10-Q contains "forward-looking statements" that anticipate results based on management's plans that are subject to uncertainty. Forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like "plans," "expects," "will," "anticipates," "estimates," and other words of similar meaning. These statements may address, among other things, the Company's strategy for growth, product development, regulatory approvals, market position, expenditures, financial results and the effect of Year 2000 readiness issues. Forward-looking statements are based on current expectations of future events. The Company cannot guarantee that any forward- looking statement will be accurate, although the Company believes that it has been reasonable in its expectations and assumptions. Investors should realize that if underlying assumptions prove inaccurate or that unknown risks or uncertainties materialize, actual results could differ materially from our projections. The Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments. The Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1999 contains, in Exhibit 99(b), a discussion of various factors that could cause actual results to differ from expectations. That Exhibit from the Form 10-K is incorporated in this filing by reference. The Company notes these factors as permitted by the Private Securities Litigation Reform Act of 1995. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors also should understand that it is not possible to predict or identify all such factors and should not consider this list to be a complete statement of all potential risks and uncertainties. - 24 - Item 3. Quantitative and Qualitative Disclosures About Market Risk There has been no material change in the Company's assessment of its sensitivity to market risk since its presentation set forth in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," in its Annual Report on Form 10-K for the fiscal year ended January 3, 1999. Part II - OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in numerous product liability cases in the United States, many of which concern adverse reactions to drugs and medical devices. The damages claimed are substantial, and while the Company is confident of the adequacy of the warnings which accompany such products, it is not feasible to predict the ultimate outcome of litigation. However, the Company believes that if any liability results from such cases, it will be substantially covered by reserves established under its self- insurance program and by commercially available excess liability insurance. The Company, along with numerous other pharmaceutical manufacturers and distributors, is a defendant in large number of individual and class actions brought by retail pharmacies in state and federal courts under the antitrust laws. These cases assert price discrimination and price-fixing violations resulting from an alleged industry-wide agreement to deny retail pharmacists price discounts on sales of brand name prescription drugs. The Company believes the claims against the Company in these actions are without merit and is defending them vigorously. The Company, together with another contact lens manufacturer, a trade association and various individual defendants, is a defendant in several consumer class actions and an action brought by multiple State Attorneys General on behalf of consumers alleging violations of federal and state antitrust laws. These cases assert that enforcement of the Company's long-standing policy of selling contact lenses only to licensed eye care professionals is a result of an unlawful conspiracy to eliminate alternative distribution channels from the disposable contact lens market. The Company believes that these actions are without merit and is defending them vigorously. - 25 - The Company's Ortho Biotech subsidiary is party to an arbitration proceeding filed against it by Amgen, Ortho's licensor of U.S. non-dialysis rights to EPO, in which Amgen seeks to terminate Ortho's U.S. license rights based on alleged deliberate EPO sales by Ortho during the early 1990's into Amgen's reserved dialysis market. The Company believes no basis exists for terminating Ortho's U.S. license rights and is vigorously contesting Amgen's claims. However, Ortho's U.S. license rights to EPO are material to the Company; thus, an unfavorable outcome could have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations. The Company is also involved in a number of patent, trademark and other lawsuits incidental to its business. The Company believes that the above proceedings, except as noted above, would not have a material adverse effect on its results of operations, cash flows or financial position. Item 5. Other Information On July 19, 1999, Leo F. Mullin was elected to the Board of Directors of Johnson & Johnson. Mr. Mullin is president, chief executive officer and a director of Delta Air lLines. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Numbers (1) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the three month period ended October 3, 1999. - 26 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JOHNSON & JOHNSON (Registrant) Date: November 12, 1999 By R. J. DARRETTA R. J. DARRETTA Vice President, Finance Date: November 12, 1999 By C. E. LOCKETT C. E. LOCKETT Controller (Chief Accounting Officer) - 27 - EX-27 2
5 9-MOS JAN-02-2000 OCT-03-1999 2,617 976 4,518 331 3,091 12,857 10,754 4,543 28,108 6,980 2,029 0 0 1,535 13,849 28,108 20,241 20,241 6,154 6,154 1,723 30 139 4,730 1,348 3,382 0 0 0 3,382 2.52 2.46
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