EX-13 9 y83983exv13.txt PAGES 28-58 OF 2002 ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 Management's Discussion and Analysis of Results of Operations and Financial Condition Overview Record 2002 sales of $36.3 billion exceeded 2001 sales by $4.0 billion or 12.3% and marked the 70th year of consecutive positive sales growth. This growth was led by the strong performances of the Pharmaceutical and Medical Devices & Diagnostics segments. The balance sheet remains strong with cash generated from operations of $8.2 billion in 2002. Cash dividends per share paid to shareholders in 2002 increased by 13.6% over 2001 and represented the 40th consecutive year of cash dividend increases. The Company continues to be one of few companies with a Triple A credit rating. Organization Management's Objectives The Company's objective is to achieve superior levels of capital efficient profitable growth. To accomplish this, the Company's management operates the business consistent with certain strategic principles that have proven successful over time. To this end, the Company participates in growth areas in human health care and is committed to attaining leadership positions in these growth segments through the development of innovative products and services. In 2002, approximately $4.0 billion or 10.9% of sales was invested in research and development, recognizing the importance of on-going development of new and differentiated products and services. The Company's system of management operates on a decentralized basis. With over 200 operating companies located in 54 countries, the Company views this management philosophy as an asset and fundamental to the success of a broadly based business. It also fosters an entrepreneurial spirit, combining the extensive resources of a large organization with the ability to react quickly to local market changes and challenges. Businesses are managed for the long term in order to sustain leadership positions and achieve growth that provides an enduring source of value to shareholders. Unifying the management team and the Company's dedicated employees in achieving these objectives is the Johnson & Johnson Credo. The Credo provides a common set of values and serves as a constant reminder of the Company's responsibilities to its customers, employees, communities and shareholders. The Company believes that these basic principles, along with its overall mission of improving the quality of life for people everywhere, will enable Johnson & Johnson to continue to be among the leaders in the health care industry. During 2002 as a result of corporate governance issues at certain companies, government lawmakers enacted the Sarbanes-Oxley Act of 2002 to protect investors by improving the accuracy and reliability of corporate disclosures. In light of this legislation, the Company has established a more documented, formal process around its already existing internal controls, like the annual certification of compliance by management with our Policy on Business Conduct. The Company continues to evaluate and enhance its internal control processes. Additionally, the Company continues to maintain a strong ethical environment, using the Johnson & Johnson Credo as the overall guide. Description of Business The Company has approximately 108,300 employees worldwide engaged in the manufacture and sale of a broad range of products in the health care field. The Company sells products in virtually all countries of the world. The Company's primary interest, both historically and currently, has been in products related to human 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. This Committee oversees and coordinates the activities of domestic and international companies which span the Consumer, Pharmaceutical and Medical Devices & Diagnostics segments. Each international subsidiary is, with some exceptions, managed by citizens of the country where it is located. In all its product lines, the Company competes with companies both large and small, located in the United States of America 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 and promotion. Description of Segments Consumer The Consumer segment's principal products are personal care, including nonprescription drugs, adult skin and hair care products, baby care products, oral care products, first aid products, women's health products and nutritional products. These products are marketed principally to the general public and distributed both to wholesalers and directly to independent and chain retail outlets throughout the world. Major brands in the skin and hair care line of products include NEUTROGENA, RoC, AVEENO, CLEAN & CLEAR, JOHNSON'S pH5.5, PIZ BUIN and SUNDOWN sun care products and SHOWER TO SHOWER personal care products. Major brands in the over-the-counter line of products include the broad family of TYLENOL acetaminophen products, adult and children's MOTRIN analgesic products, IMODIUM, MYLANTA and the PEPCID Acid Controller from the Johnson & Johnson Merck Consumer Pharmaceuticals Co. Major brands in the women's health care line of products include CAREFREE, STAYFREE, o.b. Tampons and MONISTAT. Major brands in the baby care line of products include the JOHNSON'S Baby line of products and the PENATEN and NATUSAN baby care products. Major first aid products include BAND-AID Brand Adhesive Bandages and COMPEED. Major oral care products include the REACH brand of toothbrushes. Major products in the nutritionals product line include SPLENDA, a non-caloric sugar substitute, VIACTIV calcium chews and Benecol food products. 28 Pharmaceutical The Pharmaceutical segment's principal worldwide franchises are in the antifungal, anti-infective, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, psychotropic (central nervous system) and urology fields. These products are distributed both directly and through wholesalers and health care professionals for use by prescription by the general public. Prescription drugs in the antifungal field include NIZORAL (ketoconazole), SPORANOX (itraconazole), TERAZOL (terconazole) and DAKTARIN(TM) (miconazole nitrate) antifungal products. Prescription drugs in the anti-infective field include FLOXIN (ofloxacin) and LEVAQUIN (levofloxacin). Prescription drugs in the cardiovascular field include RETAVASE (reteplase), a recombinant biologic cardiology care product for the treatment of acute myocardial infarction to improve blood flow to the heart and ReoPro (abciximab) for the treatment of acute cardiac disease. Prescription drugs in the contraceptive field include ORTHO EVRA (norelgestromin/ethinyl estradiol transdermal system), ORTHO-NOVUM (norethindrone/ethinyl estradiol) and TRICILEST (norgestimate/ethinyl estradiol, sold in the U.S. as ORTHO TRI-CYCLEN) group of oral contraceptives. Prescription drugs in the dermatology field include RETIN-A MICRO (tretinoin), a dermatological cream for acne. Prescription drugs in the gastrointestinal field include ACIPHEX (rabeprazole sodium), a proton pump inhibitor for treating erosive gastroesophageal reflux disease (GERD) and duodenal ulcers from which the Company derives service revenue as this product is co- promoted in the U.S. with Eisai; IMODIUM (loperamide HCl), an antidiarrheal; MOTILIUM (domperidone), a gastrointestinal mobilizer; and REMICADE (infliximab), a novel monoclonal antibody for treatment of certain Crohn's disease patients. REMICADE is also indicated for the treatment of rheumatoid arthritis. Prescription drugs in the hematology field include PROCRIT (Epoetin alfa, sold outside the U.S. as EPREX), a biotechnology derived version of the human hormone erythropoietin that stimulates red blood cell production. Prescription drugs in the immunology field include ORTHOCLONE OKT3 (muromonab-CD3), for reversing the rejection of kidney, heart and liver transplants. Prescription drugs in the neurology field include TOPAMAX (topiramate), REMINYL (galantamine) and STUGERON (cinnarizine). Prescription drugs in the oncology field include DOXIL (doxorubicin), an anti-cancer treatment, ERGAMISOL (levamisole hydrochloride), a colon cancer drug and LEUSTATIN (cladribine), for hairy cell leukemia. Prescription drugs in the psychotropic (central nervous system) field include antipsychotic drugs RISPERDAL (risperidone) and HALDOL (haloperidol) and CONCERTA (methylphenidate) for attention deficit/hyperactivity disorder. Prescription drugs in the pain management field include DURAGESIC (fentanyl transdermal system, sold abroad as DUROGESIC), a transdermal patch for chronic pain; and ULTRACET(TM) (tramadol hydrochloride), an analgesic for moderate to moderately severe pain. Prescription drugs in the urology field include DITROPAN XL (oxybutynin) for the treatment of overactive bladder. Medical Devices & Diagnostics The Medical Devices & Diagnostics segment includes a broad range of products used by or under the direction of health care professionals. These products include Ethicon's wound care, surgical sports medicine and women's health products; Ethicon Endo-Surgery's minimally invasive surgical products; Cordis' circulatory disease management products; LifeScan's blood glucose monitoring products; Ortho-Clinical Diagnostics' professional diagnostic products; DePuy's orthopaedic joint reconstruction and spinal products and Vistakon's disposable contact lenses. These products are used principally in the professional fields by physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics. Acquisitions in the Medical Devices & Diagnostics segment during recent years have been an integral part of an ongoing process to transform a medical supply business to one serving a range of higher technology medical specialties. Operating Results Sales In 2002, worldwide sales increased 12.3% to $36.3 billion, compared to increases of 10.8% in 2001 and 6.6% in 2000. In 2002, sales to the three largest distributors, AmerisourceBergen Corp., McKesson HBOC and Cardinal Distribution, accounted for 10.3%, 9.8% and 9.2%, respectively, of total revenues. Excluding the impact of foreign currencies, worldwide sales increased 12.1% in 2002, 13.4% in 2001, and 9.9% in 2000. Price increases accounted for approximately 1.7%, 1.2% and 1.0% of growth in 2002, 2001 and 2000, respectively. Sales by domestic companies were $22.5 billion in 2002, $19.8 billion in 2001 and $17.3 billion in 2000, that represents increases of 13.3% in 2002, 14.5% in 2001 and 11.5% in 2000. Sales by international companies were $13.8 billion in 2002, $12.5 billion in 2001 and $11.9 billion in 2000, that represents increases of 10.8% in 2002, 5.4% in 2001 and 0.3% in 2000. Excluding the impact of the foreign currency fluctuations over the past three years, sales by international companies increased 10.3% in 2002, 11.8% in 2001 and 7.8% in 2000. For the last five years, the annual compound growth rate for sales was 10.0%. Excluding the impact of foreign currency fluctuations, the annual compound growth rate for sales for the 5-year period was 12.1%. All geographic areas throughout the world posted operational gains during 2002. Excluding the effect of exchange rate fluctuations between the U.S. dollar and foreign currencies, sales increased 8.3% in Europe, 10.9% in the Western Hemisphere (excluding the U.S.) and 13.6% in the Asia-Pacific, Africa regions. Including the impact of currency fluctuations, sales increased 14.2% in Europe and 12.2% in Asia-Pacific, Africa but decreased 2.5% in the Western Hemisphere (excluding the U.S.). The Company achieved an annual compound growth rate of 10.3% for worldwide sales for the 10-year period since 1992 with domestic sales growing at a rate of 12.5% and international sales growing at a rate of 7.5%. Excluding the impact of foreign currency fluctuations, the annual compound growth rate for the 10-year period was 12.0%. 29 Consumer segment sales in 2002 were $6.6 billion, an increase of 3.9% over 2001. Of the 3.9% increase in Consumer segment sales over prior year, 4.6% was operational growth with currency negatively impacting sales growth by 0.7%. Domestic sales increased by 4.5% while international sales gains in local currency of 4.6% were offset by a negative currency impact of 1.5%, resulting in total international growth of 3.1%. Consumer sales achieved strong growth in skin care products (NEUTROGENA, CLEAN & CLEAR and AVEENO) and BAND-AID wound care products, as well as in McNeil Nutritionals' SPLENDA sweetener products and VIACTIV calcium chews. Consumer segment sales in 2001 were $6.3 billion, an increase of 0.8% over 2000. Domestic sales increased by 1.4% while international sales gains in local currency of 6.8% were offset by a negative currency impact of 6.7%, resulting in total growth of 0.1%. Consumer segment sales in 2000 were $6.3 billion, an increase of 0.4% over 1999. Domestic sales increased by 2.8% while international sales gains in local currency of 4.3% were offset by a negative currency impact of 6.6%, resulting in a total decrease of 2.3%. Pharmaceutical segment sales in 2002 were $17.2 billion, an increase of 15.5% over 2001 including 16.4% growth in domestic sales and 13.5% total growth in international sales that includes a 2.4% positive effect of currency. Of the 15.5% increase in Pharmaceutical segment sales over prior year, 14.8% was due to operational increases, with currency positively impacting sales growth by 0.7%. Sales growth reflects the strong performance of PROCRIT/EPREX, for treatment of anemia; REMICADE, a treatment for rheumatoid arthritis and Crohn's disease; RISPERDAL, an antipsychotic medication; DURAGESIC, a transdermal patch for chronic pain, and TOPAMAX, an anti-epileptic medication. Sales of PROCRIT/EPREX accounted for 11.8% of total Company revenues for 2002 and 10.6% in 2001. Johnson & Johnson markets over 100 prescription drugs around the world, with 30.5% of the sales generated outside the United States. Thirty-three drugs sold by the Company had 2002 sales in excess of $50 million, with 24 in excess of $100 million. The rate of growth for sales of PROCRIT and EPREX was slowed in the latter half of 2002 as a result of new competition for PROCRIT. Sales growth may also have been affected by rare reports of Pure Red Cell Aplasia (PRCA) in chronic renal failure (CRF) patients administered EPREX subcutaneously. The Company's on-going investigation of PRCA in CRF patients indicates that the occurrence of PRCA continues to be rare. During the second quarter of 2002, the Company completed its acquisition of Tibotec-Virco N.V. for approximately $320 million. Tibotec-Virco N.V. is a privately-held biopharmaceutical company focused on developing anti-viral treatments, with several promising compounds in development for the treatment of infectious diseases including HIV. During the fourth quarter of 2002, the Company received U.S. Food and Drug Administration (FDA) approval for LEVAQUIN (levofloxacin) for an additional indication for the treatment of nosocomial pneumonia, the second most common hospital-acquired infection. The Company also filed several new drug applications with the FDA. These include TOPAMAX (topiramate) for the prevention of migraine headaches in adults as well as for use as a monotherapy treatment in epilepsy (it is currently approved as adjunctive treatment), LEVAQUIN for a five-day treatment of community-acquired pneumonia, and RISPERDAL (risperidone) as both adjunctive and monotherapy treatments of bipolar disorder. Also in the fourth quarter of 2002, the Company announced a definitive agreement to acquire OraPharma, Inc., a specialty pharmaceutical company focused on the development and commercialization of unique therapeutics in oral health care products. The acquisition will provide entry into the oral health professional marketplace by providing a synergistic line of prevention and treatment products to maintain periodontal health. The transaction is valued at approximately $85 million, net of cash, and closed in the first quarter of 2003. Pharmaceutical segment sales in 2001 were $14.9 billion, a total increase of 17.3% over 2000 including 21.3% growth in domestic sales. Operationally, international sales increased 14.2% but were partially offset by a negative currency impact of 4.9%, resulting in total growth of 9.3%. Pharmaceutical segment sales in 2000 were $12.7 billion, an increase of 12.7% over 1999 including 21.4% growth in domestic sales. Operationally, international sales increased 7.6% but were more than offset by a negative currency impact of 8.9% resulting in a total decrease in sales of 1.3%. Sales growth was partially offset by the restricted access of PROPULSID in a number of markets around the world. Worldwide sales in 2002 of $12.6 billion in the Medical Devices & Diagnostics segment represented an increase of 12.9% over 2001. As currency had no impact on sales growth, the 12.9% total increase is also the operational sales increase over prior year. Domestic sales were up 13.0% and international sales increased 12.8% over the prior year. Strong sales growth was achieved in each of the major franchises within this segment: Cordis' circulatory disease management products; DePuy's orthopaedic joint reconstruction and spinal products; Ethicon's wound care, surgical sports medicine and women's health products; LifeScan's blood glucose monitoring products; Ethicon Endo-Surgery's minimally invasive surgical products; Ortho-Clinical Diagnostics' professional diagnostic products and Vistakon's disposable contact lenses. 30 During the third quarter of 2002, the Company announced the final results for SIRIUS, the landmark U.S. study of the CYPHERTM Sirolimus-eluting Stent. This drug-eluting coronary stent is the first of its kind to be recommended for FDA approval. Clinical results of the CYPHERTM stent indicate a significant reduction of in-stent restenosis and revascularization rates as compared to bare metal stents. The findings confirm the stent's continued excellent performance in significantly reducing reblockage of coronary arteries in patients with coronary artery disease. Additionally, in July 2002, the U.S. Department of Health and Human Services (HHS) made a decision to provide accelerated incremental reimbursement to hospitals for this technology commencing April 1, 2003 under newly established Diagnostic Related Groups (DRGs). In order to ensure access to this technology for patients as rapidly as possible, HHS has taken the unprecedented step of assigning it to new DRGs prior to FDA approval. On October 22, 2002, the Circulatory System Device Panel advisory panel voted 8-0 in favor of FDA approval with recommended conditions, for the Company's drug-eluting coronary stent. The Company is continuing to work with the FDA on their on-going review for product approval. Also in the fourth quarter of 2002, the FDA's Orthopaedic and Rehabilitation Devices Panel unanimously recommended in favor of FDA approval, with conditions, for the INDEPENDENCE(TM) iBOT(TM) Mobility System. The iBOT(TM) Mobility System is a unique device that offers benefits for individuals with mobility-related disabilities. The device can be used to navigate difficult terrain, climb stairs and ramps and balance at standing height on two wheels. In December 2002, Ethicon received FDA clearance to market VICRYL Plus Antibacterial Suture, the first and only suture designed with an antibacterial agent. Designed to reduce bacterial colonization on the suture, VICRYL Plus may help reduce the risk of complications associated with surgery. Worldwide sales in 2001 of $11.1 billion in the Medical Devices & Diagnostics segment represented a total increase of 8.8% over 2000. Domestic sales were up 12.1%, while international sales increased 5.1% as sales gains in local currency of 12.1% were offset by a negative currency impact of 7.0%. Worldwide sales in 2000 of $10.2 billion in the Medical Devices & Diagnostics segment represented a total increase of 3.7% over 1999 consisting of gains in local currency of 6.9% that were reduced by 3.2% due to the strength of the U.S. dollar. Domestic sales were up 3.9%, while international sales increased 3.4% as sales gains in local currency of 10.3% were offset by a negative currency impact of 6.9%. Gross Profit Gross profit margin in 2002 was 71.2%, an improvement of 0.8% over the gross profit margin in 2001 of 70.4%. The improvement in gross profit margin for 2001 was 1.1% over the gross profit margin in 2000 of 69.3%, an improvement of 0.5% over 1999. The improvement in gross profit margin over the past three years was primarily a result of continued improvements in the mix of businesses and successful ongoing cost control efforts. Selling, General and Administrative Expenses Consolidated selling, general and administrative expenses increased 8.5%, 7.3% and 4.3% in 2002, 2001 and 2000, respectively. Selling, general and administrative expenses as a percent to sales were 33.7%, 34.8% and 36.0% in 2002, 2001 and 2000, respectively. As a result of the implementation in 2002 of Emerging Issues Task Force (EITF) Issue No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor's Products," the Company reclassified $687 million and $674 million for 2001 and 2000, respectively, from selling, general and administrative expenses to a reduction of sales and reclassified $45 million and $49 million of expense for 2001 and 2000, respectively, from selling, general and administrative expenses to cost of products sold. Advertising expenses, which are comprised of television, radio and print media, as well as Internet advertising, were $1.5 billion in 2002, $1.4 billion in 2001 and $1.4 billion in 2000. Research 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 consumers and patients. Worldwide costs of research activities, excluding in-process research & development charges, were as follows:
(Millions of Dollars) 2002 2001 2000 --------------------------------------------------- Research expense $3,957 3,591 3,105 Percent increase over prior year 10.2% 15.7% 12.2% Percent of sales 10.9 11.1 10.6
Research expense as a percent of sales for the Pharmaceutical segment was 15.7% for 2002, 16.6% for 2001 and 16.4% for 2000 while averaging 6.6%, 6.5% and 6.2% in the Consumer and Medical Devices & Diagnostics segments for 2002, 2001 and 2000, respectively. Significant research activities continued in the Pharmaceutical segment, with spending increasing to $2.7 billion or 9.3% over 2001 representing a compound annual growth rate of approximately 12.2% for the five-year period since 1997. Johnson & Johnson Pharmaceutical Research & Development, L.L.C., formerly known as the Janssen Research Foundation and the R.W. Johnson Pharmaceutical Research Institute, is the primary worldwide pharmaceutical research organization and additional research is conducted by Centocor, ALZA Corporation (ALZA), Tibotec-Virco N.V. and through collaboration with the James Black Foundation in London, England. 31 In-Process Research & Development In the second quarter of 2002, the Company recorded in-process research & development (IPR&D) charges of $189 million after-tax ($189 million before tax as IPR&D is not generally tax deductible in the U.S.) related to acquisitions. These acquisitions included Tibotec-Virco N.V., a privately-held biopharmaceutical company focused on developing anti-viral treatments and Obtech Medical AG, a privately-held company that markets an adjustable gastric band for the treatment of morbid obesity. In the fourth quarter of 2001, the IPR&D charge of $105 million after-tax ($105 million before tax as IPR&D is not generally tax deductible in the U.S.) was incurred as a result of the acquisition of Inverness Medical Technology, a supplier of LifeScan electrochemical products for blood glucose monitoring following the spin-off of its non-diabetes businesses and TERAMed, an early stage medical device company that is developing endovascular stent-graft systems for minimally invasive treatment of abdominal aortic aneurysms and peripheral occlusive disease. In 2000, the Company's IPR&D charges of $66 million after-tax ($66 million before tax as IPR&D is not generally tax deductible in the U.S.) was related to the acquisition of Atrionix, Inc., a development stage company whose primary product is a pulmonary ablation catheter for the treatment of atrial fibrillation and Crescendo, a company formed by ALZA for the purpose of selecting, developing and commercializing human pharmaceutical products. Interest (Income) Expense Interest income decreased in 2002 primarily due to the decline in U.S. interest rates and cash expended as part of a stock repurchase program (see page 34). In 2002, the average yield on investments was more than 200 basis points below the average yield in 2001. Interest expense in 2002 as compared to 2001 remained relatively constant as there were no significant changes in average debt balances. Other (Income) Expense, Net Other (income) expense includes gains and losses related to the sale and write-down of certain equity securities of the Johnson & Johnson Development Corporation, losses on the disposal of fixed assets, currency gains & losses, minority interests, litigation settlement expense as well as royalty income. Additionally, in 2002, other (income) expense included the gain on the sale of the Ortho Prefest product line and the impact of the Amgen arbitration settlement. On October 18, 2002, an arbitrator in Chicago denied an effort by Amgen, Inc., to terminate the 1985 license agreement under which Ortho Biotech obtained exclusive U.S. rights to Amgen-developed erythropoietin (EPO which is sold as PROCRIT/EPREX) for all indications outside of kidney dialysis. Amgen had filed suit in 1995, claiming that Ortho Biotech had breached its license rights by improperly making sales of EPO into Amgen's exclusive dialysis market. In his decision, the arbitrator found that sales had been made into markets where Amgen had retained exclusive rights, but that they did not warrant the extraordinary remedy of terminating the contract. Instead, he found that Amgen could be adequately compensated with monetary damages. The arbitrator awarded $150 million in damages that was recorded in the third quarter of 2002. This arbitration was the fourth between the parties since 1989. On January 24, 2003, the arbitrator ruled that Amgen was the "prevailing party" in this arbitration, entitling it to an award of reasonable attorneys' fees and costs. Amgen has not yet submitted its application for fees and costs. The Company expensed $85 million in the fourth quarter of 2002 in connection with this outstanding claim. In 2001, in addition to the items indicated above, other (income) expense included costs related to the merger with ALZA of $147 million and the amortization expense of approximately $141 million that is no longer required under Financial Accounting Standards Board (FASB) Standard No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). In 2000, in addition to the items indicated above, other (income) expense included a favorable adjustment to the costs associated with the 1998 global manufacturing restructuring charge and the gain on the sale of various product lines. Earnings Before Provision for Taxes on Income. Consolidated earnings before provision for taxes on income increased 17.6%, 15.0% and 16.9% in 2002, 2001 and 2000, respectively. Excluding the IPR&D and merger charges noted in the previous sections, the increases were 16.3%, 18.1% and 15.8% in 2002, 2001 and 2000, respectively. The increase in 2002 is due primarily to volume growth, improved gross profit margins and efficiencies in spending in selling, marketing and administrative expenses. Operating profit by segment for 2002 and 2001 is as follows:
Percent of Sales (Millions of Dollars) 2002 2001 2002 2001 ------------------------------------------------------ Consumer $1,229 1,004 18.7% 15.9% Pharmaceutical 5,787 4,928 33.7 33.2 Med Devices & Diag 2,489 2,001 19.8 18.0 -------------- Segments total 9,505 7,933 26.2 24.5 Expenses not allocated to segments (214) (35) -------------- Earnings before taxes on income $9,291 7,898 25.6% 24.4% ==============
32 The increase in expenses not allocated to segments is primarily due to the decline in interest income in 2002 as discussed in the Interest (Income) Expense section. Consumer segment operating profit increased 22.4% over prior year and reflects an operating profit as a percent to sales improvement of 2.8%. The improvement is due primarily to leveraging of selling, promotion and administrative expenses offset by increased expenditures in advertising. Additionally, the Consumer segment operating profit improved 0.6% as amortization expense is no longer required under SFAS No. 142. Pharmaceutical segment operating profit increased 17.4% and reflects an operating profit as a percent to sales improvement of 0.5%. The Pharmaceutical segment operating profit was negatively impacted by the cost of the Amgen arbitration settlement in 2002 of $150 million in damages and $85 million in legal fees, IPR&D related to the Tibotec-Virco N.V. acquisition and offset by the gain on the sale of the Ortho Prefest product line. There was no impact of SFAS No. 142 on operating profit as a percent to sales in the Pharmaceutical segment. The Pharmaceutical segment operating profit also included the effect of leveraging marketing expenses. In 2001, the Pharmaceutical operating profit included expenses related to the merger with ALZA. Medical Devices & Diagnostics segment operating profit increased 24.4% and reflects an operating profit as a percent to sales improvement of 1.8%. The non-amortization per SFAS No. 142 accounted for 0.8% of the improvement. The remaining margin improvement over prior year was achieved despite investment spending in support of the Cordis product line. Operating profit includes the IPR&D associated with the acquisitions of Obtech Medical AG in 2002 and Inverness Medical Technology and TERAMed in 2001. Provision For Taxes on Income The worldwide effective income tax rate was 29.0% in 2002, 28.2% in 2001 and 27.9% in 2000. The increase in the effective tax rate for the years, 2002, 2001 and 2000 was primarily due to the increase in income subject to tax in the U.S. and the Company's non-deductible IPR&D charge. Refer to Footnote 8 to the financial statements for additional information. Net Income and Earnings Per Share Worldwide net earnings for 2002 were $6.6 billion, reflecting a 16.4% increase over 2001. Worldwide net earnings per share for 2002 equaled $2.16 per share, an increase of 17.4% from the $1.84 net earnings per share in 2001. Excluding the impact of IPR&D in 2002 and the impact of IPR&D and merger costs in 2001, worldwide net earnings were $6.8 billion and net earnings per share were $2.23, representing an increase of 15.0% and 16.8%, respectively, over 2001. The impact of the non-amortization per SFAS No. 142 increased net earnings and earnings per share by approximately 2.0%. Worldwide net earnings achieved a 10-year annual growth rate of 21.0%, while earnings per share grew at a rate of 20.3%. Excluding the impact of an accounting change in 1992 and IPR&D in 2002, worldwide net earnings achieved a 10-year annual growth rate of 15.7%, while earnings per share grew at a rate of 15.0%. The 5-year annual compound growth rates for net earnings and earnings per share are 16.3% and 16.2%, respectively. Excluding the impact of IPR&D and merger costs, worldwide net earnings achieved a 5-year annual growth rate of 14.9%, while earnings per share grew at a rate of 15.0%. Worldwide net earnings for 2001 were $5.7 billion, reflecting a 14.4% increase over 2000. Worldwide net earnings per share for 2001 equaled $1.84 per share, an increase of 14.3% from the $1.61 net earnings per share in 2000. Excluding the impact of IPR&D and merger costs in 2001 and IPR&D net of a favorable adjustment to the costs associated with the 1998 global manufacturing restructuring charge in 2000, worldwide net earnings were $5.9 billion and net earnings per share were $1.91, representing an increase of 18.0% and 17.2%, respectively, over 2000. Worldwide net earnings for 2000 were $5.0 billion, reflecting a 15.9% increase over 1999. Worldwide net earnings per share for 2000 equaled $1.61 per share, an increase of 15.8% from the $1.39 net earnings per share in 1999. Excluding the impact of IPR&D net of a favorable adjustment to the costs associated with the 1998 global manufacturing restructuring charge in 2000 and merger costs in 1999, worldwide net earnings were $5.0 billion and net earnings per share were $1.63, representing an increase of 14.9% and 14.8% respectively over 1999. Cash Flows and Liquidity Cash generated from operations and selected borrowings provide the major sources of funds for the growth of the business, including working capital, capital expenditures, acquisitions, share repurchases, dividends and debt repayments. Cash and current marketable securities were $7.5 billion at the end of 2002 as compared with $8.0 billion at the end of 2001. 33 Cash generated from operations amounted to $8.2 billion in 2002, which is less than the cash generated from operations in 2001 of $8.9 billion. This decrease is due primarily to the funding of the U.S. pension plan of approximately $750 million net of the current tax benefit during 2002. In 2001, there was a change in the timing of salary increases and bonuses paid to employees from December 2001 to February 2002. This change was enacted to have 2001 results finalized in order to align compensation and performance. The result of this change was an increase of approximately $450 million in cash flows in 2001 from operating activities due to the payment of the 2001 bonus in 2002. Capital Expenditures Capital expenditures in 2002 increased to $2.1 billion or 21.3% over 2001 and increased 2.5% to $1.7 billion in 2001 over 2000. The increase in 2002 is due primarily to expansion of manufacturing facilities to support new and existing products, investments in support of research and investments in information systems across all business segments. Share Repurchases & Dividends On February 13, 2002, the Company announced a stock repurchase program of up to $5 billion with no time limit on this program. This program was completed on August 1, 2002, with 83.6 million shares repurchased for an aggregate price of $5.0 billion. In addition to the 2002 stock repurchase program, the Company has an annual program to repurchase shares for use in employee stock and employee incentive plans. The Company increased its cash dividend in 2002 for the 40th consecutive year. Cash dividends paid were $0.795 per share in 2002, compared with dividends of $0.70 per share in 2001 and $0.62 per share in 2000. The dividends were distributed as follows:
2002 2001 2000 ---------------------------------------------- First quarter $ .18 .16 .14 Second quarter .205 .18 .16 Third quarter .205 .18 .16 Fourth quarter .205 .18 .16 -------------------- Total $.795 .70 .62 ====================
On January 6, 2003, the Board of Directors declared a regular cash dividend of $0.205 per share, paid on March 11, 2003 to shareholders of record as of February 18, 2003. The Company expects to continue the practice of paying regular cash dividends. Contractual Obligations & Commitments The Company has long-term contractual obligations primarily lease and debt obligations. To satisfy these obligations, the Company intends to use cash from operations. The following table summarizes the Company's contractual obligations and their aggregate maturities as of December 29, 2002 (see Notes 4 and 6 for further details):
Operating Debt (Millions of Dollars) Leases Obligations ------------------------------------------------------- 2003 $138 77 2004 121 270 2005 101 17 2006 86 12 2007 67 8 After 2007 $160 1,715
Financial Position & Capital Resources Total Assets & Returns Total assets increased $2.1 billion or 5.4% in 2002 and $4.2 billion or 12.4% in 2001. Of the consolidated assets at year-end 2002, Medical Devices & Diagnostics accounted for 37.1%, 27.4% were Pharmaceutical segment assets, 12.5% were Consumer segment assets and 23.0% were general corporate assets. At year-end 2001, 35.5% and 27.5% of the consolidated assets were identifiable to the Medical Devices & Diagnostics and Pharmaceutical segments, respectively while 10.9% and 26.1% were Consumer segment and general corporate assets, respectively. Net intangible assets in 2002 increased 1.9% over 2001 and represented 22.8% of total assets at year-end 2002. Net property, plant and equipment increased to $8.7 billion or 12.8% and represented 21.5% of total assets at year-end 2002. Shareholders' equity per share at the end of 2002 was $7.65 compared with $7.95 at year-end 2001, a decrease of 3.8%. The decrease is primarily due to the $5 billion stock repurchase program completed during 2002. Financing & Market Risk The Company uses financial instruments to manage the impact of foreign exchange rate changes on 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 primarily by the effect of foreign exchange rate changes on the underlying transactions. A 10% appreciation of the U.S. Dollar from December 29, 2002 market rates would increase the unrealized value of the Company's forward contracts by $252 million. Conversely, a 10% depreciation of the U.S. Dollar from December 29, 2002 market rates would decrease the unrealized value of the Company's forward contracts by $308 million. In either scenario, the gain or loss on the forward contract would be offset by the effect of foreign exchange rate changes on the underlying transaction. 34 The Company enters into currency swap contracts to manage the Company's exposure to changes in currency exchange rates by hedging foreign currency denominated assets and liabilities. The impact of a 1% change in interest rates on the Company's interest rate sensitive financial instruments would be 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. Total unused credit available to the Company approximates $3.1 billion, including $1.5 billion of credit commitments and $0.8 billion of uncommitted lines with various banks worldwide that expire during 2003. The Company's shelf registration filed with the Securities and Exchange Commission enables the Company to issue up to $2.6 billion of unsecured debt securities and warrants to purchase debt securities under its medium term note (MTN) program. No MTN's were issued in 2002. At December 29, 2002, the Company had $1.8 billion remaining on its shelf registration. The Company continues to be one of few companies with a Triple A credit rating. Total borrowings at the end of 2002 and 2001 were $4.1 billion and $2.8 billion, respectively. In 2002, net cash (cash and current marketable securities net of debt) was $3.3 billion. In 2001, net cash (cash and current marketable securities net of debt) was $5.2 billion. Total debt represented 15.4% of total capital (shareholders' equity and total debt) in 2002 and 10.3% of total capital in 2001. For the period ended December 29, 2002, there were no material cash commitments. A summary of borrowings can be found in Note 6. 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 the relief being 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. Other Matters Critical Accounting Policies & Estimates Management's discussion and analysis of results of operations and financial condition are based on the Company's consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported for revenues, expenses, assets, liabilities and other related disclosures. Actual results may or may not differ from these estimates. The Company's significant accounting policies are described in Note 1, however the Company believes that the understanding of certain key accounting policies and estimates is essential in achieving more insight into the Company's operating results and financial condition. These key accounting policies and estimates include revenue recognition, accounting for income taxes, legal and self insurance contingencies, valuation of long lived assets, assumptions used to determine the amounts recorded for pensions and other employee benefit plans and accounting for stock options. Revenue Recognition The Company recognizes revenue from product sales when goods are shipped or delivered depending on when title and risk passes to the customer. Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns and discounts to customers are provided for as reductions in determining sales in the same period the related sales are recorded. These provisions, the largest of these being the Medicaid rebate provision, are based on estimates derived from current program requirements and historical experience. The Company also recognizes service revenue that is received for co-promotion of certain products. At year-end December 29, 2002, these revenues were less than 2% of total revenues and are included in product sales. Income Taxes Income taxes are recorded based on amounts refundable or payable in the current year and include the results of any difference between U.S. GAAP accounting and U.S. tax reporting that are recorded as deferred tax assets or liabilities. The Company records deferred tax assets and liabilities based on current tax regulations and rates. Changes in tax laws and rates that may affect these deferred tax assets and liabilities are recorded in the future. Management believes that changes in these estimates would not have a material effect on the Company's results of operations, cash flows or financial position. The Company intends to continue to reinvest its undistributed international earnings to expand its international operations; therefore no U.S. tax expense has been recorded to cover the repatriation of such undistributed earnings. At December 29, 2002, and December 30, 2001, the cumulative amount of undistributed international earnings was approximately $12.3 billion and $12.1 billion, respectively. 35 Legal & Self Insurance Contingencies The Company records accruals for various contingencies including legal proceedings and product liability cases as they arise in the normal course of business. The accruals are based on management's judgment as to the probability of losses, opinions of legal counsel and where applicable, actuarially determined estimates. Additionally, the Company records insurance receivable amounts from third party insurers based on the probability of recovery. As appropriate, reserves against these receivables are recorded for estimated amounts that may not be collected from such third party insurers. Long Lived and Intangible Assets The Company assesses changes in economic conditions and strategic priorities and makes assumptions regarding estimated future cash flows in evaluating the value of the Company's fixed assets, goodwill and other non-current assets. As these assumptions and estimates may change over time, it may or may not be necessary for the Company to record impairment charges. Employee Benefit Plans The Company sponsors various retirement and pension plans, including defined benefit, defined contribution and termination indemnity plans that cover most employees worldwide. These plans require assumptions for the discount rate, expected return on plan assets, expected salary increases and health care cost trend rates. See Note 13 for further detail on these rates and the effect of a change in these rates on the Company's results of operations. Stock Options The Company has elected the use of Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) that does not require compensation costs related to stock options to be recorded in net income, as all options granted under the various stock option plans had an exercise price equal to the market value of the underlying common stock at grant date. Statement of Financial Accounting Standard (SFAS) No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" requires pro forma disclosure of net income and earnings per share determined as if the fair value method of accounting for stock options had been applied in measuring compensation cost. See Notes 1 and 10 for further information regarding stock options. New Accounting Standards In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The Company will adopt this standard in 2003 that is effective for fiscal years beginning after June 15, 2002 and it is not expected to have a material impact on the Company's results of operations, cash flows or financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which was effective for the first quarter of 2002. The Company's adoption of SFAS No. 144 did not have a material effect on the Company's results of operations, cash flows or financial position. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" which is effective for exit or disposal activities that are initiated after December 31, 2002. The Company will adopt SFAS No. 146 in the first quarter of 2003 and is not expected to have a material effect on the Company's results of operations, cash flows or financial position. On November 25, 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN 45 clarifies the requirements of FASB Statement No. 5, "Accounting for Contingencies," relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods that end after December 15, 2002 and have been adopted by the Company. There is no disclosure required at year-end 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of the guarantor's year-end. FIN 45 requires that upon issuance of a guarantee, the entity must recognize a liability for the fair value of the obligation it assumes under that guarantee. The Company's adoption of FIN 45 in 2003 is not expected to have a material effect on the Company's results of operations, cash flows or financial position. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51," which addresses consolidation of variable interest entities. FIN 46 expands the criteria for consideration in determining whether a variable interest entity should be consolidated by a business entity, and requires existing unconsolidated variable interest entities (which include, but are not limited to, Special Purpose Entities, or SPEs) to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 is not expected to have a material effect on the Company's results of operations, cash flows or financial position. 36 Changing Prices & 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 1992-2002, 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 2002, 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. Common Stock Market Prices The Company's common stock is listed on the New York Stock Exchange under the symbol JNJ. The composite market price ranges for Johnson & Johnson common stock during 2002 and 2001 were:
2002 2001 ----------------------------- High Low High Low --------------------------------------------------- First quarter $65.89 54.70 52.34 40.25 Second quarter 65.29 52.00 54.20 42.60 Third quarter 56.50 41.40 57.60 50.00 Fourth quarter 61.30 53.00 60.97 53.05 Year-end close $53.11 59.86
Subsequent Events On February 10, 2003, Johnson & Johnson announced that it signed a definitive agreement with Scios Inc., a biopharmaceutical company with a marketed product for cardiovascular disease and research projects focused on auto-immune diseases. The Company will acquire Scios in a cash for stock exchange. Under the terms of the agreement, Scios shareholders will receive $45.00 for each outstanding Scios share. The value of the transaction as of the anticipated closing date is expected to be approximately $2.4 billion, net of cash anticipated to be acquired, based on Scios' approximately 59.8 million fully diluted shares outstanding. The boards of directors of Johnson & Johnson and Scios have given their approval to the transaction, which is subject to clearance under the Hart-Scott-Rodino Anti-Trust Improvements Act. This transaction is also subject to the approval of the shareholders of Scios and other customary closing conditions. Scios is a biopharmaceutical company developing novel treatments for cardiovascular and inflammatory disease. The company's disease-based technology platform integrates expertise in protein biology with computational and medicinal chemistry to identify novel targets and rationally design small molecule compounds for large markets with unmet medical needs. Scios' product NATRECOR is the first novel agent approved for congestive heart failure (CHF) in more than a decade. NATRECOR is a recombinant form of a naturally occurring protein secreted by the heart as part of the body's response to CHF. The drug has several significant advantages over existing therapies for CHF, the single most common cause of hospitalization in the United States for patients over 65. The principal focus of Scios' research and development program is small molecule inhibitors, and includes several potential new treatments for pain and inflammatory diseases, including an advanced p-38 kinase inhibitor program. The transaction is expected to close in the second quarter of 2003, and the Company anticipates an IPR&D charge of approximately $700 million to be incurred in connection with this acquisition. Cautionary Factors That May Affect Future Results. This Annual Report contains forward-looking statements. Forward-looking statements do not relate strictly to historical or current facts and anticipate results based on management's plans that are subject to uncertainty. Forward-looking statements may be identified by the use of words like "plans," "expects," "will," "anticipates," "estimates" and other words of similar meaning in conjunction with, among other things, discussions of future operations, financial performance, the Company's strategy for growth, product development, regulatory approval, market position and expenditures. 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 vary materially from the Company's expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. Furthermore, 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 report on Form 10-K for the year ended December 29, 2002 that will be filed in March 2003, will contain, as an Exhibit, a discussion of various factors that could cause actual results to differ from expectations. Prior to that filing, investors should reference the Company's report on Form 10-K for the fiscal year ended December 30, 2001. The Company notes these factors as permitted by the Private Securities Litigation Reform Act of 1995. 37 Consolidated Balance Sheets Johnson & Johnson and Subsidiaries At December 29, 2002 and December 30, 2001 (Dollars in Millions Except Share and Per Share Data) (Note 1)
2002 2001 ------- ----- Assets Current assets Cash and cash Equivalents (Notes 1, 14 and 15) $ 2,894 3,758 Marketable securities (Notes 1, 14 and 15) 4,581 4,214 Accounts receivable trade, less allowances for doubtful accounts $191 (2001, $197) 5,399 4,630 Inventories (Notes 1 and 2) 3,303 2,992 Deferred taxes on income (Note 8) 1,419 1,192 Prepaid expenses and other Receivables 1,670 1,687 --------------------- Total current assets 19,266 18,473 ===================== Marketable securities, non-current (Notes 1, 14 and 15) 121 969 Property, plant and equipment, net (Notes 1 and 3) 8,710 7,719 Intangible assets, net (Notes 1 and 7) 9,246 9,077 Deferred taxes on income (Note 8) 236 288 Other assets (Note 5) 2,977 1,962 --------------------- Total assets $40,556 38,488 ===================== Liabilities and Shareholders' Equity ------------------------------------------------------- Current liabilities Loans and notes payable (Note 6) $ 2,117 565 Accounts payable 3,621 2,838 Accrued liabilities 3,820 3,135 Accrued salaries, wages and commissions 1,181 969 Taxes on income 710 537 --------------------- Total current liabilities 11,449 8,044 ===================== Long-term debt (Note 6) 2,022 2,217 Deferred tax liability (Note 8) 643 493 Employee related obligations (Note 5) 1,967 1,870 Other liabilities 1,778 1,631 Shareholders' equity Preferred stock - without par value (authorized and unissued 2,000,000 shares) -- -- Common stock - par value $1.00 per share (Note 20) (authorized 4,320,000,000 shares; issued 3,119,842,000 shares) 3,120 3,120 Note receivable from employee stock ownership plan (Note 16) (25) (30) Accumulated other comprehensive income (Note 12) (842) (530) Retained earnings 26,571 23,066 --------------------- 28,824 25,626 Less: common stock held in treasury, at cost (Note 20) (151,547,000 and 72,627,000) 6,127 1,393 --------------------- Total shareholders' equity 22,697 24,233 ===================== Total liabilities and shareholders' equity $40,556 38,488 =====================
See Notes to Consolidated Financial Statements 38 Consolidated Statements of Earnings Johnson & Johnson and Subsidiaries (Dollars in Millions Except Per Share Figures) (Note 1)
2002 2001 2000 ---------------------------------------------------------- Sales to customers $36,298 32,317 29,172 ========================== Cost of products sold 10,447 9,581 8,957 ========================== Gross profit 25,851 22,736 20,215 Selling, marketing and administrative expenses 12,216 11,260 10,495 Research expense 3,957 3,591 3,105 Purchased in-process research and development (Note 17) 189 105 66 Interest income (256) (456) (429) Interest expense, net of portion capitalized (Note 3) 160 153 204 Other (income) expense, Net 294 185 (94) -------------------------- 16,560 14,838 13,347 -------------------------- Earnings before provision for taxes on income 9,291 7,898 6,868 Provision for taxes on income (Note 8) 2,694 2,230 1,915 -------------------------- Net earnings $ 6,597 5,668 4,953 ========================== Basic net earnings per share (Notes 1 and 19) $ 2.20 1.87 1.65 ========================== Diluted net earnings per share (Notes 1 and 19) $ 2.16 1.84 1.61 ==========================
See Notes to Consolidated Financial Statements 39 Consolidated Statements of Equity Johnson & Johnson and Subsidiaries (Dollars in Millions) (Note 1)
Note Rec. From Employee Compre- Stock Owner- hensive Retained ship Plan Total Income Earnings (ESOP) ----------------------------------------------------------------------------- Balance, Jan 2, 2000 $16,995 14,768 (41) ============================================= Net earnings 4,953 4,953 4,953 Cash dividends paid (1,724) (1,724) Employee stock Compensation and stock option plans 619 (456) Conver. of subordinated Debentures 504 504 Repurchase of common Stock (973) Business combinations 77 68 Other comprehensive income, net of tax: Curncy translation adj (45) (45) Unrealized gains/(losses) on securities (2) (2) Pension liab adj (15) (15) Reclassification adj (52) ----- Total comprehensive income 4,839 ===== Note receivable from ESOP 6 6 ------ -------------------------------- Bal, Dec 31, 2000 $20,395 18,113 (35) =========================================== Net earnings 5,668 5,668 5,668 Cash dividends paid (2,047) (2,047) Employee stock Compensation and stock option plans 842 (602) Conver. of subordinated Debentures 815 632 Repurchase of common stock (2,742) Business combinations 1,366 1,302 Other comprehensive income, net of tax: Curncy translation adj (175) (175) Unrealized gains/(losses) on securities 8 8 Gains/(losses) on derivatives & hedges 98 98 Reclassification adj (14) ----- Total comprehensive income 5,585 ===== Note receivable from ESOP 5 5 ------ -------------------------------- Bal, Dec 30, 2001 $24,233 23,066 (30) =========================================== Net earnings 6,597 6,597 6,597 Cash dividends paid (2,381) (2,381) Employee stock Compensation and stock option plans 806 (489) Conver. of subordinated Debentures 131 (222) Repurchase of common stock (6,382) Other comprehensive income, net of tax: Curncy translation adj (10) (10) Unrealized gains/(losses) on securities (86) (86) Pension liab adj (18) (18) Gains/(losses) on derivatives & hedges (198) (198) Reclassification adj (26) ----- Total comprehensive income 6,259 ===== Note receivable from ESOP 5 5 ------ -------------------------------- Bal, Dec 29, 2002 $22,697 26,571 (25) ===========================================
See Notes to Consolidated Financial Statements 40 Consolidated Statements of Equity Johnson & Johnson and Subsidiaries (Dollars in Millions) (Note 1)
Accumul Other Common Compre- Stock Treasury hensive Issued Stock Income Amount Amount ------------------------------------------------------------ Balance, Jan 2, 2000 (399) 3,120 (453) ============================================================ Net earnings Cash dividends paid Employee stock Compensation and stock option plans 1,075 Conver. of subordinated Debentures Repurchase of common Stock (973) Business combinations 9 Other comprehensive income, net of tax: Curncy translation adj (45) Unrealized gains/(losses) on securities (2) Pension liab adj (15) Reclassification adj Total comprehensive income Note receivable from ESOP ----------------------- Bal, Dec 31, 2000 (461) 3,120 (342) ======================= Net earnings Cash dividends paid Employee stock Compensation and stock option plans 1,444 Conver. of subordinated Debentures 183 Repurchase of common stock (2,742) Business combinations 64 Other comprehensive income, net of tax: Curncy translation adj (175) Unrealized gains/(losses) on securities 8 Gains/(losses) on derivatives & hedges 98 Reclassification adj Total comprehensive income Note receivable from ESOP ----------------------- Bal, Dec 30, 2001 (530) 3,120 (1,393) ======================= Net earnings Cash dividends paid Employee stock Compensation and stock option plans 1,295 Conver. of subordinated Debentures 353 Repurchase of common stock (6,382) Other comprehensive income, net of tax: Curncy translation adj (10) Unrealized gains/(losses) on securities (86) Pension liab adj (18) Gains/(losses) on derivatives & hedges (198) Reclassification adj Total comprehensive income Note receivable from ESOP ----------------------- Bal, Dec 29, 2002 (842) 3,120 (6,127) =======================
See Notes to Consolidated Financial Statements (Consolidated Statements of Cash Flows Johnson & Johnson and Subsidiaries Dollars in Millions) (Note 1)
2002 2001 2000 ------ ------- ------- Cash flows from operating activities Net earnings $6,597 5,668 4,953 Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles 1,662 1,605 1,592 Purchased in-process research and development 189 105 66 Deferred tax provision (74) (106) (128) Accounts receivable reserves (6) 99 41 Changes in assets and liabilities, net of effects from acquisition of businesses: Increase in accounts receivable (510) (258) (468) (Increase) decrease in inventories (109) (167) 128 Increase in accounts payable and accrued liabilities 1,420 1,401 41 (Increase) decrease in other current and non-current assets (1,429) (270) 124 Increase in other current and non-current liabilities 436 787 554 ------------------------- Net cash flows from operating Activities 8,176 8,864 6,903 ========================= Cash flows from investing activities Additions to property, plant and equipment (2,099) (1,731) (1,689) Proceeds from the disposal of Assets 156 163 166 Acquisition of businesses, net of cash acquired (Note 17) (478) (225) (151) Purchases of investments (6,923) (8,188) (5,676) Sales of investments 7,353 5,967 4,827 Other (206) (79) (142) ------------------------- Net cash used by invest activities (2,197) (4,093) (2,665) ========================= Cash flows from financing activities Dividends to shareholders (2,381) (2,047) (1,724) Repurchase of common stock (6,538) (2,570) (973) Proceeds from short-term debt 2,359 338 814 Retirement of short-term debt (560) (1,109) (1,485) Proceeds from long-term debt 22 14 591 Retirement of long-term debt (245) (391) (35) Proceeds from the exercise of stock options 390 514 387 ------------------------- Net cash used by financing Activities (6,953) (5,251) (2,425) ========================= Effect of exchange rate changes on cash and cash equivalents 110 (40) (47) ------------------------- (Decrease) increase in cash and cash equivalents (864) (520) 1,766 Cash and cash equivalents, beginning of year (Note 1) 3,758 4,278 2,512 ------------------------- Cash and cash equivalents, end of year (Note 1) $2,894 3,758 4,278 ========================= Supplemental cash flow data Cash paid during the year for: Interest $ 141 185 215 Income taxes 2,006 2,090 1,651 Supplemental schedule of noncash investing and financing activities Treasury stock issued for employee compensation and stock option plans, net of cash proceeds $ 946 971 754 Conversion of debt 131 815 504 Acquisition of businesses Fair value of assets acquired $ 550 1,925 241 Fair value of liabilities assumed (72) (434) (5) ------------------------- 478 1,491 236 Treasury stock issued at fair value -- (1,266) (85) ------------------------- Net cash paid for acquisitions $ 478 225 151 =========================
See Notes to Consolidated Financial Statements 41 Notes to Consolidated Financial Statements 1 Summary of Significant Accounting Principles Principles of Consolidation The financial statements include the accounts of Johnson & Johnson and subsidiaries. Intercompany accounts and transactions are eliminated. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 143, "Accounting for Asset Retirement Obligations." The Company will adopt this standard in 2003 that is effective for fiscal years beginning after June 15, 2002 and it is not expected to have a material impact on the Company's results of operations, cash flows or financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which was effective for the first quarter of 2002. The Company's adoption of SFAS No. 144 did not have a material effect on the Company's results of operations, cash flows or financial position. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" which is effective for exit or disposal activities that are initiated after December 31, 2002. The Company's adoption of SFAS No. 146 in the first quarter of 2003 is not expected to have a material effect on the Company's results of operations, cash flows or financial position. On November 25, 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN 45 clarifies the requirements of FASB Statement No. 5, "Accounting for Contingencies," relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods that end after December 15, 2002. The disclosure provisions have been implemented and no disclosures were required at year-end 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of the guarantor's year-end. FIN 45 requires that upon issuance of a guarantee, the entity must recognize a liability for the fair value of the obligation it assumes under that guarantee. The Company's adoption of FIN 45 in 2003 has not and is not expected to have a material effect on the Company's results of operations, cash flows or financial position. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51," which addresses consolidation of variable interest entities. FIN 46 expands the criteria for consideration in determining whether a variable interest entity should be consolidated by a business entity, and requires existing unconsolidated variable interest entities (which include, but are not limited to, Special Purpose Entities, or SPEs) to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 is not expected to have a material effect on the Company's results of operations, cash flows or financial position. 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 fair value. Long-term debt securities that the Company has the ability and intent to hold until maturity are carried at amortized cost, which also approximates fair value. Investments classified as available-for-sale are carried at estimated fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income. Management determines the appropriate classification of its investment in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. The Company periodically reviews its investments in non-marketable equity securities for impairment and adjusts these investments to their fair value when a decline in market value is deemed to be other than temporary. 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 leasehold improvements 10-20 years Machinery and equipment 2-13 years The Company capitalizes certain computer software and development costs incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are amortized over the estimated useful lives of the software, which generally ranges from 3 to 5 years. The Company reviews long-lived assets to assess recoverability using undiscounted cash flows. When necessary, charges for impairments of long-lived assets are recorded for the amount by which the present value of future cash flows is less than the carrying value of these assets. Revenue Recognition The Company recognizes revenue from product sales when the goods are shipped or delivered depending on when title and risk passes to the customer. Provisions for certain rebates, sales incentives, trade promotions, product returns and discounts to customers are provided for as reductions in determining sales in the same period the related sales are recorded. Sales Incentives and Trade Promotional Allowances. The Company has adopted Emerging Issues Task Force (EITF) Issue No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor's Products" effective December 31, 2001. All prior periods have been restated to reclassify 42 sales incentives and trade promotional allowances from selling, general and administrative expenses to either a reduction of sales or cost of sales. As such, sales were reduced by $687 million and $674 million for 2001 and 2000, respectively, and cost of products sold increased by $45 million and $49 million for 2001 and 2000, respectively. Shipping and Handling Shipping and handling costs incurred were $518 million, $473 million and $492 million in 2002, 2001 and 2000, respectively, and are included in selling, marketing and administrative expense. The amount of revenue received for shipping and handling is immaterial for all periods presented. Inventories Inventories are stated at the lower of cost or market determined by the first-in, first-out method. Intangible Assets In accordance with SFAS No. 142, no amortization was recorded for goodwill and/or intangible assets deemed to have indefinite lives for acquisitions completed after June 30, 2001. Further, effective the beginning of fiscal year 2002 in accordance with SFAS No. 142, the Company discontinued the amortization relating to all existing goodwill and indefinite lived intangible assets. The effect of non-amortization of this goodwill and these intangible assets was approximately $141 million before tax for 2002. Intangible assets that have finite useful lives continue to be amortized over their useful lives. SFAS No. 142 requires that goodwill and non- amortizable intangible assets be assessed annually for impairment. The required initial assessment was completed at June 30, 2002 and no impairment was determined. This initial impairment assessment was updated in the fourth quarter of 2002 and no impairment was determined. Future impairment tests will be performed in the fourth quarter, annually. Financial Instruments Effective January 1, 2001, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133," collectively referred to as SFAS No. 133. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if it is, depending on the type of hedge transaction. The Company uses forward exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany product and third party purchases of raw materials denominated in foreign currency. The Company also uses currency swaps to manage currency risk primarily related to borrowings. Both of these types of derivatives are designated as cash flow hedges. Additionally, the Company uses forward exchange contracts to offset its exposure to certain foreign currency assets and liabilities. These forward exchange contracts are not designated as hedges and, therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the related foreign currency assets and liabilities. The designation as a cash flow hedge is made at the date of entering into the derivative contract. At inception, all derivatives are expected to be highly effective. Changes in the fair value of a derivative that is designated as a cash flow hedge and that is highly effective, are recorded in accumulated other comprehensive income, until the underlying transaction affects earnings and are then reclassified to earnings in the same account as the hedged transaction. Fair value of a forward exchange contract represents the present value of the change in forward exchange rates times the notional amount of the derivative. The fair value of a currency swap contract is determined by discounting to the present all future cash flows of the currencies to be exchanged at interest rates prevailing in the market for the periods the currency exchanges are due, and expressing the result in U.S. dollars at the current spot foreign currency exchange rate. On an ongoing basis, the Company assesses whether each derivative continues to be highly effective in offsetting changes in the cash flows of hedged items. If and when a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is included in current period earnings. The Company documents all relationships between hedged items and derivatives. The overall risk management strategy includes reasons for undertaking hedge transactions and entering into derivatives. The objectives of this strategy are: (1) minimize foreign currency exposure's impact on the Company's financial performance; (2) protect the Company's cash flow from adverse movements in foreign exchange rates; (3) ensure the appropriateness of financial instruments; and (4) manage the enterprise risk associated with financial institutions. Product Liability Accruals for product liability claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on existing information. The accruals are adjusted periodically as additional information becomes available. Receivables for insurance recoveries related to product liability related claims are recorded, on an undiscounted for the time value of money basis, when it is probable that a recovery will be realized. Research and Development Research and development expenses are expensed as incurred. Upfront and milestone payments made to third parties in connection with research and development collaborations are expensed as incurred up to the point of regulatory approval. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are included in other intangibles, net of accumulated amortization. Advertising Costs associated with advertising are expensed in the year incurred. Advertising expenses worldwide, which are 43 comprised of television, radio, print media as well as Internet advertising, were $1.5 billion in 2002, $1.4 billion in 2001 and $1.4 billion in 2000. Income Taxes The Company intends to continue to reinvest its undistributed international earnings to expand its international operations; therefore, no U.S. tax expense has been recorded to cover the repatriation of such undistributed earnings. At December 29, 2002, and December 30, 2001, the cumulative amount of undistributed international earnings was approximately $12.3 billion and $12.1 billion, respectively. 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. Net Earnings Per Share Basic earnings per share is computed by dividing net income available to common shareholders 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. Stock Options At December 29, 2002, the Company has 24 stock-based employee compensation plans that are described in Note 10. The Company accounts for those plans under the recognition and measurement principles of Accounting Principle Board Opinion No. 25 "Accounting for Stock Issued to Employees" and its related Interpretations. Compensation costs are not recorded in net income for stock options, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. As required by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123," the following table shows the estimated effect on net income and earnings per share if the Company had applied the fair value recognition provision of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
(Dollars in Millions Except Per Share Data) 2002 2001 2000 ----------------------------------------------------- Net income, as reported $6,597 5,668 4,953 ----------------------- Less: Compensation expense(1) 320 263 189 ----------------------- Pro forma $6,277 5,405 4,764 ======================= Earnings per share: Basic - as reported $ 2.20 1.87 1.65 - pro forma 2.09 1.78 1.59 Diluted - as reported 2.16 1.84 1.61 - pro forma 2.06 1.75 1.55 =======================
(1) Determined under fair value based method for all awards, net of tax. Risks and Uncertainties The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported. Actual results may or may not differ from those estimates. Annual Closing Date The Company follows the concept of a 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 will be the case in 2004, the fiscal year consists of 53 weeks. Reclassification Certain prior year amounts have been reclassified to conform with current year presentation. Stock Split On April 26, 2001, the Board of Directors declared a 2-for-1 stock split. Shareholders of record at the close of business on May 22, 2001 were issued one additional share of Johnson & Johnson common stock on June 12, 2001 for each share held as of the record date. All shares and per share data for all periods presented in these financial statements have been adjusted to reflect the stock split. 2 Inventories At the end of 2002 and 2001, inventories were comprised of:
(Dollars in Millions) 2002 2001 ---------------------------------------------------- Raw materials and supplies $ 835 842 Goods in process 803 605 Finished goods 1,665 1,545 -------------- $3,303 2,992 ==============
3 Property, Plant and Equipment At the end of 2002 and 2001, property, plant and equipment at cost and accumulated depreciation were:
(Dollars in Millions) 2002 2001 ---------------------------------------------------- Land and land improvements $ 472 459 Buildings and building equipment 4,364 3,911 Machinery and equipment 7,869 6,805 Construction in progress 1,609 1,283 -------------- 14,314 12,458 Less accumulated depreciation 5,604 4,739 -------------- $8,710 7,719 ==============
The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2002, 2001 and 2000 was $98 million, $95 million and $97 million, respectively. Depreciation expense, including the amortization of capitalized interest in 2002, 2001 and 2000 was $1.3 billion, $1.1 billion and $1.1 billion, 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 accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds is adjusted to earnings. 4 Rental Expense and Lease Commitments Rentals of space, vehicles, manufacturing equipment and office and data processing equipment under operating leases 44 amounted to approximately $298 million in 2002, $275 million in 2001 and $264 million in 2000. The approximate minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 29, 2002 are:
(Dollars After in Millions) 2003 2004 2005 2006 2007 2007 Total ----------------------------------------- $138 121 101 86 67 160 673
Commitments under capital leases are not significant. 5 Employee Related Obligations At the end of 2002 and 2001, employee related obligations were:
(Dollars in Millions) 2002 2001 ------------------------------------------------- Pension benefits $ 643 605 Post retirement benefits 907 878 Post employment benefits 193 168 Deferred compensation 335 311 --------------- $2,078 1,962 Current benefits payable 111 92 --------------- Employee related obligations $1,967 1,870 ===============
Prepaid employee related obligations of $959 million for 2002 are included in other assets on the consolidated balance sheet. 6 Borrowings The components of long-term debt are as follows:
Eff. Eff. (Dollars in Millions) 2002 Rate% 2001 Rate% -------------------------------------------------------------- 3% Zero Coupon Convertible Subordinated Debentures due 2020 $ 621 3.00 626 3.00 5.25% Zero Coupon Convertible Subordinated Debentures due 2014 11 5.25 117 5.25 8.72% Debentures due 2024 300 8.72 300 8.72 6.95% Notes due 2029 293 7.14 293 7.14 6.73% Debentures due 2023 250 6.73 250 6.73 7.375% Notes due 2002 - - 200 7.49 8.25% Eurodollar Notes due 2004 200 8.37 199 8.37 6.625% Notes due 2009 198 6.80 198 6.80 5.12% Notes due 2003(2) 60 0.82 60 0.82 Industrial Revenue Bonds 39 3.85 39 5.30 Other, principally International 127 - 163 - ------------------------------- 2,099 5.85(1) 2,445 5.98(1) Less current portion 77 228 ------------------------------- $2,022 2,217 ===============================
(1) Weighted average effective rate. (2) 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 a currency swap. The Company has access to substantial sources of funds at numerous banks worldwide. Total unused credit available to the Company approximates $3.1 billion, including $1.5 billion of credit commitments and $0.8 billion of uncommitted lines with various banks worldwide that expire during 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 agreements are not material. The Company's shelf registration filed with the Securities and Exchange Commission enables the Company to issue up to $2.6 billion of unsecured debt securities and warrants to purchase debt securities under its medium term note (MTN) program. No MTN's were issued in 2002. At December 29, 2002, the Company had $1.8 billion remaining on its shelf registration. Long term debt includes two convertible subordinated debentures issued by ALZA prior to its merger with Johnson & Johnson. On July 28, 2000, ALZA completed a private offering of the 3% Zero Coupon Convertible Subordinated Debentures which were issued at a price of $551.26 per $1,000 principal amount at maturity. At December 29, 2002, the outstanding 3% Debentures had a total principal amount at maturity of $1.0 billion with a yield to maturity of 3% per annum, computed on a semiannual bond equivalent basis. There are no periodic interest payments. Under the terms of the 3% debentures, holders are entitled to convert their debentures into approximately 15.0 million shares of Johnson & Johnson stock at a price of $40.102 per share. Approximately 579,000 shares have been issued as of December 29, 2002 due to voluntary conversions by note holders. At the option of the holder, the 3% Debentures may be repurchased by the Company on July 28, 2003, 2008 or 2013, at a purchase price equal to the issue price plus accreted original issue discount to such purchase date. The Company, at its option, may elect to deliver either Johnson & Johnson common stock or cash, or a combination of stock and cash, in the event of repurchase of the 3% Debentures. The Company, at its option, may also redeem any or all of the 3% Debentures after July 28, 2003 at the issue price plus accreted original issue discount. At December 29, 2002 and December 30, 2001, the fair value based on quoted market value of the 3% Debentures was $813 million and $910 million, respectively. In 1994, ALZA issued the 5.25% Zero Coupon Convertible Subordinated Debentures at a price of $354.71 per $1,000 principal amount at maturity. At December 29, 2002, the outstanding 5.25% Debentures had a total principal amount at maturity of $20 million, with a yield to maturity of 5.25% per annum, computed on a semiannual bond equivalent basis. There are no periodic interest payments. Under the terms of the debentures, note holders are entitled to convert their debentures into approximately 24.0 million shares of Johnson & Johnson stock at a price of $13.939 per share. Approximately 23.5 million shares of Johnson & Johnson stock have been issued as at December 29, 2002 due to voluntary conversions by note holders. At the option of the holder, the 5.25% Debentures may be purchased by the Company on July 14, 2004 or July 14, 2009, at a purchase price equal to the issue price plus accreted original issue discount to such purchase date. At December 29, 2002 and December 30, 2001, the fair value based on quoted 45 market value of the 5.25% Debentures was $27 million and $339 million, respectively. Short-term borrowings and current portion of long-term debt amounted to $2.1 billion at the end of 2002. These borrowings are comprised of $1.6 billion of commercial paper and $468 million of local borrowings, principally by international subsidiaries. Aggregate maturities of long-term obligations commencing in 2003 are:
After (Dollars in Millions) 2003 2004 2005 2006 2007 2007 ------------------------------------------------------------ $77 270 17 12 8 1,715
7 Intangible Assets At the end of 2002 and 2001, the gross and net amounts of intangible assets were:
(Dollars in Millions) 2002 2001 --------------------------------------------------- Goodwill - gross $ 5,320 5,245 Less accumulated amortization 667 674 ------------------ Goodwill - net $ 4,653 4,571 ================== Trademarks (non-amortizable) - gross $ 1,021 935 Less accumulated amortization 138 132 ------------------ Trademarks (non-amortizable) - net $ 883 803 ================== Patents and trademarks - gross $ 2,016 1,881 Less accumulated amortization 534 376 ------------------ Patents and trademarks - net $ 1,482 1,505 ================== Other intangibles - gross $ 2,998 2,849 Less accumulated amortization 770 651 ------------------ Other intangibles - net $ 2,228 2,198 ================== Total intangible assets - gross $11,355 10,910 Less accumulated amortization 2,109 1,833 ------------------ Total intangible assets - net $ 9,246 9,077 ==================
Goodwill as of December 29, 2002 as allocated by segments of business is as follows:
Med Dev (Dollars in Millions) Consumer Pharm & Diag Total -------------------------------------------------------------- Goodwill, net of accumulated amortization at December 30, 2001 $806 232 3,533 4,571 Reclassification of intangibles, net of accumulated amortization - (109) - (109) Acquisitions - 150 60 210 Translation & other 15 (29) (5) (19) ----------------------------------- Goodwill at December 29, 2002 $821 244 3,588 4,653 ===================================
The weighted average amortization periods for patents and trademarks and other intangible assets are 16 years and 18 years, respectively. The amortization expense of amortizable intangible assets for the fiscal year ended December 29, 2002 was $405 million pre-tax and the estimated amortization expense for the five succeeding years approximates $425 million pre-tax, per year, respectively. 8 Income Taxes The provision for taxes on income consists of:
(Dollars in Millions) 2002 2001 2000 ---------------------------------------------------------- Currently payable: U.S. taxes $2,042 1,726 1,375 International taxes 726 610 668 ------------------------ 2,768 2,336 2,043 ======================== Deferred: U.S. taxes 20 (22) (36) International taxes (94) (84) (92) ------------------------ (74) (106) (128) ------------------------ $2,694 2,230 1,915 ========================
A comparison of income tax expense at the federal statutory rate of 35% in 2002, 2001 and 2000, to the Company's effective tax rate is as follows:
(Dollars in Millions) 2002 2001 2000 ---------------------------------------------------------- U.S. $6,189 4,744 3,892 International 3,102 3,154 2,976 ------------------------ Earnings before taxes on income: $9,291 7,898 6,868 ------------------------ Statutory taxes $3,252 2,764 2,404 Tax rates: Statutory 35.0% 35.0% 35.0% Puerto Rico and Ireland operations (4.5) (5.4) (5.0) Research tax credits (0.7) (0.4) (0.8) Domestic state and local 1.2 0.9 0.8 International subsidiaries excluding Ireland (2.2) (2.6) (2.9) IPR&D 0.7 0.5 0.3 All other (0.5) 0.2 0.5 ------------------------ Effective tax rate 29.0% 28.2% 27.9% ========================
During 2002, the Company had subsidiaries operating in Puerto Rico under a tax incentive grant expiring in 2014. In addition, the Company has subsidiaries manufacturing in Ireland under an incentive tax rate effective through the year 2010. 46 Temporary differences and carry forwards for 2002 and 2001 are as follows:
2002 2001 Deferred Tax Deferred Tax -------------------------------- (Dollars in Millions) Asset Liab Asset Liab ------------------------------------------------------------ Employee related Obligations $ 443 625 Depreciation (318) (294) Non-deductible Intangibles (931) (959) International R&D
capitalized for tax 340 237 Reserves & liabilities 479 636 Income reported for tax purposes 343 313 Miscellaneous international 359 (278) 275 (260) Capitalized intangible 139 156 Miscellaneous U.S. 354 183 --------------------------------- Total deferred income taxes $2,457 (1,527) 2,425 (1,513) =================================
The difference between the net deferred tax on income per the balance sheet and the net deferred tax above is included in Taxes on Income on the balance sheet. 9 International Currency Translation For translation of its subsidiaries operating in non-U.S. dollar 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 component of accumulated other comprehensive income. 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 which are reflected in operating results. An analysis of the changes during 2002 and 2001 for foreign currency translation adjustments is included in Note 12. Net currency transaction and translation gains and losses included in other expense were after-tax losses of $25 million, $3 million and $65 million, in 2002, 2001 and 2000, respectively. 10 Common Stock, Stock Option Plans and Stock Compensation Agreements At December 29, 2002 the Company had 24 stock-based compensation plans. Under the 2000 Stock Option Plan, the Company may grant options to its employees for up to 1.6% of the issued shares of the Company's Common Stock, plus the number of shares available from the previous year that were not issued, as well as shares issued under the Plan that expired or terminated without being exercised. The shares outstanding are for contracts under the Company's 1991, 1995 and 2000 Employee Stock Option Plans, the 1997 Non-Employee Director's Plan and the Mitek, Cordis, Biosense, Gynecare, Centocor, Innovasive Devices, ALZA and Inverness Stock Option Plans. Stock options generally expire 10 years from the date they are granted and vest over service periods that range from one to six years. All options are granted at current market price on the date of grant. Shares available, under the 2000 Stock Option Plan, for future grants are based on 1.6% of the issued shares each year, and 49.9 million shares could be granted each year during the years 2002 through 2005, in addition to any other available shares as described above. Shares available for future grants under the 2000 plan were 62.1 million at the end of 2002. A summary of the status of the Company's stock option plans as of December 29, 2002, December 30, 2001 and December 31, 2000 and changes during the years ending on those dates, is presented below:
Weighted Options Average (Shares in Thousands) Outstanding Exercise Price --------------------------------------------------------------- Balance at January 2, 2000 181,486 $25.65 Options granted 46,456 48.29 Options exercised (27,130) 15.22 Options canceled/forfeited (6,824) 33.03 ---------------------- Balance at December 31, 2000 193,988 32.27 Options granted 8,975(1) 36.31 Options exercised (30,622) 19.00 Options canceled/forfeited (5,117) 49.38 ---------------------- Balance at December 30, 2001 167,224 34.37 Options granted 48,072 57.30 Options exercised (21,012) 19.64 Options canceled/forfeited (4,543) 50.86 ---------------------- Balance at December 29, 2002 189,741 $41.42 ======================
(1) Includes 3,108 options issued to replace Inverness options outstanding at or granted prior to the acquisition. 47 For the year ended December 30, 2001, there was a change in the timing of granting stock compensation and options to employees from December 2001 to February 2002. This change was enacted to have 2001 results finalized in order to align compensation with performance. The same timing of grants will be followed for fiscal 2002. The average fair value of options granted was $15.49 in 2002, $13.72 in 2001 and $14.79 in 2000. The fair value was estimated using the Black-Scholes option pricing model based on the weighted average assumptions of:
2002 2001 2000 ------------------------------------------------------------- Risk-free rate 4.39% 4.87% 5.45% Volatility 26.0% 27.0% 27.0% Expected life 5.0 yrs 5.0 yrs 5.0 yrs Dividend yield 1.33% 1.33% 1.40%
The following table summarizes stock options outstanding and exercisable at December 29, 2002:
(Shares in Thousands) Outstanding Exercisable --------------------------------------------------- ----------------------- Average Average Exercise Average Exercise Exercise Price Range Options Life(a) Price Options Price --------------------------------------------------- ----------------------- $.79-$11.15 5,572 1.2 $ 10.29 5,572 $ 10.29 $11.16-$21.24 16,550 1.8 12.93 16,550 12.93 $21.57-$39.86 43,541 4.0 27.05 42,403 26.85 $40.08-$50.66 40,916 6.7 45.94 35,829 45.76 $50.69-$55.91 36,337 7.8 50.74 306 51.82 $57.30-$61.68 46,655 9.1 57.34 1 57.36 $63.30-$66.50 170 8.0 64.37 41 64.74 --------------------------------- --------------------- 189,741 6.3 $ 41.42 100,702 $ 30.47 ================================= =====================
(a) Average contractual life remaining in years. Stock options exercisable at December 30, 2001 and December 31, 2000 were 99,176 options at an average exercise price of $24.34 and 90,384 options at an average exercise price of $19.46, respectively. 11 Segments of Business and Geographic Areas See page 57 for information on segments of business and geographic areas. 12 Accumulated Other Comprehensive Income Components of other comprehensive income/(loss) consist of the following:
Total Unrld Gains/ Accum For. Gains/ Pens (Losses) Other Cur. (Losses) Liab on Deriv Comp Trans. on Sec Adj. & Hedg Inc/(Loss) (Dollars in Millions) -------------------------------------------------------------------- Jan. 2, 2000 $(477) 78 (399) 2000 changes (45) (2) (15) (62) ------------------------------------------ Dec. 31, 2000 $(522) 76 (15) (461) 2001 changes Transition Adjustment - - - 17 Net change due to hedging transactions - - - 228 Net amount reclassed to net earnings - - - (147) ------------------------------------------ Net 2001 Changes (175) 8 - 98 (69) ------------------------------------------ Dec. 30, 2001 $(697) 84 (15) 98 (530) 2002 changes Net change due to hedging transactions - - - (394) Net amount reclassed to net earnings - - - 196 ------------------------------------------ Net 2002 Changes (10) (86) (18) (198) (312) ------------------------------------------ Dec. 29, 2002 $(707) (2) (33) (100) (842) ==========================================
Total other comprehensive income for 2002 includes reclassification adjustment gains of $45 million realized from the sale of equity securities and the associated tax expense of $19 million. In 2001, total other comprehensive income included reclassification adjustment gains of $21 million realized from the sale of equity securities and the associated tax expense of $7 million. In 2000, total other comprehensive income included reclassification adjustment gains of $80 million and the associated tax expense of $28 million. The tax effect on these unrealized gains/(losses) on equity securities is a benefit of $1 million in 2002, an expense of $64 million in 2001 and an expense of $53 million in 2000. The tax effect on the gains/(losses) on derivatives and hedges is a benefit of $56 million in 2002 and an expense of $53 million in 2001. See Note 15 for additional information relating to derivatives and hedging. The currency translation adjustments are not currently adjusted for income taxes as they relate to permanent investments in non-U.S. subsidiaries. 48 13 Retirement and Pension Plans The 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. Net periodic benefit costs for the Company's defined benefit retirement plans and other benefit plans for 2002, 2001 and 2000 include the following components:
Retirement Plans Other Benefit Plans ---------------------------------------------------------------- (Dollars in Millions) 2002 2001 2000 2002 2001 2000 ---------------------------------------------------------------- Service cost $249 219 201 23 23 20 Interest cost 354 325 295 59 52 51 Expected return on plan assets (447) (413) (377) (4) (5) (5) Amortization of prior service cost 15 18 21 (3) (3) (1) Amortization of net transition asset (7) (6) (7) - - - Recognized actuarial Gains (41) (68) (81) - (7) (10) Curtailments and Settlements (1) (1) - - - - ---------------------------------------- Net periodic benefit Cost $122 74 52 75 60 55 ========================================
The net periodic (income) cost attributable to domestic retirement plans was $61 million in 2002, $28 million in 2001 and ($14) million in 2000. 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 ------------------ ------------------- 2002 2001 2000 2002 2001 2000 Domestic Benefit Plans ----------------------------------------------------------------- Weighted average discount rate 6.75% 7.50% 7.50% 6.75% 7.50% 7.50% Expected long-term rate of return on plan assets 9.00 9.00 9.00 9.00 9.00 9.00 Rate of increase in compensation levels 4.50 4.50 5.00 4.50 4.50 5.00 International Benefit Plans ----------------------------------------------------------------- Weighted average discount rate 5.75% 5.75% 6.00% 6.75% 6.75% 6.75% Expected long-term rate of return on plan assets 7.50 7.50 7.50 - - - Rate of increase in compensation levels 3.50 3.50 3.50 4.25 4.25 4.25
Health care cost trends in the United States are projected at annual rates, for all individuals, grading from 9.0% to 4.5% by the year 2009 and beyond. The effect of a 1% change in these assumed cost trends on the accumulated postretirement benefit obligation at the end of 2002 would be a $125 million increase or a $106 million decrease and the effect on the service and interest cost components of the net periodic postretirement benefit cost for 2002 would be a $13 million increase or a $10 million decrease. Plan assets consist primarily of listed common stocks, U.S. and non-U.S. equities and fixed income investments. The fair value of Johnson & Johnson common stock in the plan assets was $384 million at December 29, 2002. 49 The following tables set forth the change in benefit obligations and change in plan assets at year-end 2002 and 2001 for the Company's defined benefit retirement plans and other benefit plans:
Retirement Plans Other Benefit Plans -------------------------------------------------------------- (Dollars in Millions) 2002 2001 2002 2001 -------------------------------------------------------------- Change in Benefit Obligation Benefit obligation - beginning of year $5,026 4,555 782 722 Service cost 249 219 23 23 Interest cost 354 325 59 52 Plan participant Contributions 18 15 - - Amendments 17 8 - - Actuarial loss 478 210 190 22 Divestitures & Acquisitions (4) 1 8 - Curtailments & settlements (6) (1) - - Total benefits paid (246) (223) (50) (34) Effect of exchange rates 165 (83) 3 (3) ------------------------------------- Benefit obligation - end of year $6,051 5,026 1,015 782 ===================================== Change in Plan Assets -------------------------------------------------------------- Plan assets at fair value - beginning of year $4,355 4,847 48 58
Actual return on plan assets (611) (276) (12) (8) Company contributions 1,074 56 47 31 Plan participant Contributions 18 15 - - Divestitures (2) - (49) - Benefits paid from plan assets (232) (212) - (33) Effect of exchange Rates 103 (75) - - ----------------------------------- Plan assets at fair value - end of year $4,705 4,355 34 48 ===================================
Amounts recognized in the Company's balance sheet consist of the following:
Retirement Plans Other Benefit Plans -------------------------------------------------------------- (Dollars in Millions) 2002 2001 2002 2001 -------------------------------------------------------------- Plan assets less than projected benefit obligation $(1,346) (671) (981) (734) Unrecognized actuarial losses /(gains) 1,588 (14) 92 (123) Unrecognized prior service cost 124 118 (18) (21) Unrecognized net transition asset (4) (9) - - -------------------------------------- Total recognized in the consolidated balance sheet $ 362 (576) (907) (878) ====================================== Book reserves $ (643) (770) (907) (878) Prepaid benefits 959 165 - - Intangible assets 13 14 - - Accumulated comprehensive Income 33 15 - - -------------------------------------- Total recognized in consolidated balance sheet $362 (576) (907) (878) ======================================
A minimum pension liability adjustment is required when the actuarial present value of accumulated benefits (ABO) exceeds the fair value of plan assets and accrued pension liabilities. The minimum pension liability adjustments in 2002 and 2001 of $46 million and $29 million, respectively relate primarily to plans outside the U.S. Plans with accumulated benefit obligations in excess of plan assets consist of the following:
Retirement Plans Other Benefit Plans ------------------------------------------------------------------------- (Dollars in Millions) 2002 2001 2002 2001 ------------------------------------------------------------------------- Accumulated benefit Obligation $ (953) (544) (941) (782) Projected benefit Obligation $(1,024) (645) -- -- Plan assets at fair value $ 305 111 34 48
50 14 Marketable Securities
December 29, 2002 --------------------------------- Un- Un- real- real- Est Net ized ized Fair Cost Gains Losses Value ------------------------------------------------------------ Money market funds $ 701 - - 701 Commercial paper 35 - - 35 Time deposits 754 - - 754 Government securities and obligations 1,976 3 - 1,979 Asset backed securities - - - - Bank notes 18 - - 18 Corporate debt securities 2,791 6 - 2,797 -------------------------------- Total current marketable securities $6,275 9 - 6,284 ================================ Government securities 14 - - 14 Asset backed securities - - - - Bank notes 27 - - 27 Corporate debt securities - - - - Investments held in trust 80 - - 80 -------------------------------- Total non-current marketable securities $ 121 - - 121 ================================
December 30, 2001 ----------------------------------- Un- Un- real- real- Est Net ized ized Fair Cost Gains Losses Value ------------------------------------------------------------ Money market funds $1,276 - - 1,276 Commercial paper 54 - - 54 Time deposits 1,162 - - 1,162 Government securities and obligations 1,046 2 - 1,048 Asset backed securities 7 - - 7 Bank notes 118 - - 118 Corporate debt securities 3,221 16 - 3,237 -------------------------------- Total current marketable securities $6,884 18 - 6,902 ================================ Government securities 314 6 - 320 Asset backed securities 122 - - 122 Bank notes 131 2 - 133 Corporate debt securities 311 7 - 318 Investments held in trust 91 4 - 95 -------------------------------- Total non-current marketable securities $ 969 19 - 988 ================================
Current marketable securities include $1.7 billion and $2.7 billion that are classified as cash equivalents on the balance sheet at December 29, 2002 and December 30, 2001, respectively. 15 Financial Instruments Effective January 1, 2001, the Company adopted SFAS 133 requiring that all derivative instruments be recorded on the balance sheet at fair value. As of December 29, 2002 the balance of deferred net losses on derivatives included in accumulated other comprehensive income was $100 million after-tax. For additional information, see Note 12. Of this amount, the Company expects that $100 million will be reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that period. The amount ultimately realized in earnings will differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity of the derivative. Transactions with third parties will cause the amount in accumulated other comprehensive income to affect net earnings. The maximum length of time over which the Company is hedging is 15 months. For the year ended December 29, 2002 the net impact of the hedges' ineffectiveness to the Company's financial statements was insignificant. For the year ended December 29, 2002 the Company has recorded a net gain of $10 million (after tax) in the "other (income) expense, net" category of the consolidated statement of earnings, representing the impact of discontinuance of cash flow hedges because it is probable that the originally forecasted transactions will not occur by the end of the originally specified time period. Refer to Note 12 for disclosures of movements in Accumulated Other Comprehensive Income. Concentration of Credit Risk The Company invests its excess cash in both deposits with major banks throughout the world and other high quality money market instruments. Refer to Note 14 for additional information. 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. 16 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). 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 shareholders' equity. Total contributions to the plans were $111 million in 2002, $96 million in 2001 and $81 million in 2000. 51 17 Mergers & Acquisitions Certain businesses were acquired for $478 million in cash and liabilities assumed of $72 million assumed during 2002. These acquisitions were accounted for by the purchase method and, accordingly, results of operations have been included in the accompanying consolidated financial statements from their respective dates of acquisition. The 2002 acquisitions included Tibotec-Virco N.V., a privately-held biopharmaceutical company focused on developing anti-viral treatments; Micro Typing Systems, Inc., a manufacturer of reagents and supplier of distributed instruments known as the ID-Micro Typing System(TM) and Obtech Medical AG, a privately-held company that markets an adjustable gastric band for the treatment of morbid obesity. The excess of purchase price over the estimated fair value of tangible assets of the acquired entities amounted to $325 million and has been allocated to identifiable intangibles and goodwill. In addition, approximately $189 million has been identified as the value of in-process research and development (IPR&D) associated with the Tibotec-Virco N.V. and Obtech Medical AG acquisitions. The IPR&D charge related to Tibotec-Virco N.V. was $150 million and is associated with two early stage HIV compounds. The value of the IPR&D was calculated with the assistance of a third party appraiser using cash flow projections discounted for the risk inherent in such projects using probability of success factors ranging from 30 - 33%. The discount rate was 9%. The IPR&D charge related to Obtech Medical AG was $39 million and is associated with the development of the current Swedish Adjustable Gastric Band (SAGB) for use in the United States as well as development of a next generation technology platform. The value of the IPR&D was calculated with the assistance of a third party appraiser using cash flow projections discounted for the risk inherent in such projects using a 70% probability of success factor and a 20% discount rate. Pro forma information is not provided since the impact of the acquisitions does not have a material effect on the Company's results of operations, cash flows or financial position. On June 22, 2001, Johnson & Johnson and ALZA Corporation (ALZA) completed the merger between the two companies. This transaction was accounted for as a pooling-of-interests. ALZA had approximately 239 million shares outstanding (286 million on a fully diluted basis) that were exchanged for approximately 234 million shares of Johnson & Johnson common stock. On a diluted basis when adjusted for stock options and convertible debt, the number of Johnson & Johnson shares issued total approximately 280 million. Holders of ALZA common stock received 0.98 of a share of Johnson & Johnson common stock, valued at $52.39 per share. ALZA is a research-based pharmaceutical company with leading drug delivery technologies. The company applies its delivery technologies to develop pharmaceutical products with enhanced therapeutic value for Johnson & Johnson affiliate portfolios and for many of the world's leading pharmaceutical companies. Certain businesses were acquired for $1.9 billion during 2001 ($0.6 billion in cash and liabilities assumed and 24.5 million shares of the Company's common stock issued from Treasury valued at $1.3 billion). These acquisitions were accounted for by the purchase method and, accordingly, results of operations have been included in the accompanying consolidated financial statements from their respective dates of acquisition. The 2001 acquisitions included Inverness Medical Technology, the supplier of LifeScan's electrochemical products for blood glucose monitoring following the spin-off of its non-diabetes businesses; Heartport, a company that develops and manufactures products for less invasive open chest and minimally invasive heart operations, including stopped heart and beating heart procedures; TERAMed Inc., an early-stage medical device company that is developing endovascular stent-graft systems for the minimally invasive treatment of abdominal aortic aneurysms and peripheral occlusive disease; BabyCenter, L.L.C., an Internet content and commerce company devoted to supporting a community of expectant and new mothers; and the VIACTIV product line, a chewable calcium supplement, from the Mead Johnson Nutritionals Division of Bristol-Myers Squibb. Inverness Medical Technology was acquired to enhance control of the primary supplier of LifeScan blood glucose monitoring products and will allow for the achievement of operational synergies. The acquisition also provides key technology for the development of future products. Approximately $105 million has been identified as the value of IPR&D associated with the Inverness Medical Technology and TERAMed Inc. acquisitions. The IPR&D charge is primarily related to Inverness projects for minimally invasive testing, continuous monitoring and insulin delivery. The value of the IPR&D was calculated with the assistance of a third party appraiser using cash flow projections discounted for the risk inherent in such projects using probability of success factors ranging from 25 - 40%. The discount rate used was 12%. Certain businesses were acquired for $241 million during 2000. These acquisitions were accounted for by the purchase method and, accordingly, results of operations have been included in the accompanying consolidated financial statements from their respective dates of acquisitions. The 2000 acquisitions included Crescendo, a company formed by ALZA for the purpose of selecting, developing and commercializing human pharmaceutical products; Innovasive Devices, a company that manufactures and sells devices for sports medicine surgery for soft tissue injuries; Atrionix, Inc., a development stage company whose primary product is a pulmonary ablation catheter for the treatment of atrial fibrillation; Medtrex, a company that develops and manufactures electrosurgical generators and disposable products, and the ST. JOSEPH aspirin business. The IPR&D writeoff associated with Atrionix, Inc. and ALZA's Crescendo acquisition was $66 million. The IPR&D charge is primarily related to an Atrionix project for the design of a catheter system to be used in a procedure which blocks electrical impulses originating in pulmonary veins, which can cause atrial fibrillation. The value of IPR&D was calculated with the assistance of a third party appraiser using a cash flow projection discounted for the risk inherent in such a project. The discount rate used was 26%. Divestitures in 2002, 2001 and 2000 did not have a material effect on the Company's results of operations, cash flows or financial position. 52 18 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 and instructions for use 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. One group of cases against the Company concerns the Janssen Pharmaceutica product PROPULSID, which was withdrawn from general sale and restricted to limited use in 2000. In the wake of publicity about those events, numerous lawsuits have been filed against Janssen, which is a wholly owned subsidiary of the Company, and the Company regarding PROPULSID in state and federal courts across the country. There are approximately 753 such cases currently pending, including the claims of approximately 5,556 plaintiffs, 1,961 of whom recently filed in Mississippi to avoid application of tort reform legislation effective January 1, 2003. More cases were likely filed in Mississippi but have not yet been served. In the active cases, 429 individuals are alleged to have died from the use of PROPULSID. These actions seek substantial compensatory and punitive damages and accuse Janssen and the Company of inadequately testing for and warning about the drug's side effects, of promoting it for off- label use and of over-promotion. In addition, Janssen and the Company have entered into agreements with various plaintiffs' counsel halting the running of the statutes of limitations with respect to the potential claims of a significant number of individuals while those attorneys evaluate whether or not to sue Janssen and the Company on their behalf. In September 2001, the first 10 plaintiffs in the Rankin case, which comprises the claims of 155 PROPULSID plaintiffs, went to trial in state court in Claiborne County, Mississippi. The jury returned compensatory damage verdicts for each plaintiff in the amount of $10 million, for a total of $100 million. The trial judge thereafter dismissed the claims of punitive damages. On March 4, 2002, the trial judge reduced these verdicts to a total of $48 million, and denied the motions of Janssen and the Company for a new trial. Janssen and the Company believe these verdicts, even as reduced, are insupportable and have appealed. In the view of Janssen and the Company, the proof at trial demonstrated that none of these plaintiffs was injured by PROPULSID and that no basis for liability existed. In April 2002, a state court judge in New Jersey denied plaintiffs' motion to certify a national class of PROPULSID users for purposes of medical monitoring and refund of the costs of purchasing PROPULSID. An effort to appeal that ruling has been denied. In June 2002 the federal judge presiding over the PROPULSID Multi-District Litigation in New Orleans, Louisiana similarly denied plaintiffs' motion there to certify a national class of PROPULSID users. Plaintiffs in the Multi- District Litigation have said they are preserving their right to appeal that ruling and other complaints filed against Janssen and the Company include class action allegations which could be the basis for future attempts to have classes certified. With respect to all the various PROPULSID actions against them, Janssen and the Company dispute the claims in those lawsuits and are vigorously defending against them except where, in their judgment, settlement is appropriate. Janssen and the Company believe they have adequate self-insurance reserves and commercially available excess insurance with respect to these cases. In communications to the Company, the excess insurance carriers have raised certain defenses to their liability under the policies. However, in the opinion of the Company, those defenses are pro forma and lack substance and the carriers will honor their obligations under the policies. The Company's Ortho Biotech subsidiary was party to an arbitration proceeding filed against it in 1995 by Amgen, Ortho Biotech's licensor of U.S. non-dialysis rights to PROCRIT, in which Amgen sought to terminate Ortho Biotech's U.S. license rights and collect substantial damages based on alleged deliberate PROCRIT sales by Ortho Biotech during the early 1990s into Amgen's reserved dialysis market. On October 18, 2002, the arbitrator issued his decision rejecting Amgen's request to terminate the license and finding no material breach of the license. However, the arbitrator found that conduct by Ortho Biotech in the early 1990s, which was subsequently halted by Ortho Biotech, amounted to a non-material breach of the license and awarded Amgen $150 million in damages which the Company expensed in the third quarter of 2002. Amgen had sought $1.2 billion in damages. On January 24, 2003, the arbitrator ruled that Amgen was the "prevailing party" in this arbitration, entitling it to an award of reasonable attorneys' fees and costs. Amgen has not yet submitted its application for fees and costs. The Company expensed $85 million in the fourth quarter of 2002 in connection with this outstanding claim. In patent infringement actions tried in Delaware Federal Court in late 2000, Cordis Corporation, a subsidiary of Johnson & Johnson, obtained verdicts of infringement and patent validity, and damage awards, against Boston Scientific Corporation and Medtronic AVE, Inc., based on a number of Cordis coronary stent patents. On December 15, 2000, the jury in the damage action against Boston Scientific returned a verdict of $324 million and on December 21, 2000 the jury in the Medtronic AVE action returned a verdict of $271 million. These sums represent lost profit and reasonable royalty damages to compensate Cordis for infringement but do not include pre or post judgment interest. In February 2001 a hearing was held on the claims of Boston Scientific and Medtronic AVE that the patents at issue were unenforceable owing to alleged inequitable conduct before the patent office. In March and May 2002, the district judge issued post trial rulings which confirmed the validity and enforceability of the main Cordis stent patent claims but found certain other Cordis patents unenforceable. Further, the district judge granted Boston Scientific a new trial on liability and damages and vacated the verdict against Medtronic AVE on legal grounds. Appeals to the Federal Circuit Court of Appeals are underway. The products of various Johnson & Johnson operating companies are the subject of various patent lawsuits which could potentially affect the ability of those operating companies to sell those products, require the payment of past damages and future royalties or, with respect to patent challenges by generic pharmaceutical firms, result in the introduction of generic versions of 53 the products in question and the ensuing loss of market share. The following patent lawsuits concern important products of Johnson & Johnson operating companies. Medtronic/ AVE v. Cordis Corporation: This action, filed in April 2002 in federal court in Texas, asserts certain patents owned by Medtronic/AVE against the Cordis Bx VELOCITY(TM) stent, which is also the stent structure used in the CYPHERTM drug eluting product. No trial date has been set for this action. Ortho Pharmaceutical v. Barr Laboratories, Inc.: Pending in federal court in New Jersey, this action, filed in June 2000, involves Barr's effort to invalidate Ortho's patents covering its ORTHO TRI-CYCLEN oral contraceptive product. Trial has not yet been scheduled in this case. Ortho-McNeil and Daiichi, Inc. v. Mylan Laboratories and Ortho-McNeil and Daiichi, Inc. v. Teva Pharmaceutical: These matters, the first of which was filed in February 2002 in federal court in West Virginia and the second in June 2002 in federal court in New Jersey, concern the efforts of Mylan and Teva to invalidate and establish non-infringement of the patent covering LEVAQUIN levofloxacin tablets. The patent owned by Daiichi and exclusively licensed to Ortho-McNeil. In the Mylan case trial has been set for late 2003. No trial date has been set in the Teva matter. Janssen and ALZA v. Mylan Laboratories: This action, filed in federal district court in Vermont in February 2002, concerns Mylan's effort to invalidate and assert non-infringement of ALZA's patent covering the DURAGESIC product. Trial is likely in the spring of 2003. With respect to all of the above matters, the Johnson & Johnson operating company involved is vigorously defending the validity and asserting the infringement of its own or its licensors' patents or, where its product is accused of infringing patents held by others, defending against those claims. The Company is also involved in a number of other patent, trademark and other lawsuits incidental to its business. The ultimate legal and financial liability of the Company in respect to all claims, lawsuits and proceedings referred to above cannot be estimated with any certainty. However, in the opinion of management, based on its examination of these matters, its experience to date and discussions with counsel, the ultimate outcome of these legal proceedings, net of liabilities already accrued in the Company's consolidated balance sheet, is not expected to have a material adverse effect on the Company's consolidated financial position, although the resolution in any reporting period of one or more of these matters could have a significant impact on the Company's results of operations for that period. 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 December 29, 2002, December 30, 2001 and December 31, 2000:
(Shares in Millions) 2002 2001 2000 -------------------------------------------------------- Basic earnings per share $2.20 1.87 1.65 Average shares outstanding - basic 2,998.3 3,033.8 2,993.5 Potential shares exercisable under stock option plans 188.3 166.6 119.0 Less: shares repurchased under treasury stock method (146.9) (121.8) (71.7) Convertible debt shares 14.4 20.7 58.4 --------------------------- Adjusted average shares outstanding - diluted 3,054.1 3,099.3 3,099.2 Diluted earnings per share $2.16 1.84 1.61 ===========================
Diluted earnings per share calculation includes the dilution effect of convertible debt: a decrease in interest expense of $12 million, $25 million and $47 million after tax for years 2002, 2001 and 2000, respectively. Diluted earnings per share excludes 1 million shares of options for each of the years 2002 and 2001, and 62 million shares of options for the year 2000, as the exercise price of these options was greater than their average market value, resulting in an anti-dilutive effect on diluted earnings per share. 20 Capital and Treasury Stock Changes in treasury stock were:
(Dollars in Millions Except Treasury Stock Number of Shares in Thousands) Shares Amount ----------------------------------------------------------- Balance at January 2, 2000 140,154 $453 Employee compensation and stock option plans (28,886) (1,075) Conversion of Subordinated Debentures (25,676) -- Repurchase of common stock 21,402 973 Business combinations (1,776) (9) -------------------- Balance at December 31, 2000 105,218 342 Employee compensation and stock option plans (30,581) (1,444) Conversion of Subordinated Debentures (30,061) (183) Repurchase of common stock 51,244 2,742 Business combinations (23,193) (64) -------------------- Balance at December 30, 2001 72,627 1,393 Employee compensation and stock option plans (22,720) (1,295) Conversion of Subordinated Debentures (5,742) (353) Repurchase of common stock 107,382 6,382 -------------------- Balance at December 29, 2002 151,547 $6,127 ====================
Shares of common stock authorized and issued were 3,119,842,000 shares at the end of 2002, 2001 and 2000. 54 21 Selected Quarterly Financial Data (Unaudited) Selected unaudited quarterly data for the years 2002 and 2001 are summarized below:
2002 ---- (Dollars in Millions First Second Third Fourth Except Per Share Amounts) Quarter Quarter(1) Qtr(2) Qtr(3) ------------------------- ------- ---------- ------ ------ Segment sales to customers Consumer $1,604 1,649 1,661 1,650 Pharmaceutical 4,181 4,258 4,277 4,435 Med Devices & Diagnostics 2,958 3,166 3,141 3,318 --------------------------------- Total sales $8,743 9,073 9,079 9,403 --------------------------------- Gross profit 6,286 6,491 6,468 6,606 Earnings before provision for taxes on income 2,621 2,428 2,393 1,849 Net earnings 1,834 1,654 1,725 1,384 ================================= Basic net earnings per share $ .60 .55 .58 .47 ================================= Diluted net earnings per share $ .59 .54 .57 .46 =================================
2001 ---- (Dollars in Millions First Second Third Fourth Except Per Share Amounts) Quarter Quarter(4) Qtr(5) Qtr(6) ------------------------- ------- ---------- ------ ------ Segment sales to customers Consumer $1,631 1,530 1,609 1,551 Pharmaceutical 3,489 3,864 3,677 3,820 Med Devices & Diagnostics 2,735 2,785 2,772 2,854 --------------------------------- Total sales $7,855 8,179 8,058 8,225 --------------------------------- Gross profit 5,544 5,807 5,662 5,723 Earnings before provision
for taxes on income 2,217 2,129 2,108 1,444 Net earnings 1,552 1,482 1,529 1,105 ================================= Basic net earnings per share $ .51 .49 .50 .36 ================================= Diluted net earnings per share $ .50 .48 .49 .36 =================================
(1) The second quarter of 2002 includes an after tax charge of $189 million relating to In-Process Research and Development (IPR&D) costs. (2) The third quarter of 2002 includes an after tax charge of $92 million relating to the Amgen arbitration settlement. (3) The fourth quarter of 2002 includes an after tax charge of $54 million relating to Amgen legal fees. (4) The second quarter of 2001 includes an after tax charge of $102 million relating to ALZA merger costs. (5) The third quarter of 2001 includes an after tax charge of $24 million relating to ALZA merger costs. (6) The fourth quarter of 2001 includes an after tax charge of $105 million relating to IPR&D costs. The fourth quarter also includes an after tax charge of $29 million relating to a LifeScan class action settlement. 22 Subsequent Event On February 10, 2003, Johnson & Johnson announced that it signed a definitive agreement with Scios Inc., a biopharmaceutical company with a marketed product for cardiovascular disease and research projects focused on auto-immune diseases. The Company will acquire Scios in a cash for stock exchange. Under the terms of the agreement, Scios shareholders will receive $45.00 for each outstanding Scios share. The value of the transaction as of the anticipated closing date is expected to be approximately $2.4 billion, net of cash anticipated to be acquired, based on Scios' approximately 59.8 million fully diluted shares outstanding. The boards of directors of Johnson & Johnson and Scios have given their approval to the transaction, which is subject to clearance under the Hart-Scott-Rodino Anti-Trust Improvements Act. This transaction is also subject to the approval of the shareholders of Scios and other customary closing conditions. Scios is a biopharmaceutical company developing novel treatments for cardiovascular and inflammatory disease. The company's disease-based technology platform integrates expertise in protein biology with computational and medicinal chemistry to identify novel targets and rationally design small molecule compounds for large markets with unmet medical needs. Scios' product NATRECOR is a recombinant form of a naturally occurring protein secreted by the heart as part of the body's response to congestive heart failure (CHF). The drug has several significant advantages over existing therapies for CHF, the single most common cause of hospitalization in the United States for patients over 65. The principal focus of Scios' research and development program is small molecule inhibitors, and includes several potential new treatments for pain and inflammatory diseases, including an advanced p-38 kinase inhibitor program. The transaction is expected to close in the second quarter of 2003. 55 Independent Auditor's Report To the Shareholders and Board of Directors of Johnson & Johnson: In our opinion, the accompanying consolidated balance sheets and the related 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 subsidiaries at December 29, 2002 and December 30, 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2002, in conformity with accounting principles generally accepted in the United States of America. 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 statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion. As discussed in Notes 1 and 7 to the financial statements, the Company has adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," effective December 31, 2001. PricewaterhouseCooper LLP New York, New York January 20, 2003, except for Note 22 for which the date is February 10, 2003 56 Segments of Business(1) Johnson & Johnson and Subsidiaries
Sales to Customers(2) --------------------- (Dollars in Millions) 2002 2001 2000 --------------------------------------------------------- Consumer - Domestic $ 3,605 3,449 3,403 International 2,959 2,871 2,868 ----------------------- Total 6,564 6,320 6,271 ----------------------- Pharmaceutical - Domestic 11,919 10,240 8,441 International 5,232 4,611 4,220 ----------------------- Total 17,151 14,851 12,661 ----------------------- Med Devices & Diagnostics - Domestic International 6,931 6,136 5,472 5,652 5,010 4,768 ----------------------- Total 12,583 11,146 10,240 ----------------------- Worldwide total $36,298 32,317 29,172 =======================
Operating Profit ---------------- (Dollars in Millions) 2002(5) 2001(6) 2000(7) --------------------- ------- ------- ------- Consumer $1,229 1,004 867 Pharmaceutical 5,787 4,928 4,394 Med Devices & Diagnostics 2,489 2,001 1,696 ---------------------------
Segments total 9,505 7,933 6,957 Expenses not allocated to segments(3) (214) (35) (89) -------------------------- General corporate(4) Worldwide total $9,291 7,898 6,868 ==========================
Identifiable Assets ------------------- (Dollars in Millions) 2002 2001 2000 --------------------- ---- ---- ---- Consumer $ 5,056 4,209 4,761 Pharmaceutical 11,112 10,591 9,209 Med Devices & Diagnostics 15,052 13,645 12,745 -------------------------- Segments total 31,220 28,445 26,715 Expenses not allocated to segments(3) General corporate(4) 9,336 10,043 7,530 -------------------------- Worldwide total $40,556 38,488 34,245 ==========================
Additions to Property, Plant & Equipment ----------------- (Dollars in Millions) 2002 2001 2000 --------------------- ---- ---- ---- Consumer $ 222 230 336 Pharmaceutical 1,012 749 627 Med Devices & Diagnostics 713 621 665 ------------------------- Segments total 1,947 1,600 1,628 General corporate 152 131 61 ------------------------- Worldwide total $2,099 1,731 1,689 =========================
Depreciation and Amortization ------------ (Dollars in Millions) 2002 2001 2000 --------------------- ---- ---- ---- Consumer $ 244 263 275 Pharmaceutical 557 492 474 Med Devices & Diagnostics 776 801 801 -------------------------- Segments total 1,577 1,556 1,550 General corporate 85 49 42 -------------------------- Worldwide total $1,662 1,605 1,592 ==========================
Geographic Areas
Sales to Customers(2) --------------------- (Dollars in Millions) 2002 2001 2000 --------------------- ---- ---- ---- United States $22,455 19,825 17,316 Europe 7,636 6,687 6,210 Western Hemisphere excluding U.S. 2,018 2,070 2,020 Asia-Pacific, Africa 4,189 3,735 3,626 ---------------------------- Segments total 36,298 32,317 29,172 General corporate Other non long-lived assets ---------------------------- Worldwide total $36,298 32,317 29,172 ============================
Long-Lived Assets ----------------- (Dollars in Millions) 2002 2001 2000 --------------------- ---- ---- ---- United States $12,854 11,922 10,043 Europe 4,712 3,632 3,551 Western Hemisphere excluding U.S. 622 640 653
Asia-Pacific, Africa 603 433 427 --------------------------- Segments total 18,791 16,627 14,674 General corporate 383 319 255 Other non long-lived assets 21,382 21,542 19,316 --------------------------- Worldwide total $40,556 38,488 34,245 ===========================
(1) See Management's Discussion and Analysis, pages 28 to 29, for a description of the segments in which the Company does business. (2) Export sales and intersegment sales are not significant. Sales to three distributors accounted for 10.3%, 9.8% and 9.2% of total revenues in 2002. These sales were concentrated in the pharmaceutical segment. Sales of PROCRIT/EPREX accounted for 11.8% and 10.6%, of total Company revenues, for 2002 and 2001, respectively. (3) Amounts not allocated to segments include interest income/expense, minority interest and general corporate income and expense. (4) General corporate includes cash and marketable securities. (5) Includes $150 million of In-Process Research & Development (IPR&D), $150 million and $85 million of Amgen costs in the Pharmaceutical segment and $39 million of IPR&D in the Medical Devices and Diagnostics segment. (6) Includes $147 million of ALZA merger costs in the Pharmaceutical segment and $105 million of IPR&D and $45 million of class action settlement in the Medical Devices and Diagnostics segment. (7) Includes restructuring gains of $24 million in the Consumer segment and $8 million and $49 million of IPR&D charges net of restructuring gains in the Pharmaceutical and Medical Devices and Diagnostics segments, respectively. 57 Summary of Operations and Statistical Data 1992-2002(3) Johnson & Johnson and Subsidiaries (Dollars in Millions Except Per Share Figures)
2002 2001 2000 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- ---- ---- ---- Sales to customers - Domestic $ 22,455 19,825 17,316 15,532 12,901 11,814 10,851 9,065 Sales to customers - International 13,843 12,492 11,856 11,825 10,910 10,708 10,536 9,472 ----------------------------------------------------------------------------------------------- Total sales 36,298 32,317 29,172 27,357 23,811 22,522 21,387 18,537 ----------------------------------------------------------------------------------------------- Cost of products sold 10,447 9,581 8,957 8,539 7,700 7,350 7,185 6,352 Selling, marketing and admin expenses 12,216 11,260 10,495 10,065 8,525 8,185 7,848 6,950 Research expense 3,957 3,591 3,105 2,768 2,506 2,373 2,109 1,788 Purchased in-process research and develop 189 105 66 -- 298 108 -- -- Interest income (256) (456) (429) (266) (302) (263) (196) (151) Interest expense, net of portion capitalized 160 153 204 255 186 179 176 184 Other (income) expense, Net 294 185 (94) 119 565 248 122 70 ----------------------------------------------------------------------------------------------- 27,007 24,419 22,304 21,480 19,478 18,180 17,244 15,193 ----------------------------------------------------------------------------------------------- Earnings before provision for taxes on income 9,291 7,898 6,868 5,877 4,333 4,342 4,143 3,344 Provision for taxes on income 2,694 2,230 1,915 1,604 1,232 1,237 1,185 926 ----------------------------------------------------------------------------------------------- Earnings before cumulative effect of accounting changes 6,597 5,668 4,953 4,273 3,101 3,105 2,958 2,418 =============================================================================================== Cumulative effect of accounting changes (net of tax) -- -- -- -- -- -- -- -- Net earnings $ 6,597 5,668 4,953 4,273 3,101 3,105 2,958 2,418 Percent of sales to Customers 18.2 17.5 17.0 15.6 13.0(2) 13.8 13.8 13.0 Diluted net earnings per share of common stock* $ 2.16(2) 1.84(2) 1.61(2) 1.39(2) 1.02(2) 1.02(2) .98 .84 Percent return on average shareholders' equity 28.1 25.4 26.5 27.0 22.2(2) 24.6 27.2 27.6 ===============================================================================================
Percent increase (decrease) over previous year: Sales to customers 12.3 10.8 6.6 14.9 5.7 5.3 15.4 19.9 Diluted net earnings per share 17.4(2) 14.3(2) 15.8(2) 36.3(2) --(2) 4.1(2) 16.7 21.7 =============================================================================================== Supplementary expense data: Cost of materials and services(4) $ 16,540 15,333 14,113 13,922 11,779 11,702 11,341 9,984 Total employment costs 8,450 7,749 7,085 6,537 5,908 5,586 5,447 4,849 Depreciation and Amortization 1,662 1,605 1,592 1,510 1,335 1,117 1,047 886 Maint and repairs(5) 360 372 327 322 286 270 285 257 Total tax expense(6) 3,497 2,995 2,619 2,271 1,881 1,824 1,753 1,458 ===============================================================================================
Supplementary balance sheet data: Property, plant and equipment, net $ 8,710 7,719 7,409 7,155 6,767 6,204 6,025 5,544 Additions to property, plant and equipment 2,099 1,731 1,689 1,822 1,610 1,454 1,427 1,307 Total assets 40,556 38,488 34,245 31,064 28,966 23,615 22,248 19,355 Long-term debt 2,022 2,217 3,163 3,429 2,652 2,084 2,347 2,702 Operating cash flow 8,176 8,864 6,903 5,920 5,106 4,210 4,001 3,436 =============================================================================================== Common stock information* Dividends paid per share $ .795 .70 .62 .55 .49 .425 .368 .32 Shareholders' equity per share $ 7.65 7.95 6.77 5.70 4.93 4.51 4.07 3.46 Market price per share (year-end close) $ 53.11 59.86 52.53 46.63 41.94 32.44 25.25 21.38 Average shares outstanding (millions) - basic 2,998.3 3,033.8 2,993.5 2,978.2 2,973.6 2,951.9 2,938.0 2,820.1 - diluted 3,054.1 3,099.3 3,099.2 3,100.4 3,082.7 3,073.0 3,046.2 2,890.0 =============================================================================================== Employees (thousands) 108.3 101.8 100.9 99.8 96.1 92.6 91.5 84.2 ===============================================================================================
(Dollars in Millions Except Per Share Figures)
1994 1993 1992 ---- ---- ---- Sales to customers - Domestic 7,731 7,121 6,899 Sales to customers - International 7,723 6,756 6,701 -------------------------------- Total sales 15,454 13,877 13,600 -------------------------------- Cost of products sold 5,393 4,908 4,783 Selling, marketing and admin expenses 5,901 5,364 5,356 Research expense 1,416 1,296 1,282 Purchased in-process research and develop 37 -- -- Interest income (85) (104) (122) Interest expense, net of portion capitalized 182 165 162 Other (income) expense, Net (5) (71) 20 -------------------------------- 12,839 11,558 11,481 -------------------------------- Earnings before provision for taxes on income 2,615 2,819 2,119 Provision for taxes on income 654 533 547 -------------------------------- Earnings before cumulative effect of accounting changes 1,961 1,786 1,572 ================================ Cumulative effect of accounting changes (net of tax) -- -- (595) Net earnings 1,961 1,786 977 Percent of sales to Customers 12.7 12.9 7.2 Diluted net earnings per share of common stock* .69 .63 .34(1) Percent return on average shareholders' equity 28.4 30.1 16.4(1) ================================
Percent increase (decrease) over previous year: Sales to customers 11.4 2.0 11.4 Diluted net earnings per share 9.5 85.3(1) 22.7(1) ================================ Supplementary expense data: Cost of materials and services(4) 8,104 7,168 7,736 Total employment costs 4,401 4,181 4,166 Depreciation and Amortization 754 649 576 Maint and repairs(5) 222 205 213 Total tax expense(6) 1,132 957 975 ================================
Supplementary balance sheet data: Property, plant and equipment, net 5,230 4,717 4,443 Additions to property, plant and equipment 979 1,001 1,162 Total assets 17,027 13,372 13,087 Long-term debt 2,776 1,761 1,882 Operating cash flow 2,984 2,202 2,136 ================================ Common stock information* Dividends paid per share .283 .253 .223 Shareholders' equity per share 2.76 2.16 2.03 Market price per share (year-end close) 13.69 11.19 12.63 Average shares outstanding (millions) - basic 2,796.9 2,816.6 2,845.8 - diluted 2,843.2 2,540.8 2,876.4 ================================ Employees (thousands) 83.4 83.2 86.9 ================================
* Adjusted to reflect the 2001 two-for-one stock split. (1) Excluding the cumulative effect of accounting changes of $595 million. -1992 earnings percent of sales to customers before accounting changes is 11.6%. -1992 earnings per share before accounting change is $.55. -1992 earnings percent return on average shareholders' equity before accounting changes is 25.1%. - 1993 diluted net earnings per share percent increase over prior year before accounting changes is 14.5%; 1992 diluted net earnings per share increase over prior year is 25.0%. (2) Excluding In-Process Research and Development (IPR&D), merger and restructuring costs: -2002 diluted net earnings per share is $2.23 and the increase over prior year is 16.8%. -2001 diluted net earnings per share is $1.91 and the increase over prior year is 17.2%. -2000 diluted net earnings per share is $1.63 and the increase over prior year is 14.8%. -1999 diluted net earnings per share is $1.42 and the increase over prior year is 14.5%. -1998 diluted net earnings per share is $1.24 and the increase over prior year is 11.7%. -1998 cost of products sold includes $60 million of inventory write-offs for restructuring, the percent return on average shareholders' equity is 26.5% and the earnings percent of sales to customers is 16.0%. -1997 diluted net earnings per share is $1.11 and the increase over prior year is 13.3%. (3) All periods have been adjusted to include the effects of the ALZA merger. (4) Net of interest and other income. (5) Also included in cost of materials and services category. (6) Includes taxes on income, payroll, property and other business taxes. 58