Johnson & Johnson is a global American pharmaceutical and consumer goods company with headquarters in New Brunswick, New Jersey. The company is listed in the Dow Jones Industrial Average.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 29, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to - ----------------------------------------------------------------- Commission file number 1-3215 JOHNSON & JOHNSON (Exact name of registrant as specified in its charter) NEW JERSEY 22-1024240 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) New Brunswick, New Jersey 08933 (Address of principal executive offices, including zip code) 732-524-0400 Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On July 25, 1997, 1,332,438,250 shares of Common Stock, $1.00 par value, were outstanding. - 1 - JOHNSON & JOHNSON AND SUBSIDIARIES TABLE OF CONTENTS Part I - Financial Information Page No. Consolidated Balance Sheet - June 29, 1997 and December 29, 1996 3 Consolidated Statement of Earnings for the Fiscal Quarter Ended June 29, 1997 and June 30, 1996 5 Consolidated Statement of Earnings for the Fiscal Six Months Ended June 29, 1997 and June 30, 1996 6 Consolidated Statement of Cash Flows for the Fiscal Six Months Ended June 29, 1997 and June 30, 1996 7 Notes to Consolidated Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Signatures 19 Part II - Other Information Item 4 - Submission of Matters to a Vote of Security Holders 17 Item 6 - Exhibits and Reports on Form 8-K 18 Items 1, 2, 3 and 5 are not applicable - 2 - Part I - FINANCIAL INFORMATION Item 1 - FINANCIAL STATEMENTS JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited; Dollars in Millions) ASSETS June 29, December 29, 1997 1996 Current Assets: Cash and cash equivalents $ 2,237 2,011 Marketable securities, at cost 126 125 Accounts receivable, trade, less allowances $317 (1996 - $309) 3,651 3,251 Inventories (Note 3) 2,630 2,498 Deferred taxes on income 769 711 Prepaid expenses and other receivables 857 774 Total current assets 10,270 9,370 Marketable securities, non-current 379 351 Property, plant and equipment, at cost 9,118 9,023 Less accumulated depreciation and amortization 3,633 3,372 5,485 5,651 Intangible assets, net (Note 4) 3,279 3,107 Deferred taxes on income 333 287 Other assets 1,259 1,244 Total assets $ 21,005 20,010 See Notes to Consolidated Financial Statements - 3 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited; Dollars in Millions) LIABILITIES AND SHAREOWNERS' EQUITY June 29, December 29, 1997 1996 Current Liabilities: Loans and notes payable $ 804 872 Accounts payable 1,447 1,743 Accrued liabilities 2,265 2,010 Accrued salaries, wages and commissions 402 322 Taxes on income 394 237 Total current liabilities 5,312 5,184 Long-term debt 1,265 1,410 Deferred tax liability 170 170 Certificates of extra compensation 108 108 Other liabilities 2,428 2,302 Shareowners' Equity: Preferred stock - without par value (authorized and unissued 2,000,000 shares) - - Common stock - par value $1.00 per share (authorized 2,160,000,000 shares; issued 1,534,824,000 shares) 1,535 1,535 Note receivable from employee stock ownership plan (51) (57) Cumulative currency translation adjustments (305) (122) Retained earnings 12,086 11,012 13,265 12,368 Less common stock held in treasury, at cost (201,800,000 & 202,340,000 shares) 1,543 1,532 Total shareowners' equity 11,722 10,836 Total liabilities and shareowners' equity $21,005 20,010 See Notes to Consolidated Financial Statements - 4 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (Unaudited; dollars & shares in millions except per share figures) Fiscal Quarter Ended June 29, Percent June 30, Percent 1997 to Sales 1996 to Sales Sales to customers (Note 5) $5,698 100.0 5,382 100.0 Cost of products sold 1,749 30.7 1,732 32.2 Selling, marketing and administrative expenses 2,142 37.6 2,027 37.7 Research expense 520 9.1 448 8.3 Interest income (57) (1.0) (33) (.6) Interest expense, net of portion capitalized 35 .6 30 .5 Other expense, net 15 .3 59 1.1 4,404 77.3 4,263 79.2 Earnings before provision for taxes on income 1,294 22.7 1,119 20.8 Provision for taxes on income (Note 2) 385 6.7 328 6.1 NET EARNINGS $ 909 16.0 791 14.7 NET EARNINGS PER SHARE $ .68 .60 CASH DIVIDENDS PER SHARE $ .22 .19 AVG. SHARES OUTSTANDING 1,332.5 1,332.9 See Notes to Consolidated Financial Statements - 5 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (Unaudited; dollars & shares in millions except per share figures) Fiscal Six Months Ended June 29, Percent June 30, Percent 1997 to Sales 1996 to Sales Sales to customers (Note 5) $11,413 100.0 10,716 100.0 Cost of products sold 3,521 30.9 3,451 32.2 Selling, marketing and administrative expenses 4,280 37.5 4,023 37.6 Research expense 998 8.7 876 8.2 Interest income (93) (.8) (63) (.6) Interest expense, net of portion capitalized 68 .6 65 .6 Other expense, net 43 .4 121 1.1 8,817 77.3 8,473 79.1 Earnings before provision for taxes on income 2,596 22.7 2,243 20.9 Provision for taxes on income (Note 2) 778 6.8 662 6.1 NET EARNINGS $ 1,818 15.9 1,581 14.8 NET EARNINGS PER SHARE $ 1.36 1.19 CASH DIVIDENDS PER SHARE $ .41 .355 AVG. SHARES OUTSTANDING 1,332.9 1,332.8 See Notes to Consolidated Financial Statements - 6 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited; Dollars in Millions) Fiscal Six Months Ended June 29, June 30, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $1,818 1,581 Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles 548 492 Increase in accounts receivable, trade, less allowances (524) (417) Increase in inventories (227) (241) Changes in other assets and liabilities 341 228 NET CASH FLOWS FROM OPERATING ACTIVITIES 1,956 1,643 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (460) (495) Proceeds from the disposal of assets 68 12 Acquired businesses and intangibles, net of cash acquired (303) (9) Other, principally marketable securities (37) 163 NET CASH USED BY INVESTING ACTIVITIES (732) (329) CASH FLOWS FROM FINANCING ACTIVITIES Dividends to shareowners (547) (467) Repurchase of common stock (356) (174) Proceeds from short-term debt 153 100 Retirement of short-term debt (153) (78) Proceeds from long-term debt 5 - Retirement of long-term debt (190) (100) Proceeds from the exercise of stock options 143 82 NET CASH USED BY FINANCING ACTIVITIES (945) (637) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (53) (18) INCREASE IN CASH AND CASH EQUIVALENTS 226 659 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,011 1,201 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,237 1,860 See Notes to Consolidated Financial Statements - 7 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - The accompanying interim financial statements and related notes should be read in conjunction with the Consolidated Financial Statements of Johnson & Johnson and Subsidiaries (the "Company") and related notes as contained in the Annual Report on Form 10-K for the fiscal year ended December 29, 1996. The interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair presentation of such statements. Earnings per share were calculated on the basis of the weighted average number of shares of common stock outstanding during the applicable period. All share and per share amounts have been restated to retroactively reflect the prior year stock split. NOTE 2 - INCOME TAXES The effective income tax rates for 1997 and 1996 are as follows: 1997 1996 First Quarter 30.2% 29.7% Second Quarter 29.8 29.3 First Half 30.0 29.5 The effective income tax rates for the first half of 1997 and 1996 are 30.0% and 29.5%, respectively, as compared to the U.S. federal statutory rate of 35%. The difference from the statutory rate is the result of domestic subsidiaries operating in Puerto Rico under a grant for tax relief expiring on December 31, 2007 and the result of subsidiaries manufacturing in Ireland under an incentive tax rate expiring on December 31, 2010. The increase in the 1997 worldwide effective tax rate was primarily due to an increase in income subject to tax in the U.S. The Omnibus Budget Reconciliation Act of 1993 includes a change in the tax code which will reduce the benefit the Company receives from its operations in Puerto Rico by 60% gradually over a five year period. - 8 - NOTE 3 - INVENTORIES (Dollars in Millions) June 29, 1997 Dec. 29, 1996 Raw materials and supplies $ 732 687 Goods in process 412 390 Finished goods 1,486 1,421 $ 2,630 2,498 NOTE 4 - INTANGIBLE ASSETS (Dollars in Millions) June 29, 1997 Dec. 29, 1996 Intangible assets $ 3,856 3,616 Less accumulated amortization 577 509 $ 3,279 3,107 The excess of the cost over the fair value of net assets of purchased businesses is recorded as goodwill and is amortized on a straight-line basis over periods of 40 years or less. The cost of other acquired intangibles is amortized on a straight-line basis over their estimated useful lives. NOTE 5 - SALES TO CUSTOMERS BY SEGMENT OF BUSINESS AND GEOGRAPHIC AREAS (Dollars in Millions) SALES BY SEGMENT OF BUSINESS Second Quarter Six Months Percent Percent 1997 1996 Increase 1997 1996 Increase Consumer Domestic $ 767 717 7.0 1,598 1,542 3.6 International 845 827 2.2 1,698 1,621 4.8 1,612 1,544 4.4% 3,296 3,163 4.2% Pharmaceutical Domestic 935 823 13.6 1,895 1,615 17.3 International 999 985 1.4 1,982 1,955 1.4 1,934 1,808 7.0% 3,877 3,570 8.6% Professional Domestic 1,179 1,097 7.5 2,335 2,132 9.5 International 973 933 4.3 1,905 1,851 2.9 2,152 2,030 6.0% 4,240 3,983 6.5% Domestic 2,881 2,637 9.3 5,828 5,289 10.2 International 2,817 2,745 2.6 5,585 5,427 2.9 Worldwide $ 5,698 5,382 5.9% 11,413 10,716 6.5% - 9 - NOTE 5 - SALES TO CUSTOMERS BY SEGMENT OF BUSINESS AND GEOGRAPHIC AREAS SALES BY GEOGRAPHIC AREAS Second Quarter Six Months Percent Percent 1997 1996 Increase 1997 1996 Increase U.S. $2,881 2,637 9.3 5,828 5,289 10.2 Europe 1,551 1,605 (3.4) 3,105 3,192 (2.7) Western Hemisphere excluding U.S. 511 464 10.1 1,007 928 8.5 Asia-Pacific, Africa 755 676 11.7 1,473 1,307 12.7 Total $5,698 5,382 5.9% 11,413 10,716 6.5% NOTE 6 - ACQUISITIONS During the first quarter, the Company completed the acquisitions of Innotech, Inc. and Nitinol Development Corporation. Innotech, Inc. develops, manufactures and sells eyeglass lens products, desktop eyeglass lens casting systems and related consumables that enable eye care professionals and optical retailers to custom fabricate high quality prescription eyeglass lenses at the point of sale. Nitinol Development Corporation is a pioneer in shape memory alloys used in the development of endovascular medical devices, including stents. The aggregate purchase price for these acquisitions was $158 million. Pro forma results of the acquisitions, assuming that the transactions were consummated at the beginning of each year presented, would not be materially different from the results reported. During the second quarter, the Company announced the acquisition of Pharmacia & Upjohn's Motrin (ibuprofen) brand in a product exchange involving several smaller consumer brands. NOTE 7 - SUBSEQUENT EVENT During the second quarter, the Company announced the signing of a merger agreement with Biopsys Medical, Inc. (NASDAQ:BIOP) in a stock-for-stock transaction. The merger, valued at $276 million, net of cash acquired, became effective on July 31, 1997. The MAMMOTOME Breast Biopsy System, pioneered and marketed by Biopsys Medical, Inc., is an innovative, minimally invasive procedure for breast cancer diagnosis, which requires only a local anesthetic and is performed on an outpatient basis. - 10 - NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 128 "Earnings per Share" ("SFAS 128") which changes the method of calculating earnings per share. SFAS 128 requires the presentation of "basic" earnings per share and "diluted" earnings per share on the face of the income statement. The statement is effective for financial statements for periods ending after December 15, 1997. The Company will adopt SFAS 128 in the fourth quarter of 1997, as early adoption is not permitted. Basic earnings per share, for the Company, is expected to be the same as reported earnings per share. Diluted earnings per share is not expected to materially differ from the fully diluted earnings per share reported in the Exhibit to the Company's quarterly Form 10-Q. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 129 "Disclosure of Information about Capital Structure" ("SFAS 129") that established standards for disclosing information about an entity's capital structure. The statement is effective for financial statements for periods ending after December 15, 1997. The Company will adopt SFAS 129 in the fourth quarter of 1997. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 130 "Reporting Comprehensive Income" ("SFAS 130") that establishes standards for reporting and display of an alternative income measurement and its components (revenue, expenses, gains, and losses) in a full set of general-purpose financial statements. This statement is effective for fiscal years beginning after December 15, 1997. The Company will adopt SFAS 130 in fiscal year 1998. - 11 - In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") that establishes standards for the reporting of information about operating segments in annual financial statements. Additionally, it requires that enterprises report selected information about operating segments in interim financial reports issued to shareholders. The Company is currently evaluating the new pronouncement for the impact on its segment disclosures. This statement is effective for periods beginning after December 15, 1997. The Company will adopt SFAS 131 in fiscal year 1998. NOTE 9 - FINANCIAL INSTRUMENTS The Company uses derivative financial instruments to reduce exposures to market risks resulting from fluctuations in interest rates and foreign exchange. The Company does not enter into financial instruments for trading or speculative purposes. The Company uses interest rate and currency swaps to manage interest rate and currency risk primarily related to borrowings. Interest rate and currency swap agreements which hedge third party debt mature with these borrowings. Unrealized gains/(losses) on currency swaps are classified in the balance sheet as other assets or liabilities. Interest expense under these agreements, and the respective debt instruments that they hedge, are recorded at the net effective interest rate of the hedged transactions. Gains and losses on foreign currency hedges of existing assets or liabilities, or hedges of firm commitments are deferred and are recognized in income as part of the related transaction. - 12 - In the event of the early termination of a swap contract, the gain or loss on the contract is amortized over the remaining life of the related transaction. If the underlying transaction associated with a swap or other derivative contract accounted for as hedge is terminated early, the related derivative contract is simultaneously terminated and any gains or losses will be included in income immediately. NOTE 10 - OTHER In June the Company resolved a litigation regarding an improper injunction against certain of its oral contraceptive products by American Home Products. The after tax gain on the settlement was utilized for certain business improvement initiatives. Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SALES AND EARNINGS Consolidated sales for the first six months of 1997 were $11,413 million, which exceeded sales of $10,716 million for the first six months of 1996 by 6.5%. The strength of the U.S. dollar relative to the foreign currencies decreased sales for the first six months of 1997 by 3.1%. Excluding the effect of the stronger U.S. dollar relative to foreign currencies, sales increased 9.6% on an operational basis for the first six months of 1997. Consolidated net earnings for the first six months of 1997 were $1,818 million, compared with net earnings of $1,581 million for the first six months of 1996. Earnings per share for the first six months of 1997 were $1.36, compared with $1.19 for the same period a year ago. Net earnings and earnings per share rose 15.0% and 14.3%, respectively. - 13 - Consolidated sales for the second quarter of 1997 were $5,698 million, an increase of 5.9% over 1996 second quarter sales of $5,382 million. The effect of the stronger U.S. dollar relative to foreign currencies decreased second quarter sales by 3.2%. Consolidated net earnings for the second quarter of 1997 were $909 million, compared with $791 million for the same period a year ago, an increase of 14.9%. Earnings per share for the second quarter of 1997 rose 13.3% to $.68, compared with $.60 in the 1996 period. Domestic sales for the first six months of 1997 were $5,828 million, an increase of 10.2% over 1996 domestic sales of $5,289 million for the same period a year ago. Sales by international subsidiaries were $5,585 million for the first six months of 1997 compared with $5,427 million for the same period a year ago, an increase of 2.9%. Excluding the impact of the stronger value of the dollar, international sales increased by 9.1%. Worldwide Consumer segment sales of $1.61 billion for the second quarter increased by 4.4% over the same period a year ago. Sales were led by the strong performance of over-the-counter pharmaceuticals and the continued strength of our skin care franchise, including the NEUTROGENA line of products. During the quarter, the Company received FDA approval for IMODIUM ADVANCED (loperamide and simethicone), a patented over-the-counter product for the treatment of diarrhea plus bloating and cramps. The company also received FDA approval for NICOTROL INHALER, to be marketed initially on a prescription basis. During the quarter, the Company also announced the acquisition of Pharmacia & Upjohn's MOTRIN (ibuprofen) brand in a product exchange involving several smaller consumer brands. - 14 - Worldwide pharmaceutical sales of $1.93 billion for the second quarter increased by 7.0%, which included 13.6% growth in domestic sales and a 1.4% increase internationally. Leading the increase in pharmaceutical sales was the continued strong growth of RISPERDAL, an antipsychotic medication; PROCRIT, for the treatment of anemia; DURAGESIC, a transdermal patch for chronic pain; and ULTRAM, a centrally acting analgesic. LEVAQUIN, the first once-per-day anti-infective proven effective against three common upper-respiratory infections and launched earlier this year, also contributed to the strong pharmaceutical sales growth. During the quarter, the Company announced the signing of a strategic alliance with Eisai Co., Ltd. of Tokyo for PARIET (rabeprazole), an investigational new drug for the treatment of ulcers and gastroesophageal reflux disease. Worldwide sales of $2.15 billion in the Professional segment represented an increase of 6.0% over the second quarter of 1996. This included domestic growth of 7.5% along with international growth of 4.3%. Professional growth was led by the strong performance of Vistakon's disposable contact lenses, Ethicon Endo- Surgery's minimally invasive surgical instruments, LifeScan's blood glucose monitoring systems and Cordis' products for the treatment of vascular disease. Also contributing to Professional segment growth was the strong performance of the orthopaedics franchise due to the recent launch of the P.F.C. SIGMA knee system. In the area of women's health, the Company licensed a real time cervical cancer test from Polartechnics, Ltd. in Australia that has the potential to provide greater accuracy than a PAP test. In the area of urology, the Company announced the signing of a definitive licensing agreement with Theragenics Corporation for exclusive worldwide rights to market and sell THERASEED, the Palladium 103 product manufactured by Theragenics, for use in the treatment of prostate cancer. - 15 - Average shares of common stock outstanding in the first half of 1997 were 1,332.9 million, compared with 1,332.8 million for the same period a year ago. LIQUIDITY AND CAPITAL RESOURCES Cash and current marketable securities increased $227 million during the first six months of 1997 to $2,363 million at June 29, 1997. Total borrowings decreased $213 million during the six months of 1997 to $2,069 million. Total debt represented 15.0% of total capital (shareowners' equity and total borrowings) at quarter end compared with 17.4% at the end of 1996. Additions to property, plant and equipment were $460 million for the first six months of 1997, compared with $495 million for the same period in 1996. On July 21, 1997, the Board of Directors approved a regular quarterly dividend rate of 22 cents per share payable on September 9, 1997 to shareowners of record as of August 19, 1997. - 16 - Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders (a) The annual meeting of the shareowners of the Company was held on April 24, 1997. (b) The shareowners elected all the Company's nominees for director, except for Clark H. Johnson who died on March 13, after the mailing of the proxy material. The shareowners also approved the appointment of Coopers & Lybrand L.L.P. as the Company's independent auditors for 1997 and defeated a shareowner proposal relating to Maquiladora Operations. The votes were as follows: 1. Election of Directors: For Withheld G. N. Burrow 1,117,847,921 5,191,332 J. G. Cooney 1,117,030,458 6,008,795 J. G. Cullen 1,117,361,662 5,677,591 P. M. Hawley 1,115,822,403 7,216,850 A. D. Jordan 1,117,525,527 5,513,726 A. G. Langbo 1,117,807,428 5,231,825 R. S. Larsen 1,117,724,429 5,314,824 J. S. Mayo 1,117,590,072 5,449,181 T. S. Murphy 1,117,072,855 5,966,398 P. J. Rizzo 1,117,339,299 5,699,954 M. F. Singer 1,117,764,069 5,275,184 R. B. Smith 1,113,527,099 9,512,154 R. N. Wilson 1,117,645,540 5,393,713 2. Approval of Appointment of Coopers & Lybrand L.L.P. For 1,116,970,230 Against 2,552,003 Abstain 3,517,020 3. A shareowner proposal on Maquiladora Operations was defeated. The vote on this proposal was as follows: For 53,404,761 Against 831,558,138 Abstain 66,218,404 - 17 - Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Numbers (1) Exhibit 11 - Calculation of Earnings per Share (2) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the three month period ended June 29, 1997. - 18 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JOHNSON & JOHNSON (Registrant) Date: August 8, 1997 By /s/ R. J. DARRETTA R. J. DARRETTA (Vice President, Finance) Date: August 8, 1997 By /s/ C.E. LOCKETT C. E. LOCKETT (Corporate Controller) - 19 -