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 September 28, 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 October 24, 1997, 1,343,674,855 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 - September 28, 1997 and December 29, 1996 3 Consolidated Statement of Earnings for the Fiscal Quarter Ended September 28, 1997 and September 29, 1996 5 Consolidated Statement of Earnings for the Fiscal Nine Months Ended September 28, 1997 and September 29, 1996 6 Consolidated Statement of Cash Flows for the Fiscal Nine Months Ended September 28, 1997 and September 29, 1996 7 Notes to Consolidated Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Signatures 18 Part II - Other Information Items 1 through 5 are not applicable Item 6 - Exhibits and Reports on Form 8-K 17 - 2 - Part I - FINANCIAL INFORMATION Item 1 - FINANCIAL STATEMENTS JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited; Dollars in Millions) ASSETS September 28, December 29, 1997 1996 Current Assets: Cash and cash equivalents $ 2,994 2,011 Marketable securities 122 125 Accounts receivable, trade, less allowances $321 (1996 - $309) 3,628 3,251 Inventories (Note 3) 2,633 2,498 Deferred taxes on income 784 711 Prepaid expenses and other receivables 978 774 Total current assets 11,139 9,370 Marketable securities, non-current 342 351 Property, plant and equipment, at cost9,242 9,023 Less accumulated depreciation and amortization 3,758 3,372 5,484 5,651 Intangible assets, net (Note 4) 3,276 3,107 Deferred taxes on income 309 287 Other assets 1,127 1,244 Total assets $ 21,677 20,010 See Notes to Consolidated Financial Statements - 3 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited; Dollars in Millions) LIABILITIES AND SHAREOWNERS' EQUITY September 28, December 29, Current Liabilities: 1997 1996 Loans and notes payable $ 839 872 Accounts payable 1,412 1,743 Accrued liabilities 2,309 2,010 Accrued salaries, wages and commissions 519 322 Taxes on income 401 237 Total current liabilities 5,480 5,184 Long-term debt 1,257 1,410 Deferred tax liability 174 170 Certificates of extra compensation 113 108 Other liabilities 2,471 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 1,534,823,000 shares) 1,535 1,535 Note receivable from employee stock ownership plan (51) (57) Cumulative currency translation adjustments (371) (122) Retained earnings 12,589 11,012 13,702 12,368 Less common stock held in treasury, at cost (197,337,000 & 202,340,000 shares) 1,520 1,532 Total shareowners' equity 12,182 10,836 Total liabilities and shareowners' equity $21,677 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 Sept. 28, Percent Sept. 29, Percent 1997 to Sales 1996 to Sales Sales to customers (Note 5)$5,586 100.0 5,402 100.0 Cost of products sold 1,750 31.3 1,715 31.8 Selling, marketing and administrative expenses 2,149 38.5 2,092 38.7 Research expense 516 9.2 441 8.2 Interest income (58) (1.0) (36) (.7) Interest expense, net of portion capitalized 36 .6 32 .6 Other (income)expense, net (4) - 99 1.8 4,389 78.6 4,343 80.4 Earnings before provision for taxes on income 1,197 21.4 1,059 19.6 Provision for taxes on income (Note 2) 342 6.1 309 5.7 NET EARNINGS $ 855 15.3 750 13.9 NET EARNINGS PER SHARE $ .64 .56 CASH DIVIDENDS PER SHARE $ .22 .19 AVG. SHARES OUTSTANDING 1,335.1 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 Nine Months Ended Sept. 28, Percent Sept. 29, Percent 1997 to Sales 1996 to Sales Sales to customers (Note 5)$16,999 100.0 16,118 100.0 Cost of products sold 5,271 31.0 5,166 32.0 Selling, marketing and administrative expenses 6,429 37.8 6,115 37.9 Research expense 1,514 8.9 1,317 8.2 Interest income (151) (.8) (99) (.6) Interest expense, net of portion capitalized 104 .6 97 .6 Other (income)expense, net 39 .2 220 1.4 13,206 77.7 12,816 79.5 Earnings before provision for taxes on income 3,793 22.3 3,302 20.5 Provision for taxes on income (Note 2) 1,120 6.6 971 6.0 NET EARNINGS $ 2,673 15.7 2,331 14.5 NET EARNINGS PER SHARE $ 2.00 1.75 CASH DIVIDENDS PER SHARE$ .63 .545 AVG. SHARES OUTSTANDING 1,333.7 1,332.8 See Notes to Consolidated Financial Statements - 6 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited; Dollars in Millions) Fiscal Nine Months Ended Sept. 28, Sept. 29 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $2,673 2,331 Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles 868 758 Increases in accounts receivable, trade, less allowances (555) (389) Increase in inventories (272) (362) Changes in other assets and liabilities 536 610 NET CASH FLOWS FROM OPERATING ACTIVITIES 3,250 2,948 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment(761) (801) Proceeds from the disposal of assets 46 14 Acquisitions of businesses, net of cash acquired and other intangible assets(276) (196) Other, principally marketable securities 29 38 NET CASH USED BY INVESTING ACTIVITIES (962) (945) CASH FLOWS FROM FINANCING ACTIVITIES Dividends to shareowners (841) (720) Repurchase of common stock (429) (274) Proceeds from short-term debt 240 185 Retirement of short-term debt (185) (87) Proceeds from long-term debt 6 7 Retirement of long-term debt (190) (322) Proceeds from the exercise of stock options 156 114 NET CASH USED BY FINANCING ACTIVITIES (1,243) (1,097) EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (62) (19) INCREASE IN CASH AND CASH EQUIVALENTS 983 887 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,011 1,201 CASH AND CASH EQUIVALENTS, END OF PERIOD$ 2,994 2,088 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% First Half 30.0 29.5 Nine Months 29.5 29.4 The effective income tax rates for the first nine months of 1997 and 1996 are 29.5% and 29.4%, 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 subsidiaries manufacturing in Ireland under an incentive tax rate expiring on December 31, 2010. NOTE 3 - INVENTORIES (Dollars in Millions) Sept. 28, 1997 Dec. 29, 1996 Raw materials and supplies $ 693 687 Goods in process 491 390 Finished goods 1,449 1,421 $ 2,633 2,498 NOTE 4 - INTANGIBLE ASSETS (Dollars in Millions) Sept. 28, 1997 Dec. 29, 1996 Intangible assets $ 3,907 3,616 Less accumulated amortization 631 509 $ 3,276 3,107 - 8 - 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 Third Quarter Nine Months Percent Percent Increase/ Increase/ 1997 1996 (Decrease) 1997 1996 (Decrease) Consumer Domestic $ 801 800 .1 2,400 2,342 2.5 International 783 783 - 2,481 2,404 3.2 1,584 1,583 .1% 4,881 4,746 2.8% Pharmaceutical Domestic 993 864 14.9 2,888 2,479 16.5 International 925 953 (2.9) 2,907 2,908 - 1,918 1,817 5.6% 5,795 5,387 7.6% Professional Domestic 1,168 1,126 3.7 3,502 3,258 7.5 International 916 876 4.6 2,821 2,727 3.4 2,084 2,002 4.1% 6,323 5,985 5.6% Domestic 2,962 2,790 6.2 8,790 8,079 8.8 International 2,624 2,612 .5 8,209 8,039 2.1 Worldwide $5,586 5,402 3.4% 16,999 16,118 5.5% SALES BY GEOGRAPHIC AREAS Third Quarter Nine Months Percent Percent Increase/ Increase/ 1997 1996 (Decrease) 1997 1996 (Decrease) U.S. $2,962 2,790 6.2 8,790 8,079 8.8 Europe 1,373 1,445 (5.0) 4,478 4,637 (3.4) Western Hemisphere excluding U.S. 512 491 4.3 1,518 1,419 7.0 Asia-Pacific, Africa 739 676 9.3 2,213 1,983 11.6 Total $5,586 5,402 3.4% 16,999 16,118 5.5% - 9 - 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. On July 31, 1997, the Company completed the previously announced merger with Biopsys Medical, Inc. (NASDAQ: BIOP) in a stock-for-stock transaction. The merger has a total value of $276 million, net of cash acquired. The merger has been accounted for as a pooling of interests, however, prior period financial statements have not been restated as the effect of reflecting data relating to this merger would not materially affect previously issued financial statements. 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. During the quarter, the Company also completed the acquisition of McFaul & Lyons. McFaul & Lyons is a consulting firm specializing in hospital operations design and materials management. - 10 - NOTE 7 - SUBSEQUENT EVENTS During the third quarter, the Company announced the signing of a merger agreement with Gynecare, Inc. in a stock-for-stock transaction. Gynecare is a maker of minimally invasive medical devices for the treatment of uterine disorders. During the quarter, the Company also announced the signing of a merger agreement with Biosense, Inc. in a stock-for-stock transaction. Biosense, a leader in medical sensor technology, is developing several principal applications of medical sensor technology that will facilitate a variety of diagnostic and therapeutic interventional and cardiovascular procedures. 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 and 10-K. - 11 - 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. 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. - 12 - 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. 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. - 13 - Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SALES AND EARNINGS Consolidated sales for the first nine months of 1997 were $16,999 million, which exceeded sales of $16,118 million for the first nine months of 1996 by 5.5%. The strength of the U.S. dollar relative to the foreign currencies decreased sales for the first nine months of 1997 by 3.7%. Excluding the effect of the stronger U.S. dollar relative to foreign currencies, sales increased 9.2% on an operational basis for the first nine months of 1997. Consolidated net earnings for the first nine months of 1997 were $2,673 million, compared with net earnings of $2,331 million for the first nine months of 1996. Earnings per share for the first nine months of 1997 were $2.00, compared with $1.75 for the same period a year ago. Net earnings and earnings per share rose 14.7% and 14.3%, respectively. Consolidated sales for the third quarter of 1997 were $5,586 million, an increase of 3.4% over 1996 third quarter sales of $5,402 million. The effect of the stronger U.S. dollar relative to foreign currencies decreased third quarter sales by 4.8%. Consolidated net earnings for the third quarter of 1997 were $855 million, compared with $750 million for the same period a year ago, an increase of 14.0%. Earnings per share for the third quarter of 1997 rose 14.3% to $.64, compared with $.56 in the 1996 period. Domestic sales for the first nine months of 1997 were $8,790 million, an increase of 8.8% over 1996 domestic sales of $8,079 million for the same period a year ago. Sales by international subsidiaries were $8,209 million for the first nine months of 1997 compared with $8,039 million for the same period a year ago, an increase of 2.1%. Excluding the impact of the stronger value of the dollar, international sales increased by 9.5%. - 14 - Worldwide Consumer segment sales of $1.6 billion for the third quarter were essentially unchanged over the same period a year ago. Solid international sales growth was offset by the negative impact of a strong U.S. dollar. Sales were led by the excellent performance of the skin care franchise, including the NEUTROGENA line of products, as well as the JOHNSON's Baby, First-Aid and Kid's product lines. During the quarter, the Company announced a licensing agreement with Raisio Group of Finland for the North American marketing rights to a patented dietary ingredient, stanol ester, which reduces the absorption of cholesterol. This product is currently marketed in Europe as a margarine product called Benecol. In the area of over-the-counter pharmaceuticals, the Company also announced an alliance with Takeda Chemical Industries in Japan for the sale and distribution of OTC products. Takeda is the second largest OTC company in Japan and will initially market several forms of TYLENOL. Worldwide pharmaceutical sales of $1.9 billion for the third quarter increased by 5.6%, including 14.9% growth in domestic sales. International sales, which posted gains in local currency, decreased by 2.9% due to the strength of the U.S. dollar. Despite the negative currency impact, pharmaceutical sales continued to show strong growth led by RISPERDAL, an antipsychotic medication; PROCRIT, for the treatment of anemia; PROPULSID, a gastrointestinal product; DURAGESIC, a transdermal patch for chronic pain; ULTRAM, a centrally acting analgesic, and LEVAQUIN, the new anti-infective agent launched earlier this year. Also in the quarter, the Company announced an agreement with NeoRx for their oncology product Avicidin. - 15 - Worldwide sales of $2.1 billion for the third quarter in the Professional segment represented an increase of 4.1% over the same period in 1996. This included domestic growth at 3.7% and international growth at 4.6%. Strong double digit international growth was significantly decreased by the strength of the U.S. dollar. Professional segment growth was led by the strong performance of Vistakon's disposable contact lenses, Ethicon Endo- Surgery's instruments for less invasive surgical procedures, LifeScan's blood glucose monitoring systems, and new knee and hip systems from Johnson & Johnson Professional. During the quarter, the Company announced a merger agreement with Gynecare in a stock-for-stock transactions. Gynecare is a maker of minimally invasive medical devices for the treatment of uterine disorders. This company will represent another excellent addition to Johnson & Johnson's portfolio of products focused on improving women's health. The Company also announced a merger agreement with Biosense, a leader in medical sensor technology. Biosense is developing several principal applications of medical sensor technology that will facilitate a variety of diagnostic and therapeutic interventional and cardiovascular procedures. Also in the quarter, the Company completed the acquisition of McFaul & Lyons. McFaul & Lyons is a consulting firm specializing in hospital operations. Average shares of common stock outstanding in the first nine months of 1997 were 1,333.7 million, compared with 1,332.8 million for the same period a year ago. LIQUIDITY AND CAPITAL RESOURCES Cash and current marketable securities increased $980 million during the first nine months of 1997 to $3,116 million at September 28, 1997. - 16 - Total borrowings decreased $186 million during the first nine months of 1997 to $2,096 million. Total debt represented 14.7% 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 $761 million for the first nine months of 1997, compared with $801 million for the same period in 1996. On October 20, 1997, the Board of Directors approved a regular quarterly dividend of 22 cents per share payable on December 9, 1997 to shareowners of record as of November 18, 1997. Part II - Other Information 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 September 28, 1997. -17- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JOHNSON & JOHNSON (Registrant) Date: November 7, 1997 By /s/ R. J. DARRETTA R. J. DARRETTA (Vice President, Finance) Date: November 7, 1997 By /s/ C. E. LOCKETT C. E. LOCKETT (Corporate Controller) - 18 -