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 March 29, 1998 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 April 24, 1998, 1,344,664,760 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 - March 29, 1998 and December 28, 1997 3 Consolidated Statement of Earnings for the Three Months Ended March 29, 1998 and March 30, 1997 5 Consolidated Statement of Cash Flows for the Three Months Ended March 29, 1998 and March 30, 1997 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Signatures 15 Part II - Other Information Item 1 through 5 are not applicable Item 6 - Exhibits and Reports on Form 8-K 14 - 2 - Part I - FINANCIAL INFORMATION Item 1 - FINANCIAL STATEMENTS JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited; Dollars in Millions) ASSETS March 29, December 28, 1998 1997 Current Assets: Cash and cash equivalents $ 2,893 2,753 Marketable securities, at cost 128 146 Accounts receivable, trade, less allowances $353 (1997 - $358) 3,500 3,329 Inventories (Note 4) 2,710 2,516 Deferred taxes on income 828 831 Prepaid expenses and other receivables 1,075 988 Total current assets 11,134 10,563 Marketable securities, non-current 385 385 Property, plant and equipment, at cost 9,460 9,444 Less accumulated depreciation and amortization 3,792 3,634 5,668 5,810 Intangible assets, net (Note 5) 3,303 3,261 Deferred taxes on income 366 332 Other assets 1,059 1,102 Total assets $ 21,915 21,453 See Notes to Consolidated Financial Statements - 3 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited; Dollars in Millions) LIABILITIES AND SHAREOWNERS' EQUITY March 29, December 28, 1998 1997 Current Liabilities: Loans and notes payable $ 570 714 Accounts payable 1,483 1,753 Accrued liabilities 2,342 2,258 Accrued salaries, wages and commissions413 332 Taxes on income 407 226 Total current liabilities 5,215 5,283 Long-term debt 1,124 1,126 Deferred tax liability 178 175 Certificates of extra compensation 128 126 Other liabilities 2,465 2,384 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 (45) (51) Accumulated other comprehensive Income (Note 2) (427) (378) Retained earnings 13,175 12,661 14,238 13,767 Less common stock held in treasury, at cost (189,895,000 & 189,687,000 shares) 1,433 1,408 Total shareowners' equity 12,805 12,359 Total liabilities and shareowners' equity $21,915 21,453 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 March 29, Percent March 30, Percent 1998 to Sales 1997 to Sales Sales to customers (Note 6) $5,783 100.0 5,715 100.0 Cost of products sold 1,777 30.7 1,772 31.0 Selling, marketing and administrative expenses 2,100 36.3 2,138 37.4 Research expense 494 8.5 478 8.4 Interest income (61) (1.0) (36) (.6) Interest expense, net of portion capitalized 28 .5 33 .5 Other expense, net 11 .2 28 .5 4,349 75.2 4,413 77.2 Earnings before provision for taxes on income 1,434 24.8 1,302 22.8 Provision for taxes on income (Note 3) 424 7.3 393 6.9 NET EARNINGS $1,010 17.5 909 15.9 NET EARNINGS PER SHARE (Notes 1 and 8) Basic $ .75 .68 Diluted $ .73 .66 CASH DIVIDENDS PER SHARE $ .22 .19 AVG. SHARES OUTSTANDING Basic 1,345.3 1,333.1 Diluted 1,374.7 1,368.5 See Notes to Consolidated Financial Statements - 5 - JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited; Dollars in Millions) Fiscal Quarter Ended March 29, March 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $1,010 909 Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles 294 280 Increase in accounts receivable, trade, less allowances (195) (367) Increase in inventories (221) (137) Changes in other assets and liabilities 311 407 NET CASH FLOWS FROM OPERATING ACTIVITIES 1,199 1,092 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment(215) (200) Proceeds from the disposal of assets 8 6 Acquisition of businesses, net of cash acquired (78) (158) Other, principally intangible assets (85) (53) NET CASH USED BY INVESTING ACTIVITIES (370) (405) CASH FLOWS FROM FINANCING ACTIVITIES Dividends to shareowners (296) (254) Repurchase of common stock (347) (273) Proceeds from short-term debt 76 101 Retirement of short-term debt (120) (133) Proceeds from long-term debt - - Retirement of long-term debt (104) - Proceeds from the exercise of stock options 111 92 NET CASH USED BY FINANCING ACTIVITIES (680) (467) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (9) (41) INCREASE IN CASH AND CASH EQUIVALENTS 140 179 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD2,753 2,011 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,893 2,190 See Notes to Consolidated Financial Statements - 6 - 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 28, 1997. 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. At year-end 1997, the Company adopted Statement of Financial Accounting Standards No. 128 that requires the reporting of both basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to common shareowners by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Prior periods have been restated to reflect the new standard. NOTE 2 - ADOPTION OF SFAS NO. 130 At March 29, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of an alternative income measurement and its components (revenue, expenses, gains and losses) in a full set of general purpose financial statements. The total comprehensive income for the three months ended March 29, 1998 is $961 million, compared with $761 million for the same period a year ago. Total comprehensive income includes net earnings, net unrealized currency gains and losses on translation and net unrealized gains and losses on securities. NOTE 3 - INCOME TAXES The effective income tax rates for the first three months of 1998 and 1997 are 29.6% and 30.2%, 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 21, 2010. The decrease in the 1998 worldwide effective tax rate was primarily due to a greater proportion of taxable income derived from lower tax rate countries. The Omnibus Budget Reconciliation Act of 1993 included 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. - 7 - NOTE 4 - INVENTORIES (Dollars in Millions) March 29, 1998 Dec. 28, 1997 Raw materials and supplies $ 740 655 Goods in process 401 417 Finished goods 1,569 1,444 $ 2,710 2,516 NOTE 5 - INTANGIBLE ASSETS (Dollars in Millions) March 29, 1998 Dec. 28, 1997 Intangible assets $ 3,982 3,885 Less accumulated amortization 679 624 $ 3,303 3,261 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 6 - SALES TO CUSTOMERS BY SEGMENT OF BUSINESS AND GEOGRAPHIC AREAS (Dollars in Millions) SALES BY SEGMENT OF BUSINESS First Quarter Percent Increase 1998 1997 (Decrease) Consumer Domestic $ 840 832 1.0 International 799 852 (6.2) 1,639 1,684 (2.7)% Pharmaceutical Domestic $ 1,169 960 21.8 International 923 983 (6.1) 2,092 1,943 7.7% Professional Domestic $ 1,086 1,155 (6.0) International 966 933 3.5 2,052 2,088 (1.7)% Domestic $ 3,095 2,947 5.0 International 2,688 2,768 (2.9) Worldwide $ 5,783 5,715 1.2% - 8 - NOTE 6 - SALES TO CUSTOMERS BY SEGMENT OF BUSINESS AND GEOGRAPHIC AREAS (Dollars in Millions) SALES BY GEOGRAPHIC AREA First Quarter Percent Increase 1998 1997 (Decrease) U.S. $ 3,095 2,947 5.0 Europe 1,539 1,557 (1.2) Western Hemisphere Excluding U.S. 507 495 2.4 Asia-Pacific, Africa 642 716 (10.3) Total $ 5,783 5,715 1.2% NOTE 7 - ACQUISITIONS During the quarter the Company completed an acquisition with IsoStent, Inc. Cordis acquired intellectual property and specific assets, including the BX Stent, a new flexible interventional medical device in development for treatment of coronary artery disease. Pro forma results of the acquisition, assuming that the transaction was consummated at the beginning of each year presented, would not be materially different from the results reported. NOTE 8 - EARNINGS PER SHARE The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the three months ended March 29, 1998 and March 30, 1997: (Shares in Millions) March 29, March 30, 1998 1997 Basic net earnings per share $ .75 .68 Average shares outstanding - basic 1,345.3 1,333.1 Potential shares exercisable under stock option plans 73.2 73.6 Less: shares which could be repurchased under treasury stock method (43.8) (38.2) Adjusted average shares outstanding - diluted1,374.7 1,368.5 Diluted earnings per share $ .73 .66 - 9 - NOTE 9 - PENDING LEGAL PROCEEDINGS The Company, along with numerous other pharmaceutical manufacturers and distributors, is a defendant in a large number of individual and class actions brought by retail pharmacies in state and federal courts under the antitrust laws. These cases assert price discrimination and price-fixing violations resulting from an alleged industry-wide agreement to deny retail pharmacists price discounts on sales of brand name prescription drugs. The Company believes the claims against the Company in these actions are without merit and is defending them vigorously. Further, the Company together with another contact lens manufacturer, a trade association and various individual defendants, is a defendant in several consumer class actions and an action brought by multiple State Attorneys General on behalf of consumers alleging violations of federal and state antitrust laws. These cases assert that enforcement of the Company's long-standing policy of selling contact lenses only to licensed eye care professionals is a result of an unlawful conspiracy to eliminate alternative distribution channels from the disposable contact lens market. The Company believes that these actions are without merit and is defending them vigorously. The Company believes that the above proceedings in the aggregate would not have a material adverse effect on its results of operations, cash flows or financial position. Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SALES AND EARNINGS Consolidated sales for the first quarter of 1998 were $5,783 million, an increase of 1.2% over 1997 first quarter sales of $5,715 million. The effect of the stronger dollar relative to foreign currencies decreased first quarter's sales by 4.4%. The sales increase of 5.6% due to operations included a positive price change effect of .4%. - 10 - Consolidated net earnings for the first quarter of 1998 were $1,010 million, compared with $909 million for the same period a year ago, an increase of 11.1%. Worldwide basic net earnings per share for the period were $.75, compared with $.68 for the same period in 1997, an increase of 10.3%. Worldwide diluted net earnings per share for the period were $.73, compared with $.66 for the same period in 1997, an increase of 10.6%. Domestic sales for the first three months of 1998 were $3,095 million, an increase of 5.0% over 1997 domestic sales of $2,947 million for the same period. Sales by international subsidiaries were $2,688 million for the first quarter of 1998 compared with $2,768 million for the same period a year ago, a decrease of 2.9%. Excluding the impact of the higher value of the dollar, international sales increased by 6.1% for the quarter. Worldwide Consumer segment sales for the first quarter of 1998 were $1.6 billion, a decrease of 2.7% versus the same period a year ago. In local currency, worldwide sales increased 2.4% before adjusting for a 5.1% negative currency impact. Consumer sales were led by continued strength in the skin care franchise, which includes the NEUTROGENA, RoC and CLEAN & CLEAR product lines, as well as strong performances from the adult and children's MOTRIN line of analgesic products. Worldwide pharmaceutical sales of $2.1 billion for the quarter increased 7.7% over the same period in 1997. In local currency, worldwide sales increased 12.1% before a negative currency impact of 4.4%, due to the stronger U.S. dollar. This growth reflects the strong performance of PROCRIT, for the treatment of anemia; PROPULSID, a gastrointestinal product; DURAGESIC, a transdermal patch for chronic pain; LEVAQUIN, an anti-infective; and ULTRAM, an analgesic. REGRANEX, the first biologic treatment proven to increase the incidence of healing in diabetic foot ulcers, was launched in the U.S. in the first quarter. - 11 - During the quarter, the company received European approval for a peri-surgery indication for EPREX. Additionally, the company announced a worldwide collaboration with Ergo Science Corporation for the development and commercialization of bromocriptine mesylate and other potential products for the treatment of Type 2 diabetes and obesity. A New Drug Application (NDA) for the use of bromocriptine mesylate to treat Type 2 diabetes was accepted by the FDA for filing in October, 1997. At the end of March, an NDA for ACIPHEX (rabeprazole), a proton pump inhibitor for gastroesophagel reflux disease (GERD), GERD maintenance and duodenal and gastric ulcers, was submitted to the FDA by our partner Eisai, Inc. Eisai and Janssen Pharmaceutica, a wholly-owned subsidiary of Johnson & Johnson, have entered into a strategic alliance to market rabeprazole worldwide with the exception of Japan and certain other territories. Worldwide sales of $2.1 billion in the Professional segment represented a decrease of 1.7% over the first quarter of 1997. In local currency, worldwide sales increased 1.9% before adjusting for a 3.6% negative currency impact. Strong sales growth of Ethicon Endo-Surgery's laparoscopy and wound closure products and LifeScan's blood glucose monitoring systems were offset by a decline in sales of Cordis' coronary stents. During the quarter, the company launched the THERMACHOICE Uterine Balloon Therapy System in the U.S. for the treatment of excessive menstrual bleeding in women. The product has been well received by the obstetrical/gynecological community and over 1,900 practitioners have already been trained. Also in the quarter, an FDA advisory committee unanimously recommended the approval of DERMABOND, a topical skin adhesive for wound closure. Ethicon, Inc., a wholly-owned subsidiary of Johnson & Johnson, has exclusive worldwide marketing and distribution rights for DERMABOND. Average shares of common stock outstanding in the first three months of 1998 were 1,345.3 million, compared with 1,333.1 million for the same period a year ago. - 12 - LIQUIDITY AND CAPITAL RESOURCES Cash and current marketable securities increased $122 million during the first three months of 1998 to $3,021 million at March 29, 1998. Total borrowings decreased $146 million during the first three months of 1998 to $1,694 million. Net cash (cash and current securities net of borrowings) was $1,327 million at March 29, 1998 compared with $1,059 million at the end of 1997. Total debt represented 11.7% of total capital (shareowners' equity and total borrowings) at quarter end compared with 13.0% at the end of 1997. Additions to property, plant and equipment were $215 million for the first three months of 1998, compared with $200 million for the same period in 1997. On April 23, 1998, the Board of Directors approved a 13.6% increase in the quarterly dividend rate from 22 cents per share to 25 cents per share. The dividend is payable on June 9, 1998 to shareowners of record as of May 19, 1998. - 13 - Part II - Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Numbers (1) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the three month period ended March 29, 1998. - 14 - 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: May 8, 1998 By /s/ R. J. DARRETTA R. J. DARRETTA (Vice President, Finance) Date: May 8, 1998 By /s/ C. E. LOCKETT C. E. LOCKETT (Corporate Controller) - 15 -