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 30, 2002
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the for the transition
period from to
Commission file number 1-3215
JOHNSON & JOHNSON
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-1024240
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
(Address of principal executive offices)
Registrant's telephone number, including area code (732) 524-0400
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 26, 2002, 2,975,339,590 shares of Common Stock, $1.00
par value, were outstanding.
1
JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page No.
Item 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheet -
June 30, 2002 and December 30, 2001 3
Consolidated Statement of Earnings for the
Fiscal Quarter Ended June 30, 2002 and
July 1, 2001 5
Consolidated Statement of Earnings for the
Fiscal Six Months Ended June 30, 2002 and
July 1, 2001 6
Consolidated Statement of Cash Flows for the
Fiscal Six Months Ended June 30, 2002 and
July 1, 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 4 - Submission of Matters to a
Vote of Security Holders 19
Item 5 - Exhibits and Reports on Form 8-K 19
Signatures 20
Certifications Pursuant to 18 U.S.C.
Section 1350 21
2
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited; Dollars in Millions)
ASSETS
June 30, December 30,
2002 2001
Current Assets:
Cash and cash equivalents $ 2,606 3,758
Marketable securities 4,251 4,214
Accounts receivable, trade, less
allowances for doubtful accounts
$200(2001 - $197) 5,408 4,630
Inventories (Note 4) 3,352 2,992
Deferred taxes on income 1,374 1,192
Prepaid expenses and other
receivables 1,863 1,687
Total current assets 18,854 18,473
Marketable securities, non-current 176 969
Property, plant and equipment,
at cost 13,393 12,458
Less accumulated
depreciation 5,345 4,739
8,048 7,719
Intangible assets, gross (Note 5) 11,194 10,910
Less accumulated amortization 1,929 1,833
Intangible assets, net 9,265 9,077
Deferred taxes on income 46 288
Other assets 1,962 1,962
Total assets $38,351 38,488
See Notes to Consolidated Financial Statements
3
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited; Dollars in Millions)
LIABILITIES AND SHAREOWNERS' EQUITY
June 30, December 30,
2002 2001
Current Liabilities:
Loans and notes payable $ 2,540 565
Accounts payable 2,883 2,838
Accrued liabilities 3,541 3,135
Accrued salaries, wages and
commissions 802 969
Taxes on income 801 537
Total current liabilities 10,567 8,044
Long-term debt 2,129 2,217
Deferred tax liability 262 493
Employee related obligations 1,703 1,870
Other liabilities 1,799 1,631
Shareowners' equity:
Preferred stock - without par
value (authorized and unissued
2,000,000 shares) - -
Common stock - par value $1.00
per share (authorized
4,320,000,000 shares; issued
3,119,842,000 shares) 3,120 3,120
Note receivable from employee
stock ownership plan (25) (30)
Accumulated other comprehensive
income (Note 8) (646) (530)
Retained earnings 24,813 23,066
27,262 25,626
Less common stock held in treasury,
at cost (136,380,000 & 72,627,000
shares) 5,371 1,393
Total shareowners' equity 21,891 24,233
Total liabilities and shareowners'
equity $38,351 38,488
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 30, Percent July 1, Percent
2002 to Sales 2001 to Sales
Sales to customers
(Note 6) $9,073 100.0 8,179 100.0
Cost of products sold 2,582 28.4 2,372 29.0
Gross Profit 6,491 71.6 5,807 71.0
Selling, marketing and
administrative expenses 3,017 33.3 2,802 34.3
Research expense 932 10.3 829 10.1
Purchased in-process
research and
development 189 2.1 - -
Interest income (74) (.8) (120) (1.4)
Interest expense, net of
portion capitalized 44 .5 50 .6
Other (income)expense, net (45) (.5) 117 1.4
4,063 44.9 3,678 45.0
Earnings before provision
for taxes on income 2,428 26.7 2,129 26.0
Provision for taxes on
income (Note 3) 774 8.5 647 7.9
NET EARNINGS $1,654 18.2 1,482 18.1
NET EARNINGS PER SHARE (Note 7)
Basic $ .55 .49
Diluted $ .54 .48
CASH DIVIDENDS PER SHARE $ .205 .18
AVG. SHARES OUTSTANDING
Basic 3,003.4 3,029.3
Diluted 3,069.3 3,110.5
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
June 30, Percent July 1, Percent
2002 to Sales 2001 to Sales
Sales to customers
(Note 6) $17,816 100.0 16,034 100.0
Cost of products sold 5,039 28.3 4,683 29.2
Gross Profit 12,777 71.7 11,351 70.8
Selling, marketing and
administrative expenses 5,860 32.9 5,468 34.1
Research expense 1,763 9.9 1,588 9.9
Purchased in-process
research and
development 189 1.1 - -
Interest income (150) (.8) (245) (1.5)
Interest expense, net of
portion capitalized 78 .4 83 .5
Other (income)expense, net (12) (.1) 111 .7
7,728 43.4 7,005 43.7
Earnings before provision
for taxes on income 5,049 28.3 4,346 27.1
Provision for taxes on
income (Note 3) 1,561 8.7 1,312 8.2
NET EARNINGS $ 3,488 19.6 3,034 18.9
NET EARNINGS PER SHARE (Note 7)
Basic $ 1.15 1.00
Diluted $ 1.13 .98
CASH DIVIDENDS PER SHARE $ .385 .34
AVG. SHARES OUTSTANDING
Basic 3,022.2 3,024.6
Diluted 3,086.9 3,106.3
See Notes to Consolidated Financial Statements
6
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited; Dollars in Millions)
Fiscal Six Months
June 30, July 1,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 3,488 3,034
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization of
property and intangibles 832 804
Purchased in-process R&D 189 -
Accounts receivable reserves (36) 59
Changes in assets and liabilities, net
of effects from acquisition of businesses:
Increase in accounts receivable (549) (431)
Increase in inventories (207) (125)
Changes in other assets and
liabilities (224) 585
NET CASH FLOWS FROM OPERATING
ACTIVITIES 3,493 3,926
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant
and equipment (802) (571)
Proceeds from the disposal of assets 128 53
Acquisition of businesses, net of cash
acquired (466) (17)
Purchases of investments (3,126) (4,430)
Sales of investments 3,942 3,649
Other (213) (69)
NET CASH USED BY INVESTING
ACTIVITIES (537) (1,385)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to shareowners (1,163) (950)
Repurchase of common stock (5,255) (629)
Proceeds from short-term debt 2,189 187
Retirement of short-term debt (219) (938)
Proceeds from long-term debt 20 10
Retirement of long-term debt (16) (20)
Proceeds from the exercise of
stock options 227 294
NET CASH USED BY FINANCING
ACTIVITIES (4,217) (2,046)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 109 (51)
(DECREASE)INCREASE IN CASH AND CASH
EQUIVALENTS (1,152) 444
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 3,758 4,278
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 2,606 4,722
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
ACQUISITION OF BUSINESSES
Fair value of assets acquired $ 535 159
Fair value of liabilities assumed (69) (66)
Net Cash Payment 466 93
Treasury stock issued
at fair value - (76)
Net cash paid for acquisitions $ 466 17
See Notes to Consolidated Financial Statements
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - The accompanying unaudited 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
30, 2001. The Company has adopted 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 periods have
been restated primarily to reclassify sales incentives and trade
promotional allowances from expense to a reduction of sales. As
such, sales for the fiscal six months of 2001 were reduced by $329
million. The unaudited 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. Certain other prior year amounts
have been reclassified to conform with the current year
presentation.
NOTE 2 - FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Company adopted SFAS No. 133
requiring that all derivative instruments be recorded on the balance
sheet at fair value.
As of June 30, 2002 the balance of deferred net losses on
derivatives included in accumulated other comprehensive income was
$22 million (after tax). Of this amount, the Company expects that
the entire $22 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 its exposure to the variability in future cash flows for
forecasted transactions is 18 months.
For the fiscal quarter ended June 30, 2002 the net impact of the
hedges' ineffectiveness to the Company's financial statements was
insignificant. For the fiscal quarter ended June 30, 2002, the
Company has recorded a net gain of $1 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 8 for disclosures of movements in Accumulated Other
Comprehensive Income.
NOTE 3 - INCOME TAXES
The effective income tax rates for the first six months of fiscal
year 2002 and 2001 are 30.9% and 30.2%, respectively, as compared to
the U.S. federal statutory rate of 35%. The difference from the
statutory rate is primarily the result of subsidiaries manufacturing
in Ireland under an incentive tax rate effective through the year
2010 and domestic subsidiaries operating in Puerto Rico under a tax
incentive grant expiring in 2014.
8
NOTE 4 - INVENTORIES
(Dollars in Millions)
June 30, 2002 Dec. 30, 2001
Raw materials and supplies $ 1,031 842
Goods in process 703 605
Finished goods 1,618 1,545
$ 3,352 2,992
NOTE 5 - INTANGIBLE ASSETS
In accordance with SFAS No. 142, for all acquisitions completed
after June 30, 2001 resulting in goodwill and/or intangible assets
deemed to have indefinite lives, no amortization was recorded.
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 $30 million after tax or $0.01 per diluted
share for the second quarter of 2002 and $60 million after tax or
$0.02 per diluted share for the six months ended June 30, 2002.
Intangible assets that have finite useful lives will continue to be
amortized over their useful lives. SFAS No. 142 requires that
goodwill and non-amortizable intangible assets will be assessed
annually for impairment and the required initial assessment was
completed at June 30, 2002 and no impairment was determined. The
amortization expense of amortizable intangible assets for the fiscal
six months ended June 30, 2002, is $188 million pre-tax and the
estimated amortization expense for the full year 2002 and for each
of the five succeeding years approximates $375 million pre tax, per
year respectively.
(Dollars in Millions)
June 30, 2002
Goodwill-gross $ 5,317
Less accumulated amortization 656
Goodwill - net 4,661
Trademarks (non-amortizable)- gross 683
Less accumulated amortization 108
Trademarks (non-amortizable)- net 575
Patents 2,167
Less accumulated amortization 471
Patents - net 1,696
Other intangible - gross 3,027
Less accumulated amortization 694
Other intangibles - net 2,333
Total intangible assets - gross 11,194
Less accumulated amortization 1,929
Total intangibles - net $ 9,265
Goodwill as of June 30, 2002 as allocated by segment of business is
as follows (Dollars in millions):
Med. Dev
Consumer Pharm & Diag Total
Goodwill, net of
accumulated amortization
at December 30, 2001 845 232 3,494 4,571
Reclassification of
intangibles, net
of accumulated
amortization - (109) - (109)
Acquisitions - 150 50 200
Translation & Other (2) (2) 3 (1)
Goodwill at June 30, 2002 843 271 3,547 4,661
9
NOTE 6 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
(Dollars in Millions)
SALES BY SEGMENT OF BUSINESS
Fiscal Second Quarter
Percent
2002 2001 Change
Consumer
Domestic $ 907 807 12.4
International 742 723 2.6
1,649 1,530 7.8%
Pharmaceutical
Domestic $ 2,934 2,722 7.8
International 1,324 1,142 15.9
4,258 3,864 10.2%
Med Dev & Diag
Domestic $ 1,758 1,530 14.9
International 1,408 1,255 12.2
3,166 2,785 13.7%
Domestic $ 5,599 5,059 10.7
International 3,474 3,120 11.3
Worldwide $ 9,073 8,179 10.9%
Fiscal Six Months
Percent
2002 2001 Change
Consumer
Domestic $ 1,807 1,703 6.1
International 1,446 1,458 (.8)
3,253 3,161 2.9%
Pharmaceutical
Domestic $ 5,892 5,078 16.0
International 2,547 2,275 12.0
8,439 7,353 14.8%
Med Dev & Diag
Domestic $ 3,421 2,993 14.3
International 2,703 2,527 7.0
6,124 5,520 10.9%
Domestic $11,120 9,774 13.8
International 6,696 6,260 7.0
Worldwide $ 17,816 16,034 11.1%
10
OPERATING PROFIT BY SEGMENT OF BUSINESS
Fiscal Second Quarter
Percent
2002 2001 Change
Consumer $ 339 253 34.0
Pharmaceutical 1,577 1,331 18.5
Med. Dev. & Diag. 564 522 8.0
Segments total 2,480 2,106 17.8
Expenses not allocated
to segments (52) 23
Worldwide total $ 2,428 2,129 14.0%
Fiscal Six Months
Percent
2002 2001 Change
Consumer $ 654 539 21.3
Pharmaceutical 3,241 2,697 20.2
Med. Dev. & Diag. 1,226 1,075 14.0
Segments total 5,121 4,311 18.8
Expenses not allocated
to segments (72) 35
Worldwide total $ 5,049 4,346 16.2%
SALES BY GEOGRAPHIC AREA
Fiscal Second Quarter
Percent
2002 2001 Change
U.S. $ 5,599 5,059 10.7
Europe 1,923 1,689 13.9
Western Hemisphere
Excluding U.S. 521 522 (.2)
Asia-Pacific, Africa 1,030 909 13.3
Total $ 9,073 8,179 10.9%
Fiscal Six Months
Percent
2002 2001 Change
U.S. $ 11,120 9,774 13.8
Europe 3,687 3,386 8.9
Western Hemisphere
Excluding U.S. 1,002 1,028 (2.5)
Asia-Pacific, Africa 2,007 1,846 8.7
Total $ 17,816 16,034 11.1%
11
NOTE 7 - EARNINGS PER SHARE
The following is a reconciliation of basic net earnings per share
to diluted net earnings per share for the fiscal three and six
months ended June 30, 2002 and July 1, 2001. Earnings per share
figures and shares outstanding reflect the two-for-one stock split
effective during the second quarter of 2001.
(Shares in Millions)
Fiscal Second Quarter
June 30, July 1,
2002 2001
Basic net earnings per share $ .55 .49
Average shares outstanding - basic 3,003.4 3,029.3
Potential shares exercisable under
stock option plans 199.6 121.9
Less: shares which could be repurchased
under treasury stock method (148.1) (76.8)
Convertible debt shares 14.4 36.1
Adjusted average shares
outstanding - diluted 3,069.3 3,110.5
Diluted earnings per share $ .54 .48
(Shares in Millions)
Fiscal Six Months
June 30, July 1,
2002 2001
Basic net earnings per share $ 1.15 1.00
Average shares outstanding - basic 3,022.2 3,024.6
Potential shares exercisable under
stock option plans 199.5 123.3
Less: shares which could be repurchased
under treasury stock method (149.2) (77.7)
Convertible debt shares 14.4 36.1
Adjusted average shares
outstanding - diluted 3,086.9 3,106.3
Diluted earnings per share $ 1.13 .98
Diluted earnings per share calculation includes the dilution
effect of convertible debt: a decrease in interest expense of $7
million and $15 million after tax for the fiscal six month period
ended June 30, 2002 and July 1, 2001, respectively. The amount of
the decrease in interest expense was $3 million and $7 million after
tax for the fiscal quarter ended June 30, 2002 and July 1, 2001,
respectively.
Diluted earnings per share excludes 0.3 million and 60 million
shares of options for the fiscal six months ended June 30, 2002 and
July 1, 2001, respectively 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. The shares of
options excluded from the diluted earnings per share calculations
for the fiscal quarter ended, June 30, 2002 and July 1, 2001 were
0.3 million and 61 million shares of options, respectively.
12
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The total comprehensive income for the fiscal six months ended
June 30, 2002 is $3,366 million, compared with $2,931 million for
the same period a year ago. Total comprehensive income includes net
earnings, net unrealized currency gains and losses on translation,
net unrealized gains and losses on available for sale securities,
pension liability adjustments and net gains and losses on derivative
instruments qualifying and designated as cash flow hedges. The
following table sets forth the components of accumulated other
comprehensive income.
Total
Unrld Gains/ Accum
For. Gains/ Pens (Losses) Other
Cur. (Losses) Liab on Deriv Comp
Trans. on Sec Adj. & Hedg
Inc/(Loss)
December 30, 2001 $ (697) 84 (15) 98 (530)
2002 Six Months changes
Net change associated
to current period hedging
transactions - - - (285)
Net amount reclassed to
net earnings - - - 165*
Net Six Months
changes 71 (67) - (120) (116)
June 30, 2002 $ (626) 17 (15) (22) (646)
Note: All amounts, other than foreign currency translation, are net
of tax. Foreign currency translation adjustments are not currently
adjusted for income taxes, as they relate to permanent investments
in non-US subsidiaries.
*Primarily offset by changes in value of the underlying
transactions.
NOTE 9 - MERGERS & ACQUISITIONS
On March 12, 2002, Johnson & Johnson acquired Micro Typing
Systems, Inc. The transaction is valued at approximately $30 million
in cash. Micro Typing Systems manufactures a line of reagents and
supplies distributed instruments known as the ID-MICRO TYPING SYSTEM
(ID-MTS). ID-MTS is used in hospitals and donor centers to help to
ensure safe and effective blood transfusions.
On April 18, 2002, Johnson & Johnson announced the completion of
the acquisition of Tibotec-Virco NV, 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. The transaction is
valued at approximately $320 million in cash and debt. Johnson &
Johnson incurred an after-tax charge of approximately $150 million,
or $0.05 per share, in the second quarter associated with in-process
research and development costs relating to this acquisition.
On June 27, 2002, Johnson & Johnson acquired Obtech Medical AG, a
privately held Swiss company that markets an adjustable gastric
band. The transaction is valued at approximately $110 million in
cash. Johnson & Johnson incurred an after-tax charge of
approximately $39 million, or $0.01 per share, in the second quarter
associated with in-process research and development costs relating
to this acquisition. The adjustable gastric band is used in Europe
during laparoscopic surgery for the treatment of morbid obesity.
NOTE 10 - LEGAL PROCEEDINGS
The information called for by this footnote is incorporated herein
by reference to Item 1 ("Legal Proceedings") included in Part II of
this Report on Form 10-Q.
13
NOTE 11 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143, "Accounting for Asset Retirement Obligations."
The Company is currently assessing the impact of this new standard
that will become effective for fiscal years beginning after June 15,
2002. 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.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALES AND EARNINGS
Consolidated sales for the fiscal first six months of 2002 were
$17.82 billion, which exceeded sales of $16.03 billion for the
fiscal first six months of 2001 by 11.1%. Excluding the impact of
the stronger value of the dollar, worldwide sales increased 12.0%.
Consolidated net earnings for the first six months of fiscal year
2002 were $3.49 billion, compared with $3.03 billion for the same
period a year ago, an increase of 15.0%. Earnings for the fiscal six
months of 2002 included special charges of after-tax in-process
research and development (IPR&D) costs associated with the
acquisitions of Tibotec-Virco and Obtech Medical AG which in total
were $189 million. Other income and expense items for the period
included the gain on the sale of ORTHO PREFEST, losses on certain
equity securities, other corporate expenses and litigation accruals.
In 2001, other income and expense included special charges of $109
million pre-tax ($102 million after tax) related to the
restructuring and deal costs for the ALZA merger and the
amortization of goodwill, that was discontinued in 2002 in
connection with the adoption of SFAS No. 142.
Worldwide basic net earnings per share for the fiscal six months
of 2002 were $1.15 compared with the $1.00 for the same period in
2001, an increase of 15.0%. Excluding special charges relating to
IPR&D in 2002 and the ALZA restructuring and deal costs in 2001,
basic net earnings per share were $1.22 an increase of 17.3%
compared to $1.04 for the same period in 2001.
Worldwide diluted net earnings per share for the fiscal six months
of 2002 were $1.13, compared with $.98 for the same period in 2001,
an increase of 15.3%. Excluding special charges for IPR&D and ALZA
merger costs as noted above, diluted earnings per share were $1.19
compared with $1.01 for the same period in 2001, an increase of
17.8%.
Consolidated sales for the fiscal second quarter of 2002 were
$9.07 billion, an increase of 10.9% over 2001 fiscal quarter sales
of $8.18 billion. Consolidated earnings for the fiscal second
quarter of 2002 were $1.65 billion, compared with $1.48 billion for
the same period a year ago, an increase of 11.6%. Worldwide basic
net earnings per share for the fiscal second quarter of 2002 rose
12.2% to $.55, compared with $.49 in the 2001 period. Excluding
special charges for IPR&D and ALZA merger costs as noted above,
worldwide basic net earnings per share for the fiscal second quarter
were $.61 compared with $.52 for the same period a year ago, an
increase of 17.3%. Worldwide diluted net earnings per share for the
fiscal second quarter of 2002 rose 12.5% to $.54 compared with $.48
in 2001. Excluding special charges for IPR&D and ALZA merger costs
as noted above, worldwide diluted net earnings per share for the
fiscal second quarter were $.60, compared to $.51 for the same
period a year ago, an increase of 17.6%.
Domestic sales for the fiscal six months of 2002 were $11.12
billion, an increase of 13.8% over 2001 domestic sales of $9.77
billion for the same period a year ago. Sales of international
subsidiaries were $6.70 billion for the fiscal six months of 2002
compared with $6.26 billion for the same period a year ago, an
increase of 7.0%. Excluding the impact of the stronger value of the
dollar, international sales increased by 9.4%.
14
Worldwide Consumer sales for the fiscal second quarter of 2002
were $1.65 billion, an increase of 7.8% versus the same period a
year ago. Domestic sales increased by 12.4% while international
sales gains were 2.6%. Consumer sales achieved strong growth in
skin care products (NEUTROGENA, CLEAN & CLEAR and AVEEN0), McNeil
Consumer's over-the-counter analgesic, upper respiratory and anti-
diarrheal products and McNeil Nutritional's SPLENDA sweetener
products.
Worldwide Pharmaceutical sales of $4.26 billion for the fiscal
quarter resulted in an increase of 10.2% over the same period in
2001. Domestic and international sales increased 7.8% and 15.9%,
respectively.
Sales growth reflects the strong performance of PROCRIT/EPREX, for
the treatment of anemia; DURAGESIC, a transdermal patch for chronic
pain; REMICADE, a treatment for rheumatoid arthritis and Crohn's
disease; TOPAMAX, an antiepileptic, and ACIPHEX/PARIET, a proton
pump inhibitor for gastrointestinal disorders.
During the quarter, the Company announced the completion of the
acquisition of Tibotec-Virco NV, a privately-held biopharmaceutical
company focused on developing anti-viral treatments. The
acquisition, valued at approximately $320 million in cash and debt,
will expand drug discovery and development capabilities,
particularly in the field of anti-viral therapies. Johnson & Johnson
incurred an after-tax charge of approximately $150 million, or $0.05
per share, in the second quarter associated with in-process research
and development costs relating to this acquisition.
Also in the quarter, the Company received regulatory approval in
the United Kingdom (UK) for DUROGESIC for the indication of chronic
intractable pain. Previously available only to treat cancer pain
patients, DUROGESIC is the UK's first skin patch to treat strong
pain. The Company also received U.S. Food and Drug Administration
(FDA) approval for a synthetic oral solution of REMINYL for the
treatment of Alzheimer's disease.
In July, the Company received U.S. Food and Drug Administration
(FDA) approval for an additional indication for REMICADE in Crohn's
disease to include maintenance therapy. Previously the drug was
approved only for a one-time use to reduce signs and symptoms of
Crohn's disease. REMICADE can now be used to induce and maintain
clinical remission in patients with moderate to severe Crohn's
disease on an on-going basis. REMICADE is the only biologic
approved to provide long-term, remission-level control of the
debilitating symptoms of Crohn's disease, a gastrointestinal
disorder. Additionally during the quarter, Centocor, Inc., received
FDA approval for its bulk manufacturing facility in Malvern PA., for
the production of REMICADE. This facility supplements the existing
manufacturing plant in Leiden, the Netherlands.
Worldwide sales for the Medical Devices and Diagnostics segment
were $3.17 billion in the second quarter of 2002, which represented
an increase of 13.7% as compared to the same period in 2001.
Domestic and international sales increased 14.9% and 12.2%,
respectively. Strong sales growth from Cordis' circulatory disease
management products; DePuy's orthopaedic joint reconstruction and
spinal products; Ethicon's wound closure, surgical sports medicine
and women's health products; LifeScan's blood glucose monitoring
products; Ethicon Endo-Surgery's minimally invasive surgical
products and Vistakon's disposable contact lenses were the primary
contributors to the Medical Devices and Diagnostics segment growth.
During the quarter, Ethicon Endo-Surgery, Inc., acquired Obtech
Medical AG, a privately held Swiss company that markets an
adjustable gastric band, used in Europe during laparoscopic surgery
for the treatment of morbid obesity. The transaction is valued at
approximately $110 million in cash. Johnson & Johnson incurred an
after-tax charge of approximately $39 million, or $0.01 per share,
in the second quarter associated with in-process research and
development costs relating to this acquisition. Additionally, Ortho
Clinical Diagnostics acquired Micro Typing Systems, Inc., a
manufacturer of a line of reagents and supplies distributed
instruments known as the ID-MICRO TYPING SYSTEM (ID-MTS). ID-MTS is
used in hospitals and donor centers to help ensure safe and
effective blood transfusions. The transaction is valued at
approximately $30 million in cash.
15
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations and selected borrowings provides
the major source of funds for the growth of the business, including
working capital, additions to property, plant and equipment,
acquisitions and stock repurchase programs. Cash and current
marketable securities totaled $6.9 billion at June 30, 2002 as
compared with $8.0 billion at the end of 2001. For the year ended
December 30, 2001, there was a change in the timing of salary
increases and bonuses 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 a decrease of approximately $450 million in cash flows
from operating activities due to the payment in 2002. Total
borrowings increased during the fiscal six months of 2002 from $2.8
billion to $4.7 billion which related primarily to the stock
repurchase program described below. Net cash (cash and current
marketable securities net of debt) as of June 30, 2002 was $2.2
billion, compared with $5.2 billion at the end of 2001. Total debt
represented 17.6% of total capital (shareowners' equity and total
debt) at fiscal quarter end compared with 10.3% at the end of 2001.
Additions to property, plant and equipment were $802 million for
the fiscal six months of 2002, compared with $571 million for the
same period in 2001.
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 83,612,822 shares
repurchased for an aggregate price of $5.0 billion. In association
with the stock repurchase program, the Company issued approximately
$2 billion of commercial paper during the second quarter of 2002.
On July 15, 2002, the Board of Directors approved a regular
quarterly dividend of $.205 per share, payable on September 10, 2002
to shareowners of record as of August 20, 2002.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q 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 approvals, 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
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 Annual Report on Form 10-K for the fiscal year ended
December 30, 2001 contains, in Exhibit 99(b), a discussion of
various factors that could cause actual results to differ from
expectations. That Exhibit from the Form 10-K is incorporated in
this filing by reference. The Company notes these factors as
permitted by the Private Securities Litigation Reform Act of 1995.
16
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's assessment of
its sensitivity to market risk since its presentation set forth in
Item 7A, "Quantitative and Qualitative Disclosures About Market
Risk," in its Annual Report on Form 10-K for the fiscal year ended
December 30, 2001.
Part II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
The Company is involved in numerous product liability cases in the
United States, many of which concern adverse reactions to drugs and
medical devices. The damages claimed are substantial, and while the
Company is confident of the adequacy of the warnings 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 950 such cases currently
pending, including the claims of approximately 3,500 plaintiffs. Of
those plaintiffs 417 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 ten 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. 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 both venues are pursuing or
preserving their rights to appeal those rulings and other complaints
filed against Janssen and the Company including class action
allegations which could be the basis for future attempts to have
classes certified.
17
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.
The Company's Ortho Biotech subsidiary is 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
seeks 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 1990's into Amgen's reserved dialysis
market. The Company believes no basis exists for terminating Ortho
Biotech's U.S. license rights or for obtaining damages and is
vigorously contesting Amgen's claims. However, Ortho Biotech's U.S.
license rights to PROCRIT are material to the Company; thus, an
unfavorable outcome on the termination issue could have a material
adverse effect on the Company's consolidated results of operations,
cash flows and financial position. The arbitration hearings have
concluded and final arguments will be held in the fall of 2002
following the submission of post-hearing briefs by both sides.
In patent infringement actions tried in Delaware Federal Court in
late 2000, Cordis, a Johnson & Johnson company, 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 are 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
will follow.
On July 19 2002, the New York Times reported on an investigation
by the U.S. Food and Drug Administration's Office of Criminal
Investigation in Puerto Rico related to allegations made by a former
Ortho Biologics employee about supposed improprieties in completing
records concerning equipment and training at the plant where bulk
EPO sold by Ortho outside the U.S. is produced. The employee in
question worked in the boiler and utility room of the plant and not
in the manufacturing area. The New York Times reporter suggested the
allegations of the former employee, if believed, could lead to the
conclusion that the integrity of the EPO manufactured at the plant
was compromised. However, the Company's review identified no evidence
that any of the allegations could be confirmed or connected to any
question of product integrity. The Company believes that the results
of the government investigation will not have a material adverse
effect on its results of operations, cash flows or financial position.
The Company is also involved in a number of patent, trademark and
other lawsuits incidental to its business.
The Company believes that the above proceedings, except as noted
above, would not have a material adverse effect on its results of
operations, cash flows or financial position.
18
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 25, 2002.
(b) The shareowners elected all the Company's nominees for
director. The shareowners also approved the appointment of
PricewaterhouseCoopers LLP as the Company's independent
auditors for 2001.
1. Election of Directors:
For Withheld
G. N. Burrow 2,571,460,936 18,829,880
J. G. Cullen 2,556,838,414 33,452,402
R. J. Darretta 2,572,328,587 17,962,229
M. J. Folkman 2,571,681,532 18,609,284
A. D. Jordan 2,570,636,443 19,654,373
A. G. Langbo 2,556,797,906 33,492,910
J. T. Lenehan 2,572,534,911 17,755,905
L. F. Mullin 2,556,695,126 33,595,690
D. Satcher 2,573,109,231 17,181,585
H. B. Schacht 2,553.906,430 36,384,386
M. F. Singer 2,570,769,358 19,521,458
J. W. Snow 2,571,678,651 18,512,165
W. C. Weldon 2,572,468,676 17,822,140
R. N. Wilson 2,572,162,175 18,128,641
2. Approval of Appointment of PricewaterhouseCoopers LLP:
For 2,480,749,005
Against 93,927,126
Abstain 15,614,685
(c) A shareowner proposal on pharmaceutical pricing was defeated.
The vote on this proposal was as follows:
For 60,717,813
Against 1,972,634,323
Abstain 85,910,449
Item 5 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
None
(b) Reports on Form 8-K
A Report on Form 8-K was filed on April 16, 2002 and revised
by amendment on April 30, 2002, which included certain
unaudited financial information related to Johnson & Johnson
and subsidiaries for the 11-year period ended December 30,
2001. This financial data gives retroactive effect for
Johnson & Johnson's adoption of Emerging Issues Task Force
("EITF") Issue No. 01-09, "Accounting for Consideration
given by a Vendor to a Customer or a Reseller of the
Vendor's Products."
Filed in this form 8-K are the unaudited consolidated
statements of earnings of Johnson & Johnson and subsidiaries
for the 11-year period ended December 30, 2001, together
with the related data for segments of business for the three
year period ended December 30, 2001. Also filed in the 8-K
are selected unaudited quarterly financial data for fiscal
year 2001.
19
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 9, 2002 By /s/ R. J. DARRETTA
R. J. DARRETTA
Executive Vice President,
Finance and Information Management
(Chief Financial Officer)
Date: August 9, 2002 By /s/ S. J. COSGROVE
S. J. COSGROVE
Controller
(Chief Accounting Officer)
20
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
The undersigned, William C. Weldon, the Chief Executive Officer of
Johnson & Johnson, a New Jersey corporation (the "Company"),
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, hereby certifies that:
(1) the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2002 (the "Report) fully
complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly
presents, in all material respects, the financial condition
and results of operations of the Company.
/s/ William C. Weldon
William C. Weldon
Chief Executive Officer
Dated: August 9, 2002
This certification accompanies this Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except
to the extent required by such Act, be deemed filed by the Company
for purposes of Section 18 of the Securities Exchange Act of 1934,
as amended.
21
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
The undersigned, Robert J. Darretta, the Chief Financial Officer of
Johnson & Johnson, a New Jersey corporation (the "Company"),
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, hereby certifies that:
(1) the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2002 (the "Report) fully
complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly
presents, in all material respects, the financial condition
and results of operations of the Company.
/s/ Robert J. Darretta
Robert J. Darretta
Chief Financial Officer
Dated: August 9, 2002
This certification accompanies this Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except
to the extent required by such Act, be deemed filed by the Company
for purposes of Section 18 of the Securities Exchange Act of 1934,
as amended.
22