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<TYPE>10-Q
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<FILENAME>secondqtrtenq.txt
<TEXT>
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 July 1, 2001
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 27, 2001, 3,119,842,548 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 -
July 1, 2001 and December 31, 2000 3
Consolidated Statement of Earnings for the
Fiscal Quarter Ended July 1, 2001 and
July 2, 2000 5
Consolidated Statement of Earnings for the
Fiscal Six Months Ended July 1, 2001 and
July 2, 2000 6
Consolidated Statement of Cash Flows for the
Fiscal Six Months Ended July 1, 2001 and
July 2, 2000 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 20
Item 5 - Exhibits and Reports on Form 8-K 20
Signatures 21
- 2 -
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited; Dollars in Millions)
ASSETS
July 1, December 31,
2001 2000
Current Assets:
Cash and cash equivalents $ 4,722 4,278
Marketable securities, at cost 2,797 2,479
Accounts receivable, trade, less
allowances $460 (2000 - $439) 4,805 4,601
Inventories (Note 4) 2,913 2,905
Deferred taxes on income 1,110 1,174
Prepaid expenses and other
receivables 1,844 1,254
Total current assets 18,191 16,691
Marketable securities, non-current 1,143 717
Property, plant and equipment,
at cost 11,936 11,866
Less accumulated depreciation and
amortization 4,733 4,457
7,203 7,409
Intangible assets, net (Note 5) 7,616 7,535
Deferred taxes on income 250 240
Other assets 1,698 1,653
Total assets $36,101 34,245
See Notes to Consolidated Financial Statements
All amounts have been restated under the pooling of interests
method of accounting to give retroactive effect to the
merger with ALZA Corporation, pursuant to the merger on
June 22, 2001, see Note 1.
- 3 -
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited; Dollars in Millions)
LIABILITIES AND SHAREOWNERS' EQUITY
July 1, December 31,
2001 2000
Current Liabilities:
Loans and notes payable $ 924 1,489
Accounts payable 2,049 2,122
Accrued liabilities 3,218 2,793
Accrued salaries, wages and
commissions 670 529
Taxes on income 485 322
Total current liabilities 7,346 7,255
Long-term debt 2,491 3,163
Deferred tax liability 242 255
Employee related obligations 1,812 1,804
Other liabilities 1,499 1,373
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 (30) (35)
Accumulated other comprehensive
income/(loss) (Note 9) (552) (461)
Retained earnings 20,469 18,113
23,007 20,737
Less common stock held in treasury,
at cost (88,284,000 & 105,218,000
shares) 296 342
Total shareowners' equity 22,711 20,395
Total liabilities and shareowners'
equity $36,101 34,245
See Notes to Consolidated Financial Statements
All amounts have been restated under the pooling of interests
method of accounting to give retroactive effect to the
merger with ALZA Corporation, pursuant to the merger on
June 22, 2001, see Note 1.
- 4 -
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited; dollars & shares in millions
except per share figures)
Fiscal Quarter Ended
July 1, Percent July 2, Percent
2001 to Sales 2000 to Sales
Sales to customers
(Note 6) $8,342 100.0 7,670 100.0
Cost of products sold 2,362 28.3 2,261 29.5
Gross Profit 5,980 71.7 5,409 70.5
Selling, marketing and
administrative expenses 2,975 35.7 2,829 36.9
Research expense 829 9.9 713 9.3
Interest income (120) (1.4) (88) (1.1)
Interest expense, net of
portion capitalized 50 .6 53 .7
Other (income)expense, net 117 1.4 (11) (.2)
3,851 46.2 3,496 45.6
Earnings before provision
for taxes on income 2,129 25.5 1,913 24.9
Provision for taxes on
income (Note 3) 647 7.7 550 7.1
NET EARNINGS $1,482 17.8 1,363 17.8
NET EARNINGS PER SHARE
(Note 8)
Basic $ .49 .46
Diluted $ .48 .44
CASH DIVIDENDS PER SHARE $ .18 .16
AVG. SHARES OUTSTANDING
Basic 3,029.3 2,983.0
Diluted 3,110.5 3,094.9
See Notes to Consolidated Financial Statements
All amounts have been restated under the pooling of interests
method of accounting to give retroactive effect to the
merger with ALZA Corporation, pursuant to the merger on
June 22, 2001, see Note 1.
- 5 -
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited; dollars & shares in millions
except per share figures)
Fiscal Six Months
July 1, Percent July 2, Percent
2001 to Sales 2000 to Sales
Sales to customers
(Note 6) $16,363 100.0 15,110 100.0
Cost of products sold 4,662 28.5 4,503 29.8
Gross Profit 11,701 71.5 10,607 70.2
Selling, marketing and
administrative expenses 5,818 35.6 5,508 36.5
Research expense 1,588 9.7 1,390 9.2
Interest income (245) (1.5) (171) (1.1)
Interest expense, net of
portion capitalized 83 .5 114 .7
Other (income)expense, net 111 .6 (61) (.4)
7,355 44.9 6,780 44.9
Earnings before provision
for taxes on income 4,346 26.6 3,827 25.3
Provision for taxes on
income (Note 3) 1,312 8.1 1,133 7.5
NET EARNINGS $ 3,034 18.5 2,694 17.8
NET EARNINGS PER SHARE
(Note 8)
Basic $ 1.00 .90
Diluted $ .98 .88
CASH DIVIDENDS PER SHARE $ .34 .30
AVG. SHARES OUTSTANDING
Basic 3,024.6 2,981.1
Diluted 3,106.3 3,091.7
See Notes to Consolidated Financial Statements
All amounts have been restated under the pooling of interests
method of accounting to give retroactive effect to the
merger with ALZA Corporation, pursuant to the merger on
June 22, 2001, see Note 1.
- 6 -
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited; Dollars in Millions)
Fiscal Six Months
July 1, July 2,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 3,034 2,694
Adj. to reconcile net earnings to cash flows:
Depreciation and amortization of
property and intangibles 804 832
Accounts receivable reserves 59 (23)
Changes in assets and liabilities, net
of effects from acquisition of
businesses:
Increase in accounts receivable (431) (286)
Increase in inventories (125) (40)
Changes in other assets and
liabilities 585 122
NET CASH FLOWS FROM OPERATING
ACTIVITIES 3,926 3,299
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant
and equip (571) (690)
Proceeds from the disposal of assets 53 31
Acquisition of businesses, net of cash
acquired (17) (7)
Purchases of investments (4,430) (2,187)
Sales of investments 3,649 2,189
Other (69) (92)
NET CASH USED BY INVESTING
ACTIVITIES (1,385) (756)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to shareowners (950) (826)
Repurchase of common stock (629) (369)
Proceeds from short-term debt 187 162
Retirement of short-term debt (938) (1,086)
Proceeds from long-term debt 10 6
Retirement of long-term debt (20) (22)
Proceeds from the exercise of stock
options 294 226
NET CASH USED BY FINANCING
ACTIVITIES (2,046) (1,909)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (51) (25)
INCREASE(DECREASE) IN CASH AND CASH
EQUIVALENTS 444 609
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 4,278 2,512
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 4,722 3,121
ACQUISITION OF BUSINESSES
Fair value of assets acquired 159 83
Fair value of liabilities assumed (66) (1)
93 82
Treasury stock issued at fair value (76) (75)
$ 17 7
See Notes to Consolidated Financial Statements
All amounts have been restated under the pooling of interests
method of accounting to give retroactive effect to the
merger with ALZA Corporation, pursuant to the merger on
June 22, 2001, see Note 1.
- 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 31, 2000 and the Supplemental Consolidated Financial
Statements on Form 8-K filed on August 7, 2001. The balance sheet as of
December 31, 2000 and the unaudited interim statements of earnings and cash
flows for the fiscal quarter and six months ended July 1, 2001 and July 2,
2000 have been prepared to give retroactive effect to the merger with ALZA
Corporation on June 22, 2001. 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. Earnings per share figures and shares
outstanding reflect the two-for-one stock split effective during the second
quarter of 2001. Certain prior year amounts have been reclassified to
conform with the current year presentation.
NOTE 2 - ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No 133", collectively referred
to as SFAS 133.
SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income
(OCI), depending on whether the derivative is designated as part of a hedge
transaction, and, if it is depending on the type of hedge transaction.
On January 1, 2001 the Company recorded a $17 million net-of-tax
cumulative effect transition adjustment gain in OCI to recognize at fair
value all derivative instruments designated as cash flow hedges. The
adjustment to net earnings was immaterial.
As of July 1, 2001 the balance of deferred net gains on derivatives
accumulated in OCI was $103 million (after tax). Of this amount, the
Company expects that $101 million, which includes the transition
adjustment, 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. The underlying
transactions which will occur and cause the amount deferred in OCI to
affect earnings primarily represent sales to third parties and purchases of
inventory. The maximum length of time over which the Company is hedging
its exposure to the variability in future cash flows for forecasted
transactions is 15 months.
For the quarter ended July 1, 2001 the net impact of the hedges'
ineffectiveness to the Company's financial statements was insignificant.
For the quarter ended July 1, 2001 the Company has recorded a net gain of
$2 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 original
forecasted transactions will not occur by the end of the originally
specified time period.
Refer to Note 9 - Accumulated Other Comprehensive Income for disclosure
of movements in OCI.
- 8 -
NOTE 3 - INCOME TAXES
The effective income tax rates for the first fiscal six months of 2001 and
2000 are 30.2% and 29.6%, respectively, as compared to the U.S. federal
statutory rate of 35%. The difference from the statutory rate is primarily
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.
NOTE 4 - INVENTORIES
(Dollars in Millions)
July 1, 2001 Dec. 31, 2000
Raw materials and supplies $ 760 718
Goods in process 538 480
Finished goods 1,615 1,707
$ 2,913 2,905
NOTE 5 - INTANGIBLE ASSETS
(Dollars in Millions)
July 1, 2001 Dec. 31, 2000
Intangible assets $ 9,323 9,076
Less accumulated amortization 1,707 1,541
$ 7,616 7,535
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 up to 40 years.
The cost of other acquired intangibles is amortized on a straight-line
basis over their estimated useful lives.
- 9 -
NOTE 6 - SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
(Dollars in Millions)
SALES BY SEGMENT OF BUSINESS
Second Quarter
Percent
Increase/
2001 2000 (Decrease)
Consumer
Domestic $ 888 902 (1.6)
International 796 805 (1.1)
1,684 1,707 (1.4)%
Pharmaceutical
Domestic $ 2,722 2,283 19.3
International 1,142 1,100 3.8
3,864 3,383 14.2%
Med Dev & Diag
Domestic $ 1,537 1,360 13.0
International 1,257 1,220 3.0
2,794 2,580 8.3%
Domestic $ 5,147 4,545 13.2
International 3,195 3,125 2.2
Worldwide $ 8,342 7,670 8.8%
Six Months
Percent
Increase/
2001 2000 (Decrease)
Consumer
Domestic $ 1,867 1,845 1.2
International 1,603 1,614 (.7)
3,470 3,459 .3%
Pharmaceutical
Domestic $ 5,078 4,353 16.7
International 2,275 2,193 3.7
7,353 6,546 12.3%
Med Dev & Diag
Domestic $ 3,012 2,671 12.8
International 2,528 2,434 3.9
5,540 5,105 8.5%
Domestic $ 9,957 8,869 12.3
International 6,406 6,241 2.6
Worldwide $16,363 15,110 8.3%
- 10 -
OPERATING PROFIT BY SEGMENT OF BUSINESS
Second Quarter
Percent
2001 2000 Change
Consumer $ 243 227 7.0
Pharmaceutical(1) 1,410 1,319 6.9
Med. Dev. & Diag. 548 450 21.8
Segments total 2,201 1,996 10.3
Expenses not allocated
to segments (72) (83)
Worldwide total $ 2,129 1,913 11.3%
Six Months
Percent
2001 2000 Change
Consumer $ 536 454 18.1
Pharmaceutical(1) 2,832 2,632 7.6
Med. Dev. & Diag. 1,119 921 21.5
Segments total 4,487 4,007 12.0
Expenses not allocated
to segments (141) (180)
Worldwide total $ 4,346 3,827 13.6%
Note: Prior year amounts have been reclassified to conform with current
year presentation.
(1) Includes special charges of $109 million for restructuring and deal
costs related to the ALZA merger.
SALES BY GEOGRAPHIC AREA
Second Quarter
Percent
2001 2000 Increase
U.S. $ 5,147 4,545 13.2
Europe 1,729 1,665 3.9
Western Hemisphere
Excluding U.S. 539 507 6.3
Asia-Pacific, Africa 927 953 (2.7)
Total $ 8,342 7,670 8.8%
Six Months
Percent
2001 2000 Increase
U.S. $ 9,957 8,869 12.3
Europe 3,466 3,343 3.7
Western Hemisphere
Excluding U.S. 1,062 1,023 3.8
Asia-Pacific, Africa 1,878 1,875 .1
Total $ 16,363 15,110 8.3%
- 11 -
NOTE 7 - ACCOUNTING FOR SALES INCENTIVES
The Company currently recognizes the expense related to coupons and certain
sales incentives upon issuance and classifies these expenses as selling,
marketing and administrative expense. The amount of such sales incentives
were $56 million and $65 million for the first six months of 2001 and 2000,
respectively. EITF 00-14 will take effect in the first quarter of 2002 and
the impact on the Company will be the reclassification of the above
mentioned amounts from expense to a reduction of sales.
NOTE 8 - EARNINGS PER SHARE
The following is a reconciliation of basic net earnings per share to
diluted net earnings per share for the six months ended July 1, 2001 and
July 2, 2000. 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 Quarter Ended
July 1, July 2,
2001 2000
Basic net earnings per share $ .49 .46
Average shares outstanding - basic 3,029.3 2,983.4
Potential shares exercisable under
stock option plans 121.9 130.5
Less: shares which could be repurchased
under treasury stock method (76.8) (80.4)
Convertible debt shares 36.1 61.4
Adjusted average shares
outstanding - diluted 3,110.5 3,094.9
Diluted earnings per share $ .48 .44
Fiscal Six Months Ended
(Shares in Millions) July 1, July 2,
2001 2000
Basic net earnings per share $ 1.00 .90
Average shares outstanding - basic 3,024.6 2,981.6
Potential shares exercisable under
stock option plans 123.3 129.4
Less: shares which could be repurchased
under treasury stock method (77.7) (80.9)
Convertible debt shares 36.1 61.6
Adjusted average shares
outstanding - diluted 3,106.3 3,091.7
Diluted earnings per share $ .98 .88
- 12 -
NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The total comprehensive income for the six months ended July 1, 2001 is
$2,931 million, compared with $2,705 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 31, 2000 $ (522) 76 (15) - (461)
2001 Six Months changes
Transition Adj. - - - 17
Net change associated
to current period hedging
transactions - - - 261
Net amount reclassed to
net earnings - - - (175)*
Net Six Months changes(209) 16 (1) 103 (91)
July 1, 2001 $ (731) 92 (16) 103 (552)
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 10 - MERGERS & ACQUISITIONS
On March 2, 2001, Johnson & Johnson acquired BabyCenter, Inc. from eToys,
Inc. The purchase was an all cash transaction valued at approximately $10
million.
BabyCenter.com is the largest and best-known online parenting resource
serving expectant and new mothers and fathers. The BabyCenter family of
websites also includes ParentCenter.com and BabyCentre.co.uk.
On April 18, 2001, Johnson & Johnson completed their previously announced
merger with Heartport, valued at approximately $81 million. Holders of
Heartport common stock received 0.0614 shares of Johnson & Johnson common
stock for each outstanding share of Heartport. Johnson & Johnson purchased
the number of shares of Johnson & Johnson common stock equal to the number
of such shares issued in connection with the merger in the open market.
Heartport manufactures and markets less invasive cardiac surgery products
that enable surgeons to perform a wide range of less invasive open-chest
and minimally invasive heart operations, including stopped heart and
beating heart procedures.
On June 22, 2001, Johnson & Johnson completed their previously announced
merger with ALZA Corporation (ALZA). The transaction was completed after
ALZA shareholders voted to approve the merger agreement with Johnson &
Johnson.
ALZA shareholders received a fixed exchange ratio of .98 shares of Johnson
& Johnson common stock for each share of ALZA in a tax-free transaction.
The transaction was accounted for by the pooling of interests method of
accounting.
ALZA Corporation is a research-based pharmaceutical company and a leader
in drug delivery technologies. ALZA applies its delivery technologies to
develop pharmaceutical products with enhanced therapeutic value for its own
portfolio and for many of the world's leading pharmaceutical companies.
ALZA's sales and marketing efforts have been focused in oncology and
urology.
- 13 -
On May 9, 2001, the Company announced it entered into a definitive merger
agreement to acquire Inverness Medical Technologies, excluding certain
businesses, in a stock-for-stock exchange. Inverness is a developer of
innovative products focused primarily on the self-management of diabetes.
The transaction is expected to close in the fourth quarter of 2001 and is
subject to certain European regulatory approvals and other customary
closing conditions.
NOTE 11 - 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.
NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS
In April 2001, the EITF reached a consensus on EITF Issue No. 00-25,
"Accounting for Consideration from a Vendor to a Retailer in Connection
with the Purchase or Promotion of the Vendor's Products." EITF Issue No.
00-25 requires that certain expenses included in marketing, administration
and research costs be recorded as a reduction of operating revenue and will
be effective in the first quarter of 2002. The Company is currently in the
process of determining the impact of EITF No. 00-25.
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." All business combinations consummated after July 1,
2001 (including the Inverness acquisition) will be accounted for in
accordance with the new pronouncements. In addition, effective January 1,
2002, the Company will no longer be required to amortize goodwill and
certain other intangible assets on acquisitions prior to July 1, 2001 as a
charge to earnings. Also, the Company will be required to review goodwill
and other intangible assets for potential impairment. The Company is
currently in the process of quantifying the impact of the new standards.
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 2001 were $16.36 billion,
which exceeded sales of $15.11 billion for the first six months of 2000 by
8.3%. The strength of the U.S. dollar relative to the foreign currencies
decreased sales for the first six months of 2001 by 3.5%. Excluding the
effect of the stronger U.S. dollar relative to foreign currencies, sales
increased 11.8% on an operational basis for the first six months of 2001.
Consolidated net earnings for the first six months of 2001 were $3.03
billion, compared with net earnings of $2.69 billion for the first six
months of 2000. Other income and expense for 2001 reflects special charges
of $102 million after-tax for restructuring and deal costs related to the
ALZA merger. For 2000, other income and expense includes gain related to
the sale of certain equity securities. Worldwide basic net earnings per
share for the first six months of 2001 were $1.00, compared with $.90 for
the same period in 2000, an increase of 11.1%. Excluding special charges,
basic net earnings per share were $1.04, an increase of 15.6% compared to
$.90 for the same period in 2000. Worldwide diluted net earnings per share
for the first six months of 2001 were $.98, compared with $.88 for the same
period in 2000, an increase of 11.4%. Excluding special charges, diluted
earnings per share were $1.01, compared with $.88 for the same period in
2000, an increase of 14.8%.
- 14 -
Consolidated sales for the second quarter of 2001 were $8.34 billion, an
increase of 8.8% over 2000 second quarter sales of $7.67 billion. The
effect of the stronger U.S. dollar relative to foreign currencies decreased
second quarter sales by 3.3%. Consolidated net earnings for the second
quarter of 2001 were $1.48 billion, compared with $1.36 billion for the
same period a year ago, an increase of 8.7%. Worldwide basic net earnings
per share for the second quarter of 2001 rose 6.5% to $.49, compared with
$.46 in the 2000 period. Excluding special charges, worldwide basic net
earnings per share for the second quarter were $.52, compared with $.46 for
the same period a year ago, an increase of 13.0%. Worldwide diluted net
earnings per share for the second quarter of 2001 rose 9.1% to $.48,
compared with $.44 in 2000. Excluding special charges, worldwide diluted
net earnings per share for the second quarter were $.51, compared to $.44
for the same period a year ago, an increase of 15.9%.
Domestic sales for the first six months of 2001 were $9.96 billion, an
increase of 12.3% over 2000 domestic sales of $8.87 billion for the same
period a year ago. Sales by international subsidiaries were $6.41 billion
for the first six months of 2001 compared with $6.24 billion for the same
period a year ago, an increase of 2.6%. Excluding the impact of the
stronger value of the dollar, international sales increased by 10.9%.
Worldwide Consumer sales for the second quarter of 2001 were $1.7 billion,
an operational increase of 2.4% versus the same period a year ago.
Domestic sales decreased by 1.6%, while international sales gains in local
currency of 6.9% were entirely offset by negative currency, resulting in a
reported worldwide sales decrease of 1.4%.
During the quarter, McNeil Consumer Healthcare reintroduced the 110-year-
old ST. JOSEPH Aspirin brand. Once known exclusively as a baby aspirin, ST.
JOSEPH Aspirin now offers adult consumers a single tablet in the strength
that doctors recommend most for cardio therapy.
Worldwide Pharmaceutical sales of $3.9 billion for the quarter resulted in
an operational increase of 16.5% over the same period in 2000. Domestic
sales increased 19.3%. International sales increased operationally 10.8%
but were offset by a negative currency impact of 7.0%. Worldwide reported
sales growth including a 2.3% negative currency impact was 14.2%.
Sales growth reflects the strong performance of PROCRIT/EPREX, for the
treatment of anemia; RISPERDAL, an antipsychotic medication; DURAGESIC, a
transdermal patch for chronic pain; REMICADE, for the treatment of
rheumatoid arthritis and Crohn's disease; TOPAMAX, an antiepileptic, and
ACIPHEX/PARIET, a proton pump inhibitor for gastrointestinal disorders.
On June 22, 2001, the Company completed the merger with ALZA Corporation,
a research-based pharmaceutical company and a leader in drug delivery
technologies. ALZA applies its delivery technologies to develop
pharmaceutical products with enhanced therapeutic value for its own
portfolio and for many of the world's leading pharmaceutical companies.
- 15 -
During the quarter, the Company received U.S. Food and Drug Administration
(FDA) approval for an oral solution formulation of REMINYL (galantamine
hydrobromide), a new treatment for mild to moderate Alzheimer's disease.
REMINYL Oral Solution provides patients and their caregivers with a new
dosing option for individuals who prefer a liquid or cannot swallow
tablets. REMINYL tablets were launched in the United States in April. The
Company also received FDA approval for SPORANOX (itraconazole) for empiric
therapy of febrile, neutropenic patients with suspected fungal infections.
Empiric therapy allows physicians to prescribe treatment promptly based on
their observation and experience without time-consuming tests.
Worldwide sales for the Medical Devices and Diagnostics segment were $2.8
billion in the second quarter of 2001, which represented an increase of
12.4% in local currency as compared to the same period in 2000. Domestic
sales were up 13.0%, while international sales increased 11.9% on an
operational basis. Worldwide sales gains including the negative impact of
currency were reported at 8.3%. The primary contributors to the segment's
growth were the Cordis circulatory disease management products; DePuy's
orthopaedic joint reconstruction and spinal products; Ethicon's Mitek
suture anchors and Gynecare women's health products; and Ethicon Endo-
Surgery's minimally invasive surgical products.
On April 18, 2001, the Company announced the completion of the merger with
Heartport, Inc. Heartport is a pioneer in developing, manufacturing and
selling less invasive cardiac open-chest and minimally invasive heart
operations, including stopped heart and beating heart procedures.
In the second quarter, the Company announced it entered into a definitive
merger agreement to acquire Inverness Medical Technologies, excluding
certain businesses, in a stock-for-stock exchange. Inverness is a
developer of innovative products focused primarily on the self-management
of diabetes. The transaction is expected to close in the fourth quarter of
2001 and is subject to certain European regulatory approvals and other
customary closing conditions.
LIQUIDITY AND CAPITAL RESOURCES
Cash and current marketable securities increased $762 million during the
first six months of 2001 to $7.52 billion at July 1, 2001. Total
borrowings decreased $1.24 billion during the first six months of 2001 to
$3.42 billion. Net cash (cash and current marketable securities net of
debt) as of July 1, 2001 was $4.1 billion, compared with $2.11 billion at
the end of 2000. Total debt represented 13.1% of total capital
(shareowners' equity and total debt) at quarter end compared with 18.6% at
the end of 2000. Johnson & Johnson exercised its option to redeem the $460
million convertible subordinated debentures of Centocor due 2005 at a price
equal to 102.714% of the principal amount plus accrued interest. The
debentures were subsequently converted by the holders into approximately
11,928,000 shares of Johnson & Johnson common stock. For the period ended
July 1, 2001, there were no material cash commitments.
Additions to property, plant and equipment were $571 million for the first
six months of 2001, compared with $690 million for the same period in 2000.
On April 26, 2001, the Board of Directors approved an increase in the
authorized common stock from 2.16 billion to 4.32 billion shares and a
subsequent two-for-one split of its common stock. Par value will remain at
$1.00 per common share. One new share of common stock was issued on June
12, 2001 with respect to each existing share of common stock held of record
as of the close of business on May 22, 2001.
On July 16, 2001, the Board of Directors approved a regular quarterly
dividend of $.18 cents per share, payable on September 11, 2001 to
shareowners of record as of August 21, 2001.
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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 31, 2000 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.
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 31, 2000.
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 product
Propulsid, which was withdrawn from general sale and restricted to limited
use in 2000. In the wake of publicity about those events, hundreds of
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. Many of these actions involve the claims
of multiple plaintiffs and a significant number seek certification as class
actions. These actions 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. These actions seek substantial
compensatory and punitive damages. Janssen and the Company dispute the
claims against them and are vigorously defending these actions. The Company
believes it has adequate self and commercially available excess insurance
with respect to these cases.
- 17 -
The Company's subsidiary, Johnson & Johnson Vision Care Inc. (Vision
Care), together with 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, which were filed between
July 1994 and December 1996 and are consolidated before the United States
District Court for the Middle District of Florida, assert that enforcement
of Vision Care'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. In April 2001, after several weeks of trial, these cases were
concluded based on a settlement agreement, yet to be approved finally by
the court, which provides for a cash payment to the class, a package of
consumer benefits available to class members based on certain eligibility
requirements, and reciprocal requirements for Vision Care to provide
contact lenses to alternative channels of supply (e.g., mail order) under
specified circumstances and for the State Attorneys General to continue to
enforce state laws governing sale of contact lenses by mail order firms.
Several mail order firms have filed motions to intervene in the
proceedings, arguing that the settlement, or Vistakon's interpretation of
it, will harm them.
Johnson & Johnson Vision Care is also a defendant in a nationwide consumer
class action brought on behalf of purchasers of its ACUVUE brand contact
lenses. The plaintiffs in that action, which was filed in 1996 in New
Jersey State Court, allege that Vision Care sold its 1-DAY ACUVUE lens at a
substantially cheaper price than ACUVUE and misled consumers into believing
these were different lenses when, in fact, they were allegedly "the same
lenses." Plaintiffs are seeking substantial damages and an injunction
against supposed improper conduct. A settlement agreement has been reached
with plaintiffs in this case which has been preliminarily approved by the
court. The settlement provides for cash and consumer benefits based on
proof of eligibility, and revision of certain Vision Care marketing and
labeling materials.
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 EPO, in which Amgen seeks to terminate Ortho
Biotech's U.S. license rights and collect substantial damages based on
alleged deliberate EPO 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 EPO are material to the Company; thus, an unfavorable
outcome on the termination issue could have a material adverse effect on
the Company's consolidated financial position, liquidity and results of
operations. The arbitration is scheduled to begin in September of this
year.
- 18 -
The Company and its LifeScan subsidiary are defendants in several class
actions filed in federal and state courts in California in 1998 in which it
is alleged that purchasers of SureStep blood glucose meters and strips
suffered economic harm because those products contained undisclosed
defects. In late 2000, LifeScan pleaded guilty in federal court to three
misdemeanors and paid a total of $60 million in fines and civil costs to
resolve an investigation related to those same alleged defects. In one of
the federal class actions, a nationwide class was certified by the district
court last year and trial has been scheduled for November of this year. The
Company and LifeScan believe these claims are without merit and are
vigorously defending these actions.
In patent infringement actions tried in Delaware Federal Court late last
year, 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. Post trial motions and appeals to the Federal Circuit Court of
Appeals will follow and no judgments are likely to be paid, if at all,
until those proceedings have run their course. Furthermore, since the
amount of damages, if any, which the Company may receive cannot be
quantified until the legal process is complete, no gain has been recorded
in the financial statements for either of these awards.
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.
- 19 -
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 26, 2001.
(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 1,160,305,362 4,401,900
J. G. Cooney 1,116,277,522 48,429,740
J. G. Cullen 1,160,372,918 4,334,344
M. J. Folkman 1,160,200,614 4,506,648
A. D. Jordan 1,160,081,291 4,625,971
A. G. Langbo 1,160,485,503 4,221,759
R. S. Larsen 1,160,552,294 4,154,968
J. T. Lenehan 1,160,727,491 3,979,771
J. S. Mayo 1,159,658,459 5,048,803
L. F. Mullin 1,160,375,408 4,331,854
H. B. Schacht 1,159,455,218 5,252,044
M. F. Singer 1,159,753,207 4,954,055
J. W. Snow 1,160,336,316 4,370,946
W. C. Weldon 1,160,686,159 4,021,103
R. N. Wilson 1,160,362,075 4,345,187
2. Approval of Appointment of PricewaterhouseCoopers LLP:
For 1,129,588,939
Against 28,495,208
Abstain 6,623,115
(c) A shareowner proposal on pharmaceutical pricing was defeated.
The vote on this proposal was as follows:
For 56,404,756
Against 877,946,132
Abstain 35,161,337
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibit Numbers
(1) Exhibit 3 - Certificate of Amendment to the
Restated Certificate of Incorporation of the
Company effective May 22, 2001.
(2) Exhibit 99.2 - By-Laws of the Company, as amended
effective June 11, 2001
(b) Reports on Form 8-K
A Report on Form 8-K was filed on August 7, 2001, which included
Management's Discussion and Analysis of Results of Operations and
Financial Condition, the consolidated balance sheets of Johnson &
Johnson and subsidiaries as of April 1, 2001, December 31, 2000
and January 2, 2000 and the related consolidated statement of
earnings, shareowners' equity and cash flows for April 1, 2001,
April 2, 2000 and each of the three years in the period ended
December 31, 2000.
- 20 -
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 15, 2001 By /s/ R. J. DARRETTA
R. J. DARRETTA
Vice President, Finance
Date: August 15, 2001 By /s/ C. E. LOCKETT
C. E. LOCKETT
Controller
(Chief Accounting Officer)
- 21 -
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