Management's Discussion and Analysis of Results of Operations and
Financial Condition
Organization and Business Segments
Description of the Company and Business Segments
The Company and its subsidiaries have approximately 110,600 employees worldwide
engaged in the manufacture and sale of a broad range of products in the health
care field. The Company conducts business in virtually all countries of the
world and its primary interest, both historically and currently, has been in
products related to human health and well-being.
The Company is organized into three business segments: Consumer, Pharmaceutical
and Medical Devices and Diagnostics. The Consumer segment manufactures and
markets a broad range of products used in the baby and child care, skin care,
oral and wound care and women's health care fields as well as nutritional and
over-the-counter pharmaceutical products. These products are marketed
principally to the general public and sold both to wholesalers and directly to
independent and chain retail outlets throughout the world. The Pharmaceutical
segment includes products in the following therapeutic areas: anti-fungal,
anti-infective, cardiovascular, contraceptive, dermatology, gastrointestinal,
hematology, immunology, neurology, oncology, pain management, psychotropic
(central nervous system) and urology areas. These products are distributed both
directly and through wholesalers and health care professionals for prescription
use by the general public. The Medical Devices and Diagnostics segment includes
a broad range of products used principally in the professional fields by
physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics.
These products include Cordis' circulatory disease management products; DePuy's
orthopaedic joint reconstruction and spinal products; Ethicon's wound care and
women's health products; Ethicon Endo-Surgery's minimally invasive surgical
products; LifeScan's blood glucose monitoring products, Ortho-Clinical
Diagnostics' products and Vistakon's disposable contact lenses.
The Company's structure is based upon the principle of decentralized management.
The Executive Committee of Johnson & Johnson is the principal management group
responsible for the operations and allocation of the resources of the Company.
This Committee oversees and coordinates the activities of the Consumer,
Pharmaceutical and Medical Devices and Diagnostics business segments. Each
subsidiary within the business segments is, with some exceptions, managed by
citizens of the country where it is located.
In all of its product lines, the Company competes with companies both large and
small, located throughout the world. Competition is strong in all product lines
without regard to the number and size of the competing companies involved.
Competition in research, involving the development and the improvement of new
and existing products and processes, is particularly significant. This
periodically results in product and process obsolescence. The development of new
and improved products is important to the Company's success in all areas of its
business. This competitive environment requires substantial investments in
continuing research and multiple sales forces. In addition, the winning and
retention of customer acceptance of the Company's consumer products involves
significant expenditures for advertising and promotion.
Management's Objectives
The Company's objective is to achieve superior levels of capital efficient
profitable growth. To accomplish this, the Company's management operates the
business consistent with certain strategic principles that have proven
successful over time. To this end, the Company participates in growth areas in
human health care and is committed to attaining leadership positions in these
growth segments through the development of innovative products and services. In
2003, $4.7 billion or 11.2% of sales was invested in research and development,
recognizing the importance of on-going development of new and differentiated
products and services.
With more than 200 operating companies located in 57 countries, the Company
views its principle of decentralized management as an asset and fundamental to
the success of a broadly based business. It also fosters an entrepreneurial
spirit, combining the extensive resources of a large organization with the
ability to react quickly to local market changes and challenges. Businesses are
managed for the long term in order to sustain leadership positions and achieve
growth that provides an enduring source of value to shareholders.
Unifying the management team and the Company's dedicated employees in achieving
these objectives is the Johnson & Johnson Credo. The Credo provides a common set
of values and serves as a constant reminder of the Company's responsibilities to
its customers, employees, communities and shareholders. The Company believes
that these basic principles, along with its overall mission of improving the
quality of life for people everywhere, will enable Johnson & Johnson to continue
to be among the leaders in the health care industry.
During 2003, the Company continued to evaluate and enhance its existing internal
control processes and further evaluate and implement the internal control
reporting requirements of the Sarbanes-Oxley Act of 2002. The Company recognizes
that it must rely and depend on the leadership of its management teams
throughout the Johnson & Johnson Family of Companies to ensure successful
compliance with the Sarbanes-Oxley Act. Additionally, the Company continues to
maintain a strong ethical environment, using the Johnson & Johnson Credo as the
overall guide.
Results of Operations
Analysis of Consolidated Sales
In 2003, worldwide sales increased 15.3% to $41.9 billion, compared to increases
of 12.3% in 2002 and 10.8% in 2001. These sales increases consist of the
following:
Sales increase
due to: 2003 2002 2001
- -------------- ------ ------ ------
Volume 9.4% 10.4% 12.2%
Price 1.3% 1.7% 1.2%
Currency 4.6% 0.2% (2.6%)
Total 15.3% 12.3% 10.8%
28
Sales by U.S. companies were $25.3 billion in 2003, $22.5 billion in 2002 and
$19.8 billion in 2001. This represents an increase of 12.6% in 2003, 13.3% in
2002 and 14.5% in 2001. Sales by international companies were $16.6 billion in
2003, $13.8 billion in 2002 and $12.5 billion in 2001. This represents an
increase of 19.8% in 2003, 10.8% in 2002 and 5.4% in 2001.
[Graph]
For the last five years, the annual compound growth rates for worldwide, U.S.
and international sales were 11.9%, 14.4% and 8.7%, respectively. The ten-year
annual compound growth rates for worldwide, U.S. and international sales were
11.7%, 13.5% and 9.4%, respectively.
[Graph]
All geographic areas throughout the world posted double-digit sales increases
during 2003 as sales increased 24.2% in Europe, 10.8% in the Western Hemisphere
(excluding the U.S.) and 16.2% in the Asia-Pacific, Africa regions. These sales
gains include the positive impact of currency fluctuations between the U.S.
dollar and foreign currencies in Europe of 17.8% and in the Asia-Pacific, Africa
region of 8.5% while there was a negative impact due to currency fluctuations of
2.0% in the Western Hemisphere (excluding the U.S.).
In 2003, sales to three distributors, McKesson HBOC, AmerisourceBergen Corp. and
Cardinal Distribution accounted for 10.5%, 9.0% and 9.1%, respectively, of total
revenues. In 2002, AmerisourceBergen Corp. accounted for 10.3% of total revenues
with McKesson HBOC and Cardinal Distribution accounting for 9.8% and 9.2% of
revenues, respectively.
[Graph]
Analysis of Sales by Business Segments
Consumer
Consumer segment sales in 2003 were $7.4 billion, or an increase of 13.2%, over
2002 with operational growth accounting for 9.4% of the total growth and 3.8%
due to currency fluctuations. U.S. Consumer segment sales were $4.0 billion, an
increase of 10.1%, while international sales were $3.4 billion, or an increase
of 17.0%, with 8.6% due to operations and 8.4% due to currency fluctuations over
2002. Consumer segment sales growth is attributable to strong sales performance
in the major franchises in this segment including Skin Care, Baby & Kids Care
and the McNeil Consumer over-the-counter pharmaceutical and nutritional
products. The Skin Care franchise sales in 2003 were $1.8 billion, representing
a 14.4% increase over 2002. This growth was attributed to solid sales in
NEUTROGENA brand products, especially in international markets, and AVEENO brand
products in the facial care line as well as new products launched in the latter
half of 2003. The Baby & Kids Care franchise grew by 12.8% to $1.3 billion in
2003. Growth in this franchise was led by new products launched in 2003
including JOHNSON'S SOFTWASH and JOHNSON'S SOFTLOTION. McNeil Consumer
over-the-counter pharmaceutical and nutritional products sales were $2.0
billion, an increase of 13.6% over 2002. Contributing to this growth was the
continued growth of SPLENDA brand no calorie sweetener and the increased sales
in the MOTRIN and TYLENOL brand products due to an early and strong cold and flu
season. Another franchise contributing to the overall sales growth in the
Consumer segment was the Women's Health franchise that achieved sales of $1.4
billion, a 9.6% increase over 2002. Strong growth in the sanitary protection
products in international markets contributed to the growth in this franchise.
29
Consumer segment sales in 2002 were $6.6 billion, an increase of 3.9% over 2001,
with 4.6% of the increase due to operational growth offset by 0.7% of a negative
currency impact. U.S. sales increased by 4.5% while international sales gains
were 3.1% with 4.6% operational gains offset by a negative currency impact of
1.5%. Consumer segment sales in 2001 were $6.3 billion, an increase of 0.8% over
2000, with 3.9% of the increase due to operational growth offset by 3.1% of a
negative currency impact. U.S. sales increased by 1.4% while international sales
gains were 0.1% with sales gains in local currency of 6.8% offset by a negative
currency impact of 6.7%.
Pharmaceutical
Pharmaceutical segment sales in 2003 were $19.5 billion, an increase of 13.8%
over 2002, with 9.7% of this change due to operational growth and the remaining
4.1% increase related to the positive impact of currency. U.S. Pharmaceutical
segment sales increased 11.3% while international Pharmaceutical segment sales
increased 19.4%, which included 6.0% growth operationally and 13.4% related to
the positive impact of currency.
Sales over $1 Billion
% Change
----------------------
(Millions of Dollars) 2003 2002 2001 03 vs. 02 02 vs. 01
- ----------------------- --------- -------- -------- --------- ---------
PROCRIT/EPREX (Epoetin
alfa) $ 3,984 4,269 3,430 (6.7%) 24.3%
RISPERDAL (risperidone) 2,512 2,146 1,845 17.1% 16.3%
REMICADE (infliximab) 1,729 1,297 721 33.4% 80.1%
DURAGESIC (fentanyl
transdermal system) 1,631 1,203 875 35.6% 37.4%
Hormonal Contraceptives 1,175 1,003 1,003 17.1% 0.2%
LEVAQUIN/FLOXIN
(levofloxacin/
ofloxacin) 1,149 1,032 1,052 11.3% (2.0%)
TOPAMAX (topiramate) 1,043 687 477 51.7% 43.8%
Pharmaceutical segment sales growth reflects the strong performance of many of
the key pharmaceutical products despite the sales decline of PROCRIT (Epoetin
alfa) and EPREX (Epoetin alfa) that were adversely affected by competition and a
label change. Combined, PROCRIT and EPREX sales declined 6.7% in 2003 as
compared to 2002. This decline is the net effect of strong market growth and a
positive currency impact of 4.0% offset by a loss of market share. The Company
continues to implement programs to improve its competitive position that include
steps to ensure that PROCRIT is priced competitively as well as conducting
clinical development programs, which will provide comparative data with
competitive products.
Strong growth drivers in the Pharmaceutical segment were DURAGESIC (fentanyl
transdermal system), which is sold outside the U.S. as DUROGESIC, with its novel
delivery system for the treatment of chronic pain that continued to achieve
outstanding results, growing 35.6% last year. Currently, there is litigation
challenging the patent exclusivity of DURAGESIC that may or may not impact 2004
sales of this product. In any event, the product is expected to face generic
competition by January 2005. See Note 18 for further discussion of this matter.
In the psychotropic (central nervous system) field, RISPERDAL (risperidone), a
medication that treats the symptoms of schizophrenia, accounted for $2.5 billion
in sales in 2003, fueled by the successful launch of RISPERDAL CONSTA
[(risperidone) long-acting injection] in the markets outside of the United
States. In October 2003, this product was approved in the U.S. by the Food and
Drug Administration (FDA). REMICADE (infliximab), a novel monoclonal antibody
therapy indicated to treat the symptoms of Crohn's disease and rheumatoid
arthritis, two autoimmune disorders, accounted for $1.7 billion in sales in 2003
and continued to maintain its leadership position in the growing autoimmune
market. The anti-infective field, including LEVAQUIN (levofloxacin) and FLOXIN
(ofloxacin), also had strong growth of 11.3% over 2002. The hormonal
contraceptive franchise grew 17.1%, fueled by ORTHO EVRA (norelgestromin/ethinyl
estradiol), the first contraceptive patch approved by the FDA.
There was also strong growth in various other brands, including DOXIL
(doxorubicin), an anti-cancer treatment; DITROPAN XL (oxybutynin), for the
treatment of overactive bladder; and REMINYL (galantamine HBr), a treatment for
patients with mild to moderate Alzheimer's disease.
The acquisition of Scios Inc., a biopharmaceutical company with a marketed
product for cardiovascular disease and research projects focused on autoimmune
diseases, also contributed to the Pharmaceutical segment sales growth. Scios was
acquired to strengthen the Company's business in key therapeutic areas and
technology platforms. Scios' product NATRECOR (nesiritide) is a novel agent
approved for congestive heart failure and has several significant advantages
over existing therapies.
Pharmaceutical segment sales in 2002 were $17.2 billion, an increase of 15.5%
over 2001, with 14.8% due to operations growth and 0.7% due to currency
fluctuations. U.S. sales increased by 16.4% while international sales grew 13.5%
over 2001; that includes a 2.4% positive impact of currency and operational
growth of 11.1%. Pharmaceutical segment sales in 2001 were $14.9 billion, a
total increase of 17.3% over 2000. U.S. sales increased by 21.3% while
international sales increased by 9.3% with 14.2% operational growth offset by a
negative currency impact of 4.9%.
Medical Devices and Diagnostics
Worldwide, the Medical Devices and Diagnostics segment achieved sales of $14.9
billion in 2003, representing an increase over the prior year of 18.5% with
operational growth of 12.8% and a positive impact from currency of 5.7%. U.S.
sales
30
increased 15.9% while international sales increased 21.7% with 9.0% from
operations and 12.7% from currency.
Strong sales growth in this segment was led by the Cordis and DePuy franchises.
The Cordis franchise was a key contributor to the Medical Devices and
Diagnostics segment results with reported sales of $2.7 billion, which signifies
65.0% growth over the prior year. The primary driver of this sales growth for
2003 was the CYPHER Sirolimus-eluting Stent that was approved in the U.S. by the
FDA in April 2003. This device for the treatment of coronary artery disease has
been implanted in approximately half a million patients around the world. In
2003, CYPHER was the only drug-eluting stent approved for use in the U.S.;
however, there is a product pending approval by the FDA that will compete with
the CYPHER Sirolimus-eluting Stent.
The DePuy franchise reported $3.0 billion in sales, which represents an 18.6%
growth over the prior year. DePuy's orthopaedic joint reconstruction products,
including the shoulder and knee product lines, are primarily responsible for
this growth through the Global Advantage System in the shoulder market and the
continuing trend towards mobile bearings and minimally invasive unicompartmental
knees. Strong performance was also reported in the area of spinal
orthobiologics, led by the continued success of new product sales and the
acquisition of Orquest and its principal product HEALOS, a bone graft substitute
designed to enhance fusion.
Other franchises that contributed to the overall sales growth in the Medical
Devices and Diagnostics segment include the Ethicon, Ethicon Endo-Surgery,
LifeScan, Ortho-Clinical Diagnostics and the Vision Care franchises. The Ethicon
worldwide franchise reported $2.6 billion of sales in 2003, which was a growth
rate of 10.6% over the prior year. The Ethicon franchise continues to grow by
introducing new products into the marketplace, such as the Coated VICRYL
(polyglactin 910) Plus, the first product in a new anti-bacterial suture
platform.
The Ethicon Endo-Surgery franchise reported $2.6 billion of sales in 2003, which
was a growth rate of 12.9% over the prior year. This growth was mainly driven by
endocutter sales that include products used in performing bariatric procedures
for the treatment of obesity, an important focus area for Ethicon Endo-Surgery.
The LifeScan franchise reported $1.4 billion of sales in 2003, a growth rate of
6.3% over the prior year. In September 2003, LifeScan launched an upgraded
ONETOUCH BASIC test strip, which requires 50% less blood for insulin testing.
The Ortho-Clinical Diagnostics franchise reported $1.2 billion of sales in 2003,
which was a growth rate of 7.5% over the prior year. This growth was mainly
driven by the launch of VITROS Eci aHAV-Total assay for the measurement of
antibody to the Hepatitis A virus.
The Vision Care franchise reported $1.3 billion of sales in 2003, which was a
growth rate of 10.9% over the prior year led by the continued success in the
Japanese market.
Worldwide sales in 2002 of $12.6 billion in the Medical Devices and Diagnostics
segment represented a total increase of 12.9% over 2001. The 12.9% total
increase also represents the operational sales increase over prior year. U.S.
sales were up 13.0% and international sales increased 12.8% over the prior year.
Worldwide sales in 2001 of $11.1 billion in the Medical Devices and Diagnostics
segment represented a total increase of 8.8% over 2000 with operational sales
gains of 12.0% offset by a negative currency impact of 3.2%. U.S. sales were up
12.1% while international sales increased 5.1% as operational sales gains of
12.1% were offset by a negative currency impact of 7.0%.
Analysis of Consolidated Earnings Before Provision for
Taxes on Income
Consolidated earnings before provision for taxes on income increased to $10.3
billion, or 10.9%, over the $9.3 billion in 2002. The increase in 2002 was 17.6%
over the $7.9 billion in 2001. As a percent to sales, consolidated earnings
before provision for taxes on income in 2003 was 24.6% that represents a decline
of 1.0% over the 25.6% in 2002. For 2002, the improvement was 1.2% over the
24.4% in 2001, and the improvement in 2001 was 0.9% over 2000. The sections that
follow highlight the significant components of the changes in consolidated
earnings before provision for taxes on income.
Cost of Goods Sold and Selling, Marketing and Administrative Expenses: Cost of
goods sold and selling, marketing and administrative expenses as a percent to
sales are as follows:
% of Sales
--------------------------
2003 2002 2001
------ ------ ------
Cost of goods sold 29.1% 28.8 29.6
Increase/(decrease) 0.3 (0.8) (1.1)
Selling, marketing
and administrative
expenses 33.7% 33.7 34.8
Increase/(decrease) - (1.1) (1.2)
In 2003, there was no improvement in the percent to sales of selling, marketing
and administrative expenses and an increase in the percent to sales of costs of
goods sold. This was due to the changes in the mix of products with varying cost
structures as well as the cost of the retirement enhancement program of $95
million offered in the fourth quarter of 2003. In 2002 and 2001, the decreases
were attributable to expense leveraging on sales increases and productivity
improvements.
Research & Development: Research activities represent a significant part of the
Company's business. These expenditures relate to the development of new
products, improvement of existing products, technical support of products and
compliance with governmental regulations for the protection of the consumer.
Worldwide costs of research activities, excluding the in-process research &
development charges, were as follows:
(Millions of Dollars) 2003 2002 2001
- --------------------- ------- ------- -------
Research expense $ 4,684 3,957 3,591
Percent increase
over prior year 18.4% 10.2% 15.7%
Percent of sales 11.2% 10.9% 11.1%
Research & development expense as a percent of sales for the Pharmaceutical
segment was 16.4% for 2003, 15.7% for 2002
31
and 16.6% for 2001 while averaging 6.7%, 6.6% and 6.5% in the Consumer and
Medical Devices and Diagnostics segments combined for 2003, 2002 and 2001,
respectively.
Significant research activities continued in the Pharmaceutical segment,
increasing to $3.2 billion, or 18.8%, over 2002 and a compound annual growth
rate of approximately 14.9% for the five-year period since 1998. Johnson &
Johnson Pharmaceutical Research & Development, L.L.C., formerly operating as two
separate units - the Janssen Research Foundation and the R.W. Johnson
Pharmaceutical Research Institute - is the primary worldwide pharmaceutical
research organization. Additional research is conducted by Centocor, ALZA,
Tibotec-Virco N.V., Scios Inc. and through collaboration with the James Black
Foundation in London, England.
In-Process Research & Development: In 2003, the Company recorded in-process
research & development (IPR&D) charges of $918 million before tax related to
acquisitions. These acquisitions included Scios Inc., Link Spine Group, Inc.,
certain assets of Orquest, Inc. and 3-Dimensional Pharmaceuticals, Inc. Scios
Inc. is a biopharmaceutical company with a marketed product for cardiovascular
disease and research projects focused on autoimmune diseases. The acquisition of
Scios Inc. accounted for $730 million before tax of the IPR&D charges and is
included in the operating profit of the Pharmaceutical segment. Link Spine
Group, Inc. was acquired to provide the Company with exclusive worldwide rights
to the CHARITE Artificial Disc for the treatment of spine disorders. The
acquisition of Link Spine Group, Inc. accounted for $170 million before tax of
the IPR&D charges and is included in the operating profit of the Medical Devices
and Diagnostics segment. Orquest, Inc. is a biotechnology company focused on
developing biologically-based implants for orthopaedic spine surgery. The
acquisition of certain assets of Orquest, Inc. accounted for $11 million before
tax of the IPR&D charges and is included in the operating profit of the Medical
Devices and Diagnostics segment. 3-Dimensional Pharmaceuticals, Inc. is a
company with a technology platform focused on the discovery and development of
potential new drugs in early stage development for inflammation. The acquisition
of 3-Dimensional Pharmaceuticals, Inc. accounted for $7 million before tax of
the IPR&D charges and is included in the operating profit of the Pharmaceutical
segment.
In 2002, the Company recorded IPR&D charges of $189 million before tax related
to the acquisitions of Tibotec-Virco N.V., a privately-held biopharmaceutical
company focused on developing anti-viral treatments, and Obtech Medical AG, a
privately held company that markets an adjustable gastric band for the treatment
of morbid obesity. IPR&D of $150 million and $39 million is included in the
Pharmaceutical and Medical Devices and Diagnostics group, respectively.
During 2001, the Company recorded IPR&D charges of $105 million before tax
incurred as a result of the acquisition of Inverness Medical Technology Inc., a
supplier of LifeScan's electrochemical products for blood glucose monitoring
following the spin-off of the non-diabetes businesses, and TERAMed Inc., an
early stage medical device company that is developing endovascular stent-graft
systems for minimally invasive treatment of abdominal aortic aneurysms. The
total IPR&D of $105 million is included in the Medical Devices and Diagnostics
segment.
Other (Income) Expense, Net: Other (income) expense includes gains and losses
related to the sale and write-down of certain investments in equity securities
held by the Johnson & Johnson Development Corporation, gains/losses on the
disposal of fixed assets, currency gains and losses, minority interests,
litigation settlement (income) expense and royalty income. The change in net
other (income) expense from 2002 to 2003 was net other income of $679 million.
For 2003, the other (income) expense includes the income from an arbitration
ruling of $230 million related to a stent patent. This amount was received
during the fourth quarter of 2003 and is included in the Medical Devices and
Diagnostics segment operating profit. Also, included in the Medical Devices and
Diagnostics segment operating profit is the gain on the sale of various product
lines that were no longer compatible with this segment's strategic goals. Other
(income) expense for 2003 also includes the recovery of a $40 million loan that
had previously been reserved and is included in the Pharmaceutical segment
operating profit.
In 2002, other (income) expense included the gain on the sale of the Ortho
Prefest product line, and the impact of the Amgen arbitration settlement. On
October 18, 2002, an arbitrator in Chicago denied an effort by Amgen, Inc. to
terminate the 1985 license agreement under which Ortho Biotech Inc. obtained
exclusive U.S. rights to Amgen-developed erythropoetin (EPO) for all indications
outside of kidney dialysis. In his decision, the arbitrator found that sales had
been made into markets where Amgen had retained exclusive rights, but that they
did not warrant the extraordinary remedy of terminating the contract. Instead,
he found that Amgen could be adequately compensated with monetary damages. The
arbitrator awarded $150 million in damages. On January 24, 2003, the arbitrator
ruled that Amgen was the "prevailing party" in this arbitration, entitling it to
an award of reasonable attorney's fees and costs. The Company expensed $85
million in the fourth quarter of 2002 in connection with this claim. These
charges are included in the Pharmaceutical segment operating profit.
32
In 2001, in addition to the items indicated above, other (income) expense
included costs related to the merger with ALZA of $147 million and amortization
expense of approximately $141 million that is no longer required under Financial
Accounting Standards Board (FASB) Standard No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142).
Operating profits by segments of business were as follows:
Percent Of
Segment Sales
--------------------
(Millions of Dollars) 2003 2002 2003 2002
- --------------------- --------- --------- -------- --------
Consumer $ 1,393 1,229 18.7% 18.7%
Pharmaceutical 5,896 5,787 30.2 33.7
Med Devices
and Diag 3,370 2,489 22.6 19.8
Segments total 10,659 9,505 25.5 26.2
Expenses not
allocated to
segments(1) (351) (214)
Earnings before
provision for
taxes on income $ 10,308 9,291 24.6% 25.6%
(1) Amounts not allocated to segments include interest (income)/expense,
minority interest, and general corporate income and expense.
[Graph]
Consumer Segment: Operating profit for the Consumer segment as a percent to
sales in 2003 remained unchanged from 2002 at 18.7%. Expense leveraging due to
increased sales volumes was offset by costs incurred for manufacturing programs
to gain future efficiencies and advertising. In 2002, Consumer segment operating
profit increased 22.4% over the prior year and reflects an operating profit as a
percent to sales improvement of 2.8%. The improvement is due primarily to
leveraging of selling, promotion and administrative expenses offset by increased
expenditures in advertising. Additionally, the Consumer segment operating profit
improved by 0.6% as amortization expense for goodwill and certain trademarks was
no longer required under SFAS No. 142.
Pharmaceutical Segment: Operating profit for the Pharmaceutical segment as a
percent to sales was 30.2%, reflecting a decline of 3.5% due to the IPR&D
charges related to acquisitions as previously noted. Additionally, operating
profit was impacted by the sales decline of high margin products, such as
PROCRIT/EPREX, and increased consumer promotional spending for new products and
line extensions. In 2002, Pharmaceutical segment operating profit increased
17.4% and reflects an operating profit as a percent to sales improvement of 0.5%
to 33.7%. Operating profit was negatively impacted by the cost of the Amgen
arbitration settlement of $235 million in damages and legal fees and IPR&D
related to acquisitions offset by the gain on the sale of the Ortho Prefest
product line. There was no impact of SFAS No. 142 on operating profit as a
percent to sales. In 2001, operating profit also included the impact of expenses
related to the merger with ALZA of $147 million.
Medical Devices and Diagnostics: Operating profit for the Medical Devices and
Diagnostics segment in 2003 as a percent to sales was 22.6%, reflecting an
improvement of 2.8% over 2002. Increased sales volume, primarily due to CYPHER
Stent sales, was the driver of the Medical Devices and Diagnostics segment
growth. In 2002, the Medical Devices and Diagnostics segment operating profit
increased 24.4%, reflecting an operating profit as a percent to sales
improvement of 1.8%. The non-amortization of goodwill and certain trademarks
accounted for 0.8% of the improvement. The remaining margin improvement over the
prior year was achieved despite investment spending in support of the Cordis
product line. Operating profit also includes the IPR&D related to acquisitions
in 2002 and 2001.
Interest (Income) Expense: Interest income in 2003 decreased by $79 million due
primarily to a 100 basis point decrease in the average yield on investments
compared to 2002. The cash balance that includes current marketable securities
at the end of 2003 was $9.5 billion and averaged $8.6 billion, which was
slightly higher than the $8.3 billion average cash balance in 2002.
Interest expense in 2003 increased by $47 million as compared to 2002 primarily
due to an increase in the average debt balance, from $3.8 billion in 2002 to
$5.0 billion in 2003. The average interest rate on outstanding debt decreased
approximately 70 basis points year to year.
Provision For Taxes On Income: The worldwide effective income tax rate was 30.2%
in 2003, 29.0% in 2002 and 28.2% in 2001. The increase in the effective tax rate
for the years 2003, 2002 and 2001 was primarily due to the Company's
non-deductible IPR&D charges and the increase in income subject to tax in the
U.S. Refer to Note 8 for additional information.
33
Liquidity and Capital Resources
Cash Flows
Cash generated from operations and selected borrowings provides the major
sources of funds for the growth of the business, including working capital,
capital expenditures, acquisitions, share repurchases, dividends and debt
repayments.
In 2003, cash flow from operations was $10.6 billion, an increase of $2.4
billion over 2002. Major factors contributing to the increase were an increase
in net income of $0.6 billion, an increase in IPR&D from 2002 of $0.7 billion,
an increase in accounts payable and accrued liabilities of $0.8 billion due
primarily to an increase in volume and timing of payments, the decrease in the
pension funding from 2002 of $0.5 billion and changes to deferred taxes of $0.6
billion. For a more detailed discussion on the change in deferred taxes, see
Note 8.
Net cash used by investing activities increased by $2.3 billion in 2003 due to
acquisitions. For a more detailed discussion on mergers and acquisitions, see
Note 17.
Net cash used by financing activities decreased by $3.1 billion in 2003 due to
the impact of the $5.0 billion stock repurchase in 2002 offset by a change in
net repayment of debt of $1.8 billion. Financing activities also had increases
and decreases in both long-term and short-term debt due to the financing of the
acquisition of Scios Inc. During 2003, the Company retired a net $1.0 billion of
commercial paper.
Cash and current marketable securities were $9.5 billion at the end of 2003 as
compared with $7.5 billion at the end of 2002.
[Graph]
Cash generated from operations amounted to $8.2 billion in 2002, which is less
than the cash generated from operations in 2001 of $8.9 billion. This decrease
is due primarily to the funding of the U.S. pension plan of approximately $0.8
billion net of the current tax benefit during 2002.
Contractual Obligations and Commitments
The Company has long-term contractual obligations, primarily lease, debt
obligations and unfunded retirement plans. To satisfy these obligations, the
Company will use cash from operations. The following table summarizes the
Company's contractual obligations and their aggregate maturities as of December
28, 2003 (see Notes 4, 6 and 13 for further details):
Unfunded
Operating Debt Retirement
(Millions of Dollars) Leases Obligations Plans
- --------------------- --------- ----------- ----------
2004 $ 143 224 19
2005 127 18 20
2006 115 18 22
2007 97 11 23
2008 80 8 26
After 2008 $ 193 2,900 735
Share Repurchase and Dividends
On February 13, 2002, the Company announced a stock repurchase program of up to
$5.0 billion with no time limit on this program. This program was completed on
August 1, 2002, with 83.6 million shares repurchased for an aggregate price of
$5.0 billion. In addition, the Company has an annual program to repurchase
shares for use in employee stock and employee incentive plans.
The Company increased its dividend in 2003 for the 41st consecutive year. Cash
dividends paid were $0.925 per share in 2003, compared with dividends of $0.795
per share in 2002 and $0.70 per share in 2001. The dividends were distributed as
follows:
2003 2002 2001
--------- ----------- ----------
First quarter $ 0.205 0.18 0.16
Second quarter 0.24 0.205 0.18
Third quarter 0.24 0.205 0.18
Fourth quarter 0.24 0.205 0.18
Total $ 0.925 0.795 0.70
On January 5, 2004, the Board of Directors declared a regular cash dividend of
$0.24 per share, payable on March 9, 2004, to shareholders of record as of
February 17, 2004. The Company expects to continue the practice of paying
regular cash dividends.
Financing and Market Risk
The Company uses financial instruments to manage the impact of foreign exchange
rate changes on cash flows. Accordingly, the Company enters into forward foreign
exchange contracts to protect the value of existing foreign currency assets and
liabilities and to hedge future foreign currency product costs. Gains or losses
on these contracts are offset by the gains or losses on the underlying
transactions. A 10% appreciation of the U.S. dollar from the December 28, 2003
market rates would increase the unrealized value of the Company's forward
contracts by
34
$257 million. Conversely, a 10% depreciation of the U.S. dollar from the
December 28, 2003 market rates would decrease the unrealized value of the
Company's forward contracts by $314 million. In either scenario, the gain or
loss on the forward contract would be offset by the gain or loss on the
underlying transaction and, therefore, would have no impact on future earnings
and cash flows.
The Company hedges the exposure to fluctuations in currency exchange rates, and
the effect on assets and liabilities in foreign currency, by entering into
currency swap contracts. A 1% change in the spread between U.S. and foreign
interest rates on the Company's interest rate sensitive financial instruments
would either increase or decrease the unrealized value of the Company's swap
contracts by approximately $48 million. In either scenario, at maturity, the
gain or loss on the swap contract would be offset by the gain or loss on the
underlying transaction and therefore would have no impact on future cash flows.
The Company does not enter into financial instruments for trading or speculative
purposes. Further, the Company has a policy of only entering into contracts with
parties that have at least an "A" (or equivalent) credit rating. The
counterparties to these contracts are major financial institutions and the
Company does not have significant exposure to any one counterparty. Management
believes the risk of loss is remote.
Total unused credit available to the Company approximates $3.2 billion,
including $1.5 billion of credit commitments and $0.8 billion of uncommitted
lines with various banks worldwide that expire on September 30, 2004. In May
2003, the Company issued a total of $1.0 billion in bonds from its shelf
registration: $500 million of 3.80% Debentures due May 15, 2013 and $500 million
of 4.95% Debentures due May 15, 2033. In December 2003, the Company filed a new
shelf registration with the Securities and Exchange Commission that, in
combination with $785 million remaining from a prior shelf registration, enables
the Company to issue up to $1.985 billion of unsecured debt securities and
warrants to purchase debt. The new shelf registration became effective on
January 21, 2004. Johnson & Johnson continues to be one of a few industrial
companies with a Triple A credit rating.
Total borrowings were $4.1 billion at the end of both 2003 and 2002. In 2003,
net cash (cash and current marketable securities net of debt) was $5.4 billion.
In 2002, net cash (cash and current marketable securities net of debt) was $3.3
billion. Total debt represented 13.2% of total capital (shareholders' equity and
total debt) in 2003 and 15.4% of total capital in 2002. Shareholders' equity per
share at the end of 2003 was $9.05 compared with $7.65 at year-end 2002, an
increase of 18.3%. For the period ended December 28, 2003, there were no
material cash commitments. A summary of borrowings can be found in Note 6.
Other Information
Critical Accounting Policies and Estimates
Management's discussion and analysis of results of operations and financial
condition are based on the Company's consolidated financial statements that have
been prepared in accordance with accounting principles generally accepted in the
U.S. The preparation of these financial statements requires that management make
estimates and assumptions that affect the amounts reported for revenues,
expenses, assets, liabilities and other related disclosures. Actual results may
or may not differ from these estimates. The Company's significant accounting
policies are described in Note 1; however the Company believes that the
understanding of certain key accounting policies is essential in achieving more
insight into the Company's operating results and financial condition. These key
accounting policies include revenue recognition, income taxes, legal and self
insurance contingencies, valuation of long-lived assets and assumptions used to
determine the amounts recorded for pensions and other employee benefit plans and
accounting for stock options.
Revenue Recognition: The Company recognizes revenue from product sales when
goods are shipped or delivered and title and risk passes to the customer.
Provisions for certain rebates, sales incentives, trade promotions, coupons,
product returns and discounts to customers are accounted for as reductions in
determining sales in the same period the related sales are recorded. These
provisions, the largest of these being the Medicaid rebate provision, are based
on estimates derived from current program requirements and historical
experience. The Company also recognizes service revenue that is received for
co-promotion of certain products. For all years presented, service revenues were
less than 2% of total revenues and are included in product sales.
Income Taxes: Income taxes are recorded based on amounts refundable or payable
in the current year and include the results of any difference between U.S. GAAP
accounting and U.S. tax reporting that are recorded as deferred tax assets or
liabilities. The Company estimates deferred tax assets and liabilities based on
current tax regulations and rates. Changes in tax laws and rates may affect
these deferred tax assets and liabilities recorded in the future. Management
believes that changes in these estimates would not result in a material effect
on the Company's results of operations, cash flows or financial position.
The Company intends to continue to reinvest its undistributed international
earnings to expand its international operations; therefore, no U.S. tax expense
has been recorded to cover the repatriation of such undistributed earnings. At
December 28, 2003 and December 29, 2002, the cumulative amount of undistributed
international earnings was approximately $14.8 billion and $12.3 billion,
respectively.
Legal and Self Insurance Contingencies: The Company records accruals for various
contingencies including legal proceedings and product liability cases as these
arise in the normal course of business. The accruals are based on management's
judgment as to the probability of losses, opinions of legal counsel and, where
applicable, actuarially determined estimates.
35
Additionally, the Company records insurance receivable amounts from third party
insurers based on the probability of recovery. As appropriate, reserves against
these receivables are recorded for estimated amounts that may not be collected
from third party insurers.
Long-Lived And Intangible Assets: The Company assesses changes in economic
conditions and makes assumptions regarding estimated future cash flows in
evaluating the value of the Company's fixed assets, goodwill and other
non-current assets. As these assumptions and estimates may change over time, it
may or may not be necessary for the Company to record impairment charges.
Employee Benefit Plans: The Company sponsors various retirement and pension
plans, including defined benefit, defined contribution and termination indemnity
plans that cover most employees worldwide. These plans require assumptions for
the discount rate, expected return on plan assets, expected salary increases and
health care cost trend rates. See Note 13 for further detail on these rates and
the effect of a change in these rates on the Company's results of operations.
Stock Options: The Company has elected to use Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), that does not
require compensation costs related to stock options to be recorded in net income
as all options granted under the various stock options plans had an exercise
price equal to the market value of the underlying common stock at grant date.
Statement of Financial Accounting Standard (SFAS) No. 148 Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123, requires pro forma disclosure of net income and earnings per
share determined as if the fair value method of accounting for stock options had
been applied in measuring compensation cost. See Notes 1 and 10 for further
information regarding stock options.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 143, Accounting for Asset Retirement
Obligations. The Company adopted this standard in 2003 and it did not have a
material impact on the Company's results of operations, cash flows or financial
position.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which is effective for exit or disposal activities
that are initiated after December 31, 2002. The Company's adoption of SFAS No.
146 did not have a material effect on the Company's results of operations, cash
flows or financial position.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of FASB Statement No. 5, Accounting for
Contingencies, relating to the guarantor's accounting for and disclosure of the
issuance of certain types of guarantees. The disclosure requirements of FIN 45
were effective for financial statements of interim or annual periods that end
after December 15, 2002. The provisions for initial recognition and measurement
are effective on a prospective basis for guarantees that are issued or modified
during 2003, irrespective of the guarantor's year-end. FIN 45 requires that upon
issuance of a guarantee, the entity must recognize a liability for the fair
value of the obligation it assumes under that guarantee. The Company's adoption
of FIN 45 did not have a material effect on the Company's results of operations,
cash flows or financial position.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities - an interpretation of ARB No. 51, and in December 2003, issued a
revised FIN 46(R), Consolidation of Variable Interest Entities - an
interpretation of ARB No. 51, both of which address consolidation of variable
interest entities. FIN 46 expanded the criteria for consideration in determining
whether a variable interest entity should be consolidated by a business entity,
and requires existing unconsolidated variable interest entities (which include,
but are not limited to, Special Purpose Entities, or SPEs) to be consolidated by
their primary beneficiaries if the entities do not effectively disperse risks
among parties involved. This interpretation was immediately applicable to
variable interest entities created after January 31, 2003. The adoption of this
portion of FIN 46 has not had a material effect on the Company's results of
operation, cash flows or financial position. FIN 46 is applicable in 2004 to
variable interest entities in which an enterprise holds a variable interest that
was acquired before February 1, 2003. The Company has various investments and
arrangements, which may or may not be considered variable interests, and the
adoption of FIN 46 is not anticipated to have a material effect on the results
of operations, cash flows and financial position of the Company.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which is effective for contracts
entered into or modified after June 30, 2003. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The Company's adoption of SFAS No. 149 in 2003 did not have
a material effect on the Company's results of operations, cash flows or
financial position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which is
effective for financial instruments entered into or modified after May 31, 2003.
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. The Company's adoption of SFAS No. 150 in 2003 did not have a material
effect on the Company's results of operations, cash flows or financial position.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment of
FASB Statement No. 87, 88 and 106, which was effective for the fourth quarter of
2003. This Statement revises employers' disclosures about
36
pension plans and other postretirement benefit plans and these disclosures are
included in Note 13.
In December 2003, the FASB issued FASB Staff Position (FSP) FAS No. 106-1,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003, which is effective for interim
or annual financial statements of fiscal years ending after December 7, 2003.
The Company has elected to defer the adoption of FSP FAS No. 106-1 until 2004,
as allowed by the Standard. The Company's adoption of FSP FAS No. 106-1 is not
expected to have a material effect on the Company's results of operations, cash
flows or financial position.
Economic and Market Factors
Johnson & Johnson is aware that its products are used in an environment where,
for more than a decade, policymakers, consumers and businesses have expressed
concern about the rising cost of health care. In response to these concerns,
Johnson & Johnson has a long standing policy of pricing products responsibly.
For the period 1993 - 2003, in the United States, the weighted average compound
annual growth rate of Johnson & Johnson price increases for health care products
(prescription and over-the-counter drugs, hospital and professional products)
was below the U.S. Consumer Price Index (CPI).
Inflation rates, even though moderate in many parts of the world during 2003,
continue to have an effect on worldwide economies and, consequently, on the way
companies operate. In the face of increasing costs, the Company strives to
maintain its profit margins through cost reduction programs, productivity
improvements and periodic price increases.
The Company faces various worldwide health care changes that may result in
pricing pressures that include health care cost containment and government
legislation relating to sales, promotions and reimbursement. On December 8,
2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003
was enacted that introduces a prescription drug benefit under Medicare as well
as a subsidy to sponsors of retiree health care benefit plans. The Company has
elected to defer the recognition of the Act until such time when the
authoritative guidance is issued. Any measures of the accumulated postretirement
benefit obligation or net periodic postretirement benefit cost in the Company's
financial statements do not reflect the effect of the Act.
The Company also operates in an environment which is becoming increasingly
hostile to intellectual property rights. Generic drug firms have filed
Abbreviated New Drug Applications seeking to market generic forms of most of the
Company's key pharmaceutical products, prior to expiration of the applicable
patents covering those products. In the event the Company is not successful in
defending a lawsuit resulting from an Abbreviated New Drug Application filing,
the generic firms will then introduce generic versions of the product at issue,
resulting in very substantial market share and revenue losses. For further
information see the discussion on "Litigation Against Filers of Abbreviated New
Drug Applications" in Note 18.
Common Stock Market Prices
The Company's common stock is listed on the New York Stock Exchange under the
symbol JNJ. The composite market price ranges for Johnson & Johnson common stock
during 2003 and 2002 were:
2003 2002
---------------------- ----------------------
High Low High Low
--------- --------- --------- ---------
First quarter $ 58.68 49.10 65.89 54.70
Second quarter 59.08 50.75 65.29 52.00
Third quarter 54.24 49.00 56.50 41.02
Fourth quarter 52.89 48.05 61.30 53.00
Year-end close $50.62 53.11
Cautionary Factors That May Affect Future Results
This Annual Report 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 approval, 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 that 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. The Company assumes no obligation to update any
forward-looking statements as a result of new information or future events or
developments.
Risks and uncertainties include general industry conditions and competition;
economic conditions, such as interest rate and currency exchange rate
fluctuations; technological advances, new products and patents attained by
competitors; challenges inherent in new product development, including obtaining
regulatory approvals; challenges to patents; U.S. and foreign health care
reforms and governmental laws and regulations; trends toward health care cost
containment; increased scrutiny of the health care industry by government
agencies; product efficacy or safety concerns resulting in product recalls or
regulatory action.
The Company's report on Form 10-K for the year ended December 28, 2003 contains,
as an Exhibit, a discussion of additional factors that could cause actual
results to differ from expectations. The Company notes these factors as
permitted by the Private Securities Litigation Reform Act of 1995.
37
Consolidated Balance Sheets
Johnson & Johnson Subsidiaries
At December 28, 2003 and December 29, 2002
(Dollars in Millions Except Share and Per Share Data) (Note 1)
2003 2002
--------- ----------
Assets
Current assets
Cash and cash
Equivalents
(Notes 1, 14 and 15) $ 5,377 2,894
Marketable securities
(Notes 1, 14 and 15) 4,146 4,581
Accounts receivable trade,
less allowances for
doubtful accounts $192
(2002, $191) 6,574 5,399
Inventories (Notes 1 and 2) 3,588 3,303
Deferred taxes on income
(Note 8) 1,526 1,419
Prepaid expenses and other
receivables 1,784 1,670
Total current assets 22,995 19,266
Marketable securities,
non-current (Notes 1, 14 and 15) 84 121
Property, plant and equipment,
net (Notes 1 and 3) 9,846 8,710
Intangible assets, net
(Notes 1 and 7) 11,539 9,246
Deferred taxes on income
(Note 8) 692 236
Other assets (Note 5) 3,107 2,977
Total assets $ 48,263 40,556
Liabilities and Shareholders' Equity
Current liabilities
Loans and notes payable
(Note 6) $ 1,139 2,117
Accounts payable 4,966 3,621
Accrued liabilities 2,639 2,059
Accrued rebates, returns
and promotions 2,308 1,761
Accrued salaries, wages
and commissions 1,452 1,181
Accrued taxes on income 944 710
Total current liabilities 13,448 11,449
Long-term debt (Note 6) 2,955 2,022
Deferred tax liability (Note 8) 780 643
Employee related obligations
(Notes 5 and 13) 2,262 1,967
Other liabilities 1,949 1,778
Shareholders' equity
Preferred stock - without par value
(authorized and unissued
2,000,000 shares) - -
Common stock - par value
$1.00 per share (Note 20)
(authorized 4,320,000,000 shares;
issued 3,119,842,000 shares) 3,120 3,120
Note receivable from employee
stock ownership plan (Note 16) (18) (25)
Accumulated other comprehensive
income (Note 12) (590) (842)
Retained earnings 30,503 26,571
33,015 28,824
Less: common stock held in
treasury, at cost (Note 20)
(151,869,000 and 151,547,000) 6,146 6,127
Total shareholders' equity 26,869 22,697
Total liabilities and
Shareholders' equity $ 48,263 40,556
See Notes to Consolidated Financial Statements
38
Consolidated Statements of Earnings
Johnson & Johnson and Subsidiaries
(Dollars in Millions Except Per Share Figures) (Note 1)
2003 2002 2001
--------- --------- ---------
Sales to customers $ 41,862 36,298 32,317
Cost of products sold 12,176 10,447 9,581
Gross profit 29,686 25,851 22,736
Selling, marketing and
administrative expenses 14,131 12,216 11,260
Research expense 4,684 3,957 3,591
Purchased in-process
research and development
(Note 17) 918 189 105
Interest income (177) (256) (456)
Interest expense, net
of portion capitalized
(Note 3) 207 160 153
Other (income) expense,
net (385) 294 185
19,378 16,560 14,838
Earnings before provision
for taxes on income 10,308 9,291 7,898
Provision for taxes on income
(Note 8) 3,111 2,694 2,230
Net earnings $ 7,197 6,597 5,668
Basic net earnings per share
(Notes 1 and 19) $ 2.42 2.20 1.87
Diluted net earnings per share
(Notes 1 and 19) $ 2.40 2.16 1.84
See Notes to Consolidated Financial Statements
39
Consolidated Statements of Equity
Johnson & Johnson and Subsidiaries
(Dollars in Millions) (Note 1)
Note Rec.
From Employee
Compre- Stock Owner-
hensive Retained ship Plan
Total Income Earnings (ESOP)
----------- ----------- ----------- -------------
Bal, Dec 31, 2000 $ 20,395 18,113 (35)
Net earnings 5,668 5,668 5,668
Cash dividends paid (2,047) (2,047)
Employee stock
compensation and
stock option plans 842 (602)
Conver. of subordinated
debentures 815 632
Repurchase of common
stock (2,742)
Business combinations 1,366 1,302
Other comprehensive income,
net of tax:
Curncy translation adj (175) (175)
Unrealized gains on
securities 8 8
Gains on derivatives
& hedges 98 98
Reclassification adj (14)
Total comprehensive income 5,585
Note receivable from ESOP 5 5
Bal, Dec 30, 2001 $ 24,233 23,066 (30)
Net earnings 6,597 6,597 6,597
Cash dividends paid (2,381) (2,381)
Employee stock
compensation and
stock option plans 806 (489)
Conver. of subordinated
debentures 131 (222)
Repurchase of common
stock (6,382)
Other comprehensive income,
net of tax:
Curncy translation adj (10) (10)
Unrealized losses on
securities (86) (86)
Pension liability adj (18) (18)
Losses on derivatives
& hedges (198) (198)
Reclassification adj (26)
Total comprehensive income 6,259
Note receivable from ESOP 5 5
Bal, Dec 29, 2002 $ 22,697 26,571 (25)
Net earnings 7,197 7,197 7,197
Cash dividends paid (2,746) (2,746)
Employee stock
compensation and
stock option plans 534 (626)
Conver. of subordinated
debentures 2 (2)
Repurchase of common
stock (1,183)
Business combinations 109 109
Other comprehensive income,
net of tax:
Curncy translation adj 334 334
Unrealized gains on
securities 29 29
Pension liab adj (31) (31)
Losses on derivatives
& hedges (80) (80)
Reclassification adj (2)
Total comprehensive income 7,447
Note receivable from ESOP 7 7
Bal, Dec 28, 2003 $ 26,869 30,503 (18)
40
See Notes to Consolidated Financial Statements
Accumul
Other Common
Compre- Stock Treasury
hensive Issued Stock
Income Amount Amount
----------- ----------- ------------
Bal, Dec 31, 2000 (461) 3,120 (342)
Net earnings
Cash dividends paid
Employee stock compensation and
stock option plans 1,444
Conversion of subordinated debentures 183
Repurchase of common stock (2,742)
Business combinations 64
Other comprehensive income,
net of tax:
Currency translation adj (175)
Unrealized gains on securities 8
Gains on derivatives & hedges 98
Reclassification adj
Total comprehensive income
Note receivable from ESOP
Bal, Dec 30, 2001 $ (530) 3,120 (1,393)
Net earnings
Cash dividends paid
Employee stock compensation and
stock option plans 1,295
Conversion of subordinated debentures 353
Repurchase of common stock (6,382)
Other comprehensive income, net of tax:
Currency translation adj (10)
Unrealized losses on securities (86)
Pension liability adj (18)
Losses on derivatives & hedges (198)
Reclassification adj
Total comprehensive income
Note receivable from ESOP
Bal, Dec 29, 2002 (842) 3,120 (6,127)
Net earnings
Cash dividends paid
Employee stock compensation and
stock option plans 1,160
Conversion of subordinated debentures 4
Repurchase of common stock (1,183)
Business combinations
Other comprehensive income,
net of tax:
Currency translation adj 334
Unrealized gains on securities 29
Pension liability adj (31)
Losses on derivatives & hedges (80)
Reclassification adj
Total comprehensive income
Note receivable from ESOP
Bal, Dec 28, 2003 $ (590) 3,120 (6,146)
See Notes to Consolidated Financial Statements
40
Consolidated Statements of Cash Flows
Johnson & Johnson and Subsidiaries
(Dollars in Millions) (Note 1)
2003 2002 2001
--------- --------- ---------
Cash flows from operating activities
Net earnings $ 7,197 6,597 5,668
Adjustments to reconcile net
earnings to cash flows:
Depreciation and amortization
of property and intangibles 1,869 1,662 1,605
Purchased in-process research
and development 918 189 105
Deferred tax provision (720) (74) (106)
Accounts receivable reserves 6 (6) 99
Changes in assets and liabilities,
net of effects from acquisition of
businesses:
Increase in accounts receivable (691) (510) (258)
Decrease (increase) in inventories 39 (109) (167)
Increase in accounts payable and
accrued liabilities 2,192 1,420 1,401
Increase in other current
and non-current assets (746) (1,429) (270)
Increase in other current and
non-current liabilities 531 436 787
Net cash flows from operating activities 10,595 8,176 8,864
Cash flows from investing activities
Additions to property, plant
and equipment (2,262) (2,099) (1,731)
Proceeds from the disposal of assets 335 156 163
Acquisition of businesses,
net of cash acquired (Note 17) (2,812) (478) (225)
Purchases of investments (7,590) (6,923) (8,188)
Sales of investments 8,062 7,353 5,967
Other (259) (206) (79)
Net cash used by investing activities (4,526) (2,197) (4,093)
Cash flows from financing activities
Dividends to shareholders (2,746) (2,381) (2,047)
Repurchase of common stock (1,183) (6,538) (2,570)
Proceeds from short -term debt 3,062 2,359 338
Retirement of short -term debt (4,134) (560) (1,109)
Proceeds from long -term debt 1,023 22 14
Retirement of long -term debt (196) (245) (391)
Proceeds from the exercise of stock options 311 390 514
Net cash used by financing activities (3,863) (6,953) (5,251)
Effect of exchange rate changes
on cash and cash equivalents 277 110 (40)
Increase/(decrease) in cash and
cash equivalents 2,483 (864) (520)
Cash and cash equivalents,
beginning of year (Note 1) 2,894 3,758 4,278
Cash and cash equivalents,
end of year (Note 1) $ 5,377 2,894 3,758
Supplemental cash flow data
Cash paid during the year for:
Interest $ 206 141 185
Income taxes 3,146 2,006 2,090
Supplemental schedule of noncash investing
and financing activities
Treasury stock issued for employee
compensation and stock option plans,
net of cash proceeds $ 905 946 971
Conversion of debt 2 131 815
Acquisition of businesses
Fair value of assets acquired $ 3,135 550 1,925
Fair value of liabilities assumed (323) (72) (434)
2,812 478 1,491
Treasury stock issued at fair value - - (1,266)
Net cash paid for acquisitions $ 2,812 478 225
See Notes to Consolidated Financial Statements
41
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Principles
Principles of Consolidation
The financial statements include the accounts of Johnson & Johnson and
subsidiaries. Intercompany accounts and transactions are eliminated.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 143, Accounting for Asset Retirement
Obligations. The Company adopted this standard in 2003 and it did not have a
material impact on the Company's results of operations, cash flows or financial
position.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which is effective for exit or disposal activities
that are initiated after December 31, 2002. The Company's adoption of SFAS No.
146 did not have a material effect on the Company's results of operations, cash
flows or financial position.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of FASB Statement No. 5, Accounting for
Contingencies, relating to the guarantor's accounting for and disclosure of the
issuance of certain types of guarantees. The disclosure requirements of FIN 45
are effective for financial statements of interim or annual periods that end
after December 15, 2002. The provisions for initial recognition and measurement
are effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of the guarantor's year-end. FIN 45
requires that upon issuance of a guarantee, the entity must recognize a
liability for the fair value of the obligation it assumes under that guarantee.
The Company's adoption of FIN 45 did not have a material effect on the Company's
results of operations, cash flows or financial position.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities - an interpretation of ARB No. 51, and in December 2003, issued a
revised FIN 46(R), Consolidation of Variable Interest Entities - an
interpretation of ARB No. 51, both of which address consolidation of variable
interest entities. FIN 46 expanded the criteria for consideration in determining
whether a variable interest entity should be consolidated by a business entity,
and requires existing unconsolidated variable interest entities (which include,
but are not limited to, Special Purpose Entities, or SPEs) to be consolidated by
their primary beneficiaries if the entities do not effectively disperse risks
among parties involved. This interpretation was immediately applicable to
variable interest entities created after January 31, 2003. The adoption of this
portion of FIN 46 has not had a material effect on the Company's results of
operation, cash flows or financial position. FIN 46 is applicable in 2004 to
variable interest entities in which an enterprise holds a variable interest that
were acquired before February 1, 2003. The Company has various investments and
arrangements, which may or may not be considered variable interests, and the
adoption of FIN 46 is not anticipated to have a material effect on the results
of operations, cash flows and financial position of the Company.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which is effective for contracts
entered into or modified after June 30, 2003. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The Company's adoption of SFAS No. 149 in 2003 did not have
a material effect on the Company's results of operations, cash flows or
financial position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which is
effective for financial instruments entered into or modified after May 31, 2003.
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. The Company's adoption of SFAS No. 150 in 2003 did not have a material
effect on the Company's results of operations, cash flows or financial position.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment of
FASB Statement No. 87, 88 and 106, which was effective for the fourth quarter of
2003. This Statement revises employers' disclosures about pension plans and
other postretirement benefit plans and these disclosures are included in Note
13.
In December 2003, the FASB issued FASB Staff Position (FSP) FAS No. 106-1,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003, which is effective for interim
or annual financial statements of fiscal years ending after December 7, 2003.
The Company has elected to defer adoption of FSP FAS No. 106-1 until 2004, as
allowed by the Standard. The Company's adoption of FSP FAS No. 106-1 is not
expected to have a material effect on the Company's results of operations, cash
flows or financial position.
Cash Equivalents
The Company considers securities with maturities of three months or less, when
purchased, to be cash equivalents.
Investments
Short-term marketable securities are carried at cost, which approximates fair
value. Long-term debt securities that the Company has the ability and intent to
hold until maturity are carried at amortized cost, which also approximates fair
value. Investments classified as available-for-sale are carried at estimated
fair value with unrealized gains and losses recorded as a component of
accumulated other comprehensive income. Management determines the appropriate
classification of its investment in debt and equity securities at the time of
purchase and re-evaluates such determination at each balance sheet date. The
Company periodically reviews its investments in non-marketable equity securities
for impairment and adjusts
42
these investments to their fair value when a decline in market value is deemed
to be other than temporary.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at cost. The Company utilizes the
straight-line method of depreciation over the estimated useful lives of the
assets:
Building and building equipment 20-40 years
Land and leasehold improvements 10-20 years
Machinery and equipment 2-13 years
The Company capitalizes certain computer software and development costs,
included in machinery and equipment, incurred in connection with developing or
obtaining computer software for internal use. Capitalized software costs are
amortized over the estimated useful lives of the software, which generally range
from 3 to 5 years.
The Company reviews long-lived assets to assess recoverability using
undiscounted cash flows. When necessary, charges for impairments of long-lived
assets are recorded for the amount by which the present value of future cash
flows is less than the carrying value of these assets.
Revenue Recognition
The Company recognizes revenue from product sales when the goods are shipped or
delivered depending on when title and risk passes to the customer. Provisions
for certain rebates, sales incentives, trade promotions, product returns and
discounts to customers are provided for as reductions in determining sales in
the same period the related sales are recorded. The Company also recognizes
service revenue that is received for co-promotion of certain products.
Sales Incentives and Trade Promotional Allowances
The Company has adopted Emerging Issues Task Force (EITF) Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer or Reseller of
Vendor's Products, effective December 31, 2001. As such, sales were reduced by
$687 million for 2001, and cost of products sold increased by $45 million for
2001.
Shipping and Handling
Shipping and handling costs incurred were $604 million, $518 million and $473
million in 2003, 2002 and 2001, respectively, and are included in selling,
marketing and administrative expense. The amount of revenue received for
shipping and handling is less than 0.5% of sales to customers for all periods
presented.
Inventories
Inventories are stated at the lower of cost or market determined by the
first-in, first-out method.
Intangible Assets
In accordance with SFAS No. 142, no amortization was recorded for goodwill
and/or intangible assets deemed to have indefinite lives for acquisitions
completed after June 30, 2001. Further, effective at 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. If SFAS No. 142 were effective for 2001, the effect would have been to
reduce amortization expense by $141 million before tax. Intangible assets that
have finite useful lives continue to be amortized over their useful lives. SFAS
No. 142 requires that goodwill and non-amortizable intangible assets be assessed
annually for impairment. The Company completed the annual impairment test for
2003 in the fiscal fourth quarter and no impairment was determined. Future
impairment tests will be performed in the fiscal fourth quarter, annually.
Financial Instruments
The Company follows the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB Statement No. 133, collectively referred to as SFAS No. 133. SFAS No. 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, depending on whether the
derivative is designated as part of a hedge transaction, and if it is, depending
on the type of hedge transaction.
The Company uses forward exchange contracts to manage its exposure to the
variability of cash flows, primarily related to the foreign exchange rate
changes of future intercompany product and third party purchases of raw
materials denominated in foreign currency. The Company also uses currency swaps
to manage currency risk primarily related to borrowings. Both of these types of
derivatives are designated as cash flow hedges. Additionally, the Company uses
forward exchange contracts to offset its exposure to certain foreign currency
assets and liabilities. These forward exchange contracts are not designated as
hedges and, therefore, changes in the fair values of these derivatives are
recognized in earnings, thereby offsetting the current earnings effect of the
related foreign currency assets and liabilities.
The designation as a cash flow hedge is made at the date of entering into the
derivative contract. At inception, all derivatives are expected to be highly
effective. Changes in the fair value of a derivative that is designated as a
cash flow hedge and is highly effective are recorded in accumulated other
comprehensive income until the underlying transaction affects earnings, and are
then reclassified to earnings in the same account as the hedged transaction.
Fair value of a forward exchange contract represents the present value of the
change in forward exchange rates times the notional amount of the derivative.
The fair value of a currency swap contract is determined by discounting to the
present all future cash flows of the currencies to be exchanged at interest
rates prevailing in the market for the periods the currency exchanges are due
and expressing the result in U.S. dollars at the current spot foreign currency
exchange rate.
On an ongoing basis, the Company assesses whether each derivative continues to
be highly effective in offsetting changes in the cash flows of hedged items. If
and when a derivative is no longer expected to be highly effective, hedge
accounting is discontinued. Hedge ineffectiveness, if any, is included in
current period earnings.
43
The Company documents all relationships between hedged items and derivatives.
The overall risk management strategy includes reasons for undertaking hedge
transactions and entering into derivatives. The objectives of this strategy are:
(1) minimize foreign currency exposure's impact on the Company's financial
performance; (2) protect the Company's cash flow from adverse movements in
foreign exchange rates; (3) ensure the appropriateness of financial instruments;
and (4) manage the enterprise risk associated with financial institutions.
Product Liability
Accruals for product liability claims are recorded, on an undiscounted basis,
when it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated based on existing information. The
accruals are adjusted periodically as additional information becomes available.
Receivables for insurance recoveries related to product liability related claims
are recorded, on an undiscounted basis, when it is probable that a recovery will
be realized.
Research and Development
Research and development expenses are expensed as incurred. Upfront and
milestone payments made to third parties in connection with research and
development collaborations are expensed as incurred up to the point of
regulatory approval. Payments made to third parties subsequent to regulatory
approval are capitalized and amortized over the remaining useful life of the
related product. Amounts capitalized for such payments are included in other
intangibles, net of accumulated amortization.
Advertising
Costs associated with advertising are expensed in the year incurred and are
included in the selling, marketing and administrative expenses. Advertising
expenses worldwide, which are comprised of television, radio, print media and
Internet advertising, were $1.7 billion in 2003, $1.5 billion in 2002 and $1.4
billion in 2001.
Income Taxes
The Company intends to continue to reinvest its undistributed international
earnings to expand its international operations; therefore, no U.S. tax expense
has been recorded to cover the repatriation of such undistributed earnings. At
December 28, 2003, and December 29, 2002, the cumulative amount of undistributed
international earnings was approximately $14.8 billion and $12.3 billion,
respectively.
Deferred income taxes are recognized for tax consequences of temporary
differences by applying enacted statutory tax rates, applicable to future years,
to differences between the financial reporting and the tax basis of existing
assets and liabilities.
Net Earnings Per Share
Basic earnings per share is computed by dividing net income available to common
shareholders 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.
Stock Options
At December 28, 2003, the Company had 21 stock-based employee compensation plans
that are described in Note 10. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principle Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25), and its related
Interpretations. Compensation costs are not recorded in net income for stock
options as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant.
As required by SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123, the
following table shows the estimated effect on net income and earnings per share
if the Company had applied the fair value recognition provision of SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
(Dollars in Millions
Except Per Share Data) 2003 2002 2001
- ------------------------ --------- --------- ---------
Net income, as reported $ 7,197 6,597 5,668
Less:
Compensation expense(1) 349 320 263
Pro forma $ 6,848 6,277 5,405
Earnings per share:
Basic - as reported $ 2.42 2.20 1.87
- pro forma 2.31 2.09 1.78
Diluted - as reported 2.40 2.16 1.84
- pro forma 2.29 2.06 1.75
(1) Determined under fair value based method for all awards, net of tax.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to make
estimates and assumptions that affect the amounts reported. Actual results may
or may not differ from those estimates.
Annual Closing Date
The Company follows the concept of a fiscal year which ends on the Sunday
nearest to the end of the month of December. Normally each fiscal year consists
of 52 weeks, but every five or six years, as will be the case in 2004, the
fiscal year consists of 53 weeks.
44
Reclassification
Certain prior year amounts have been reclassified to conform with current year
presentation.
Stock Split
On April 26, 2001, the Board of Directors declared a 2-for-1 stock split.
Shareholders of record at the close of business on May 22, 2001, were issued one
additional share of Johnson & Johnson common stock on June 12, 2001, for each
share held as of the record date. All shares and per share data for all periods
presented in these financial statements have been adjusted to reflect the stock
split.
2 Inventories
At the end of 2003 and 2002, inventories were comprised of:
(Dollars in Millions) 2003 2002
- -------------------------- ---------- ---------
Raw materials and supplies $ 966 835
Goods in process 981 803
Finished goods 1,641 1,665
$ 3,588 3,303
3 Property, Plant and Equipment
At the end of 2003 and 2002, property, plant and equipment at cost and
accumulated depreciation were:
(Dollars in Millions) 2003 2002
- -------------------------------- ----------- -----------
Land and land improvements $ 594 472
Buildings and building equipment 5,219 4,364
Machinery and equipment 9,558 7,869
Construction in progress 1,681 1,609
17,052 14,314
Less accumulated depreciation 7,206 5,604
$ 9,846 8,710
The Company capitalizes interest expense as part of the cost of construction of
facilities and equipment. Interest expense capitalized in 2003, 2002 and 2001
was $108 million, $98 million and $95 million, respectively.
Depreciation expense, including the amortization of capitalized interest in
2003, 2002 and 2001 was $1.4 billion, $1.3 billion and $1.1 billion,
respectively.
Upon retirement or other disposal of fixed assets, the cost and related amount
of accumulated depreciation or amortization are eliminated from the asset and
accumulated depreciation accounts, respectively. The difference, if any, between
the net asset value and the proceeds is adjusted to earnings.
4 Rental Expense and Lease Commitments
Rentals of space, vehicles, manufacturing equipment and office and data
processing equipment under operating leases were approximately $279 million in
2003, $298 million in 2002 and $275 million in 2001.
The approximate minimum rental payments required under operating leases that
have initial or remaining non-cancelable lease terms in excess of one year at
December 28, 2003 are:
(Dollars After
in Millions) 2004 2005 2006 2007 2008 2008 Total
- ------------ ------ ------ ------ ------ ------ ------ -------
$ 143 127 115 97 80 193 755
Commitments under capital leases are not significant.
5 Employee Related Obligations
At the end of 2003 and 2002, employee related obligations were:
(Dollars in Millions) 2003 2002
- ------------------------ --------- --------
Pension benefits $ 862 643
Postretirement benefits 966 907
Postemployment benefits 213 193
Deferred compensation 362 335
2,403 2,078
Current benefits payable 141 111
Employee related
obligations $ 2,262 1,967
Prepaid employee related obligations of $1,021 million and $959 million for 2003
and 2002, respectively, are included in other assets on the consolidated balance
sheet.
45
6 Borrowings
The components of long-term debt are as follows:
Eff. Eff.
(Dollars in Millions) 2003 Rate% 2002 Rate%
- ------------------------- --------- ------------ --------- ------------
3% Zero Coupon
Convertible
Subordinated Debentures
due 2020 $ 639 3.00 621 3.00
4.95% Debentures
due 2033 500 4.95 - -
3.80% Debentures
due 2013 500 3.82 - -
8.72% Debentures
due 2024 300 8.72 300 8.72
6.95% Notes due 2029 293 7.14 293 7.14
6.73% Debentures
due 2023 250 6.73 250 6.73
8.25% Eurodollar Notes
due 2004 200 8.37 200 8.37
6.625% Notes due 2009 198 6.80 198 6.80
5.50% Convertible
Subordinated Notes
due 2009 182 2.00 - -
5.12% Notes due 2003(2) - - 60 0.82
5.25% Zero Coupon
Convertible Subordinated
Debentures due 2014 10 5.25 11 5.25
Industrial Revenue Bonds 36 3.54 39 3.85
Other 71 - 127 -
3,179 5.23(1) 2,099 5.85(1)
Less current portion 224 77
$ 2,955 2,022
(1) Weighted average effective rate.
(2) Represents 5.12% U.S. Dollar notes due 2003 issued by a Japanese subsidiary
and converted to a 0.82% fixed rate yen note via a currency swap.
45
The Company has access to substantial sources of funds at numerous banks
worldwide. Total unused credit available to the Company approximates $3.2
billion, including $1.5 billion of credit commitments and $0.8 billion of
uncommitted lines with various banks worldwide that expire during 2004. Interest
charged on borrowings under the credit line agreements is based on either bids
provided by the banks, the prime rate or London Interbank Offered Rates (LIBOR)
plus applicable margins. Commitment fees under the agreements are not material.
At year-end 2002, the Company had $1.8 billion remaining on its shelf
registration. In May 2003, the Company issued a total of $1.0 billion in bonds
from this shelf: $500 million of 3.8% Debentures due May 15, 2013, and $500
million of 4.95% Debentures due May 15, 2033. In December 2003, the Company
filed a new shelf registration with the Securities and Exchange Commission, and,
in combination with the $785 million remaining from the prior shelf
registration, may issue up to $2.0 billion in debt securities and warrants to
purchase debt securities. The new shelf registration became effective on January
21, 2004.
Long term debt includes three convertible subordinated debentures, two issued by
ALZA Corporation and one by Scios Inc., prior to the companies becoming wholly
owned subsidiaries of Johnson & Johnson.
In August 2002, Scios Inc. issued in a private offering $150 million of 5.5%
Convertible Subordinated Notes due 2009; interest payable semi-annually on
February 15 and August 15. The Notes were convertible at the option of the
holder at any time prior to redemption, repurchase or maturity at a conversion
price of $39.30. Following the acquisition by Johnson & Johnson in April 2003,
each $1,000 in principal amount of the Notes became convertible into the right
to receive $1,145.04 in cash without interest. Semi-annual interest remains
payable until conversion, repurchase or maturity. At December 28, 2003, the book
value of these Notes approximates fair value.
On July 28, 2000, ALZA completed a private offering of the 3% Zero Coupon
Convertible Subordinated Debentures, which were issued at a price of $551.26 per
$1,000 principal amount at maturity. At December 28, 2003, the outstanding 3%
Debentures had a total principal amount at maturity of $1.0 billion with a yield
to maturity of 3% per annum, computed on a semiannual bond equivalent basis.
There are no periodic interest payments. Under the terms of the 3% Debentures,
holders are entitled to convert their Debentures into approximately 15.0 million
shares of Johnson & Johnson stock at a price of $40.102 per share. Approximately
581,000 shares have been issued as of December 28, 2003, due to voluntary
conversions by note holders. At the option of the holder, the 3% Debentures may
be repurchased by the Company on July 28, 2008 or 2013 at a purchase price equal
to the issue price plus accreted original issue discount to such purchase date.
The Company, at its option, may elect to deliver either Johnson & Johnson common
stock or cash, or a combination of stock and cash, in the event of repurchase of
the 3% Debentures. The Company, at its option, may also redeem any or all of the
3% Debentures after July 28, 2003, at the issue price plus accreted original
issue discount. At December 28, 2003, and December 29, 2002, the fair value
based on quoted market value of the 3% Debentures was $712.3 million and $812.5
million, respectively.
In 1994, ALZA issued the 5.25% Zero Coupon Convertible Subordinated Debentures
at a price of $354.71 per $1,000 principal amount at maturity. At December 28,
2003, the outstanding 5.25% Debentures had a total principal amount at maturity
of $17 million with a yield to maturity of 5.25% per annum, computed on a
semiannual bond equivalent basis. There are no periodic interest payments. Under
the terms of the Debentures, note holders are entitled to convert their
Debentures into approximately 24.0 million shares of Johnson & Johnson stock at
a price of $13.939 per share. Approximately 23.6 million shares of Johnson &
Johnson stock have been issued as of December 28, 2003, due to voluntary
conversions by Debenture holders. At the option of the holder, the 5.25%
Debentures can be purchased by the Company on July 14, 2004, or July 14, 2009,
at a purchase price equal to the issue price plus accreted original issue
discount to such purchase date. The Company, at its option, may elect to deliver
either common stock or cash in the event of conversion or purchase of the 5.25%
Debentures. The Company, at its option, may also redeem any or all of the 5.25%
Debentures for cash after July 14, 1999, at a redemption price equal to the
issue price plus accreted original issue discount. At December 28, 2003, and
December 29, 2002, the fair value based on quoted market value of the 5.25%
Debentures was $22 million and $27 million, respectively.
Short-term borrowings and current portion of long-term debt amounted to $1.1
billion at the end of 2003. These borrowings are comprised of $599 million of
Commercial Paper, $200 million of 8.25% Eurodollar Notes that are maturing in
2004 and $340 million of local borrowings, principally by international
subsidiaries.
Aggregate maturities of long-term obligations commencing in 2004 are:
After
(Dollars in Millions) 2004 2005 2006 2007 2008 2008
- --------------------- ------ ------ ------ ------ ------ -------
$ 224 18 18 11 8 2,900
46
7 Intangible Assets
At the end of 2003 and 2002, the gross and net amounts of intangible assets
were:
(Dollars in Millions) 2003 2002
- ------------------------------------ --------- ---------
Goodwill - gross $ 6,085 5,320
Less accumulated amortization 695 667
Goodwill - net $ 5,390 4,653
Trademarks (non-amortizable) - gross $ 1,098 1,021
Less accumulated amortization 136 138
Trademarks (non-amortizable) - net $ 962 883
Patents and trademarks - gross $ 3,798 2,016
Less accumulated amortization 818 534
Patents and trademarks - net $ 2,980 1,482
Other intangibles - gross $ 3,187 2,998
Less accumulated amortization 980 770
Other intangibles - net $ 2,207 2,228
Total intangible assets - gross $ 14,168 11,355
Less accumulated amortization 2,629 2,109
Total intangible assets - net $ 11,539 9,246
Goodwill as of December 28, 2003, as allocated by segments of business is as
follows:
Med Dev
(Dollars in Millions) Consumer Pharm and Diag Total
- ---------------------------- --------- --------- --------- ---------
Goodwill, net of
accumulated amortization at
December 29, 2002 $ 821 244 3,588 4,653
Acquisitions - 502 113 615
Translation & other 61 35 26 122
Goodwill at
December 28, 2003 $ 882 781 3,727 5,390
The weighted average amortization periods for patents and trademarks and other
intangible assets are 16 years and 18 years, respectively. The amortization
expense of amortizable intangible assets for the fiscal year ended December 28,
2003, was $454 million before tax and the estimated amortization expense for the
five succeeding years approximates $485 million before tax, per year.
8 Income Taxes
The provision for taxes on income consists of:
(Dollars in Millions) 2003 2002 2001
- --------------------- --------- --------- ---------
Currently payable:
U.S. taxes $ 2,934 2,042 1,726
International taxes 897 726 610
3,831 2,768 2,336
Deferred:
U.S. taxes (409) 20 (22)
International taxes (311) (94) (84)
(720) (74) (106)
$ 3,111 2,694 2,230
A comparison of income tax expense at the federal statutory rate of 35% in 2003,
2002 and 2001, to the Company's effective tax rate is as follows:
(Dollars in Millions) 2003 2002 2001
- -------------------------- --------- ---------- ----------
U.S. $ 6,333 6,189 4,744
International 3,975 3,102 3,154
Earnings before taxes
on income: $ 10,308 9,291 7,898
Statutory taxes 3,608 3,252 2,764
Tax rates:
Statutory 35.0% 35.0% 35.0%
Puerto Rico and
Ireland operations (6.1) (4.5) (5.4)
Research tax credits (1.0) (0.7) (0.4)
U.S. state and local 2.0 1.2 0.9
International subsidiaries
excluding Ireland (2.0) (2.2) (2.6)
IPR&D 3.1 0.7 0.5
All other (0.8) (0.5) 0.2
Effective tax rate 30.2% 29.0% 28.2%
During 2003, the Company had subsidiaries operating in Puerto Rico under various
tax incentive grants. In addition, the Company has subsidiaries manufacturing in
Ireland under an incentive tax rate.
47
Temporary differences and carry forwards for 2003 and 2002 are as follows:
2003 2002
Deferred Tax Deferred Tax
----------------------- -----------------------
(Dollars in Millions) Asset Liability Asset Liability
- ---------------------- --------- --------- --------- ---------
Employee related
obligations $ 356 443
Depreciation (248) (318)
Non-deductible
intangibles (1,455) (931)
International R&D
capitalized for tax 574 340
Reserves & liabilities 556 479
Income reported
for tax purposes 416 343
Miscellaneous
international 502 (258) 359 (278)
Capitalized intangible 131 139
Miscellaneous U.S. 760 354
Total deferred
income taxes $ 3,295 (1,961) 2,457 (1,527)
The difference between the net deferred tax on income per the balance sheet and
the net deferred tax above is included in Taxes on Income on the balance sheet.
9 International Currency Translation
For translation of its subsidiaries operating in non-U.S. dollar currencies, the
Company has determined that the local currencies of its international
subsidiaries are the functional currencies except those in highly inflationary
economies, which are defined as those which have had compound cumulative rates
of inflation of 100% or more during the past three years.
In consolidating international subsidiaries, balance sheet currency effects are
recorded as a component of accumulated other comprehensive income. This equity
account includes the results of translating all balance sheet assets and
liabilities at current exchange rates, except for those located in highly
inflationary economies that are reflected in operating results.
An analysis of the changes during 2003 and 2002 for foreign currency translation
adjustments is included in Note 12.
Net currency transaction and translation gains and losses included in other
expense were before tax losses of $22 million, $29 million and $4 million in
2003, 2002 and 2001, respectively.
10 Common Stock, Stock Option Plans and Stock
Compensation Agreements
At December 28, 2003, the Company had 21 stock-based compensation plans. Under
the 2000 Stock Option Plan, the Company may grant options to its employees for
up to 1.6% of the issued shares of the Company's Common Stock plus the number of
shares available from the previous year that were not issued as well as shares
issued under the Plan that expired or terminated without being exercised. The
shares outstanding are for contracts under the Company's 1991, 1995 and 2000
Stock Option Plans, the 1997 Non-Employee Director's Plan and the Mitek, Cordis,
Biosense, Gynecare, Centocor, Innovasive Devices, ALZA, Inverness and Scios
Stock Option Plans. During 2003, no options were granted under any of these
plans except the 2000 Stock Option Plan and the Scios Stock Option Plan
(pre-acquisition).
Stock options expire 10 years from the date they are granted and vest over
service periods that range from one to five years. All options are granted at
current market price on the date of grant. Shares available under the 2000 Stock
Option Plan for future grants are based on 1.6% of the issued shares each year,
and 49.9 million shares could be granted each year during the years 2000 through
2005 in addition to any other available shares as described above. Shares
available for future grants under the 2000 plan were 73.1 million at the end of
2003.
A summary of the status of the Company's stock option plans as of December 28,
2003, December 29, 2002 and December 30, 2001, and changes during the years
ending on those dates are presented below:
Weighted
Options Average
(Shares in Thousands) Outstanding Exercise Price
- ---------------------------- ----------- --------------
Balance at December 31, 2000 193,988 $ 32.27
Options granted 8,975(1) 36.31
Options exercised (30,622) 19.00
Options canceled/forfeited (5,117) 49.38
Balance at December 30, 2001 167,224 34.37
Options granted 48,072 57.30
Options exercised (21,012) 19.64
Options canceled/forfeited (4,543) 50.86
Balance at December 29, 2002 189,741 41.42
Options granted 50,880(2) 49.15
Options exercised (21,242) 17.22
Options canceled/forfeited (5,430) 52.68
Balance at December 28, 2003 213,949 $ 45.37
(1) Includes 3,108 options issued to replace Inverness options outstanding at or
granted prior to the acquisition.
(2) Includes 7,002 options issued to replace Scios options outstanding at or
granted prior to the acquisition.
48
For the year ended December 30, 2001, there was a change in the timing of
granting stock compensation and options to employees from December 2001 to
February 2002. This change was enacted to have 2001 results finalized in order
to align compensation with performance. The same timing of grants will be
followed prospectively.
The average fair value of options granted was $13.58 in 2003, $15.49 in 2002 and
$13.72 in 2001. The fair value was estimated using the Black-Scholes option
pricing model based on the weighted average assumptions of:
2003 2002 2001
---------- ---------- ----------
Risk-free rate 3.09% 4.39% 4.87%
Volatility 28.0% 26.0% 27.0%
Expected life 5.0 yrs 5.0 yrs 5.0 yrs
Dividend yield 1.35% 1.33% 1.33%
The following table summarizes stock options outstanding and exercisable at
December 28, 2003:
(Shares in Thousands)
Outstanding Exercisable
------------------------------------- -----------------------
Average Average
Exercise Average Exercise Exercise
Price Range Options Life(a) Price Options Price
- ------------- --------- --------- --------- --------- ---------
$3.85-$21.57 22,736 2.0 $ 18.34 22,653 $ 18.35
$21.60-$39.86 28,579 4.2 30.11 26,778 30.13
$40.08-$50.08 39,209 5.7 45.96 36,608 45.86
$50.11-$52.11 34,880 6.8 50.70 33,282 50.69
$52.20-$54.69 43,114 9.1 52.29 220 54.31
$54.80-$65.10 45,431 8.1 57.34 122 58.56
213,949 6.5 $ 45.37 119,663 $ 38.51
(a) Average contractual life remaining in years.
Stock options exercisable at December 29, 2002, and December 30, 2001, were
100,702 options at an average price of $30.47 and 99,176 options at an average
exercise price of $24.34, respectively.
11 Segments of Business and Geographic Areas
12 Accumulated Other Comprehensive Income
Components of other comprehensive income/(loss) consist of the following:
(Dollars in Millions)
Total
Unrld Gains/ Accum
For. Gains/ Pens (Losses) Other
Cur. (Losses) Liab on Deriv Comp
Trans. On Sec Adj. & Hedg Inc/(Loss)
--------- ---------- ---------- ---------- ----------
Dec. 31, 2000 $ (522) 76 (15) - (461)
Net 2001 changes (175) 8 - 98 (69)
Dec. 30, 2001 (697) 84 (15) 98 (530)
2002 changes
Net change due
to hedging transactions - - - (394)
Net amount
reclassed to net earnings - - - 196
Net 2002
changes (10) (86) (18) (198) (312)
Dec. 29, 2002 $ (707) (2) (33) (100) (842)
2003 changes
Net change due
to hedging transactions - - - (567)
Net amount
reclassed to
net earnings - - - 487
Net 2003
changes 334 29 (31) (80) 252
Dec. 28, 2003 $ (373) 27 (64) (180) (590)
Total other comprehensive income for 2003 includes reclassification adjustment
losses of $3 million realized from the sale of equity securities and the
associated tax benefit of $1 million. Total other comprehensive income for 2002
includes reclassification adjustment gains of $45 million realized from the sale
of equity securities and the associated tax expense of $19 million. In 2001,
total other comprehensive income included reclassification adjustment gains of
$21 million realized from the sale of equity securities and the associated tax
expense of $7 million.
The tax effect on the unrealized gains/(losses) on equity securities is an
expense of $15 million in 2003, a benefit of $1 million in 2002 and an expense
of $64 million in 2001. The tax effect on the gains/(losses) on derivatives and
hedges are benefits of $99 million and $56 million in 2003 and 2002,
respectively, and an expense of $53 million in 2001. See Note 15 for additional
information relating to derivatives and hedging.
The currency translation adjustments are not currently adjusted for income taxes
as they relate to permanent investments in international subsidiaries.
49
13 Pensions and Other Benefit Plans
The Company sponsors various retirement and pension plans, including defined
benefit, defined contribution and termination indemnity plans, which cover most
employees worldwide. The Company also provides postretirement benefits,
primarily health care, to all U.S. retired employees and their dependents.
Many international employees are covered by government-sponsored programs and
the cost to the company is not significant.
Retirement plan benefits are primarily based on the employee's compensation
during the last three to five years before retirement and the number of years of
service. International subsidiaries have plans under which funds are deposited
with trustees, annuities are purchased under group contracts or reserves are
provided.
The Company does not fund retiree health care benefits in advance and has the
right to modify these plans in the future.
In December 2003, SFAS No. 132 (revised 2003), Employers' Disclosures about
Pensions and Other Postretirement Benefits, was issued and amends further the
disclosure requirements for pensions and other postretirement benefits. The
revised Statement addresses disclosures only. It does not address liability
measurement or expense recognition.
The Company uses the date of its consolidated financial statements (December 28,
2003, and December 29, 2002, respectively) as the measurement date for all U.S.
and international retirement and other benefit plans.
Net periodic benefit costs for the Company's defined benefit retirement plans
and other benefit plans for 2003, 2002 and 2001 include the following
components:
Retirement Plans Other Benefit Plans
--------------------------------------- ----------------------------------------
(Dollars in Millions) 2003 2002 2001 2003 2002 2001
- ------------------------------------ --------- ---------- ---------- ---------- ---------- ----------
Service cost $ 325 249 219 28 23 23
Interest cost 391 354 325 70 59 52
Expected return on plan assets (495) (447) (413) (3) (4) (5)
Amortization of prior service cost 18 15 18 (3) (3) (3)
Amortization of net transition asset (4) (7) (6) - - -
Recognized actuarial losses/(gains) 109 (41) (68) 3 - (7)
Curtailments and settlements 1 (1) (1) - - -
Special termination benefits 95 - - - - -
Net periodic benefit cost $ 440 122 74 95 75 60
The net periodic cost attributable to U.S. retirement plans was $309 million in
2003, $61 million in 2002 and $28 million in 2001.
During 2003, the Company offered a voluntary retirement program with enhanced
benefits called the Retirement Enhancement Program (REP) to eligible U.S.
regular, full-time employees who will have attained age 55 with at least 10
years of pension credited service by June 30, 2004. The program enhancements
include the elimination of the early retirement reduction for pension benefit
purposes (normally 4% per year prior to age 62) and a special termination
benefit (one week of pay per year of credited service). The program resulted in
an increase in U.S. pension expense of $95 million in 2003 to reflect the value
of the retirement enhancement.
The weighted-average assumptions in the following table represent the rates used
to develop the actuarial present value of projected benefit obligation for the
year listed and also the net periodic benefit cost for the following year.
Retirement Plans
-------------------------------------------------------
U.S. Benefit Plans 2003 2002 2001 2000
- --------------------------------------- ---------- ---------- ---------- ----------
Discount rate 6.00% 6.75% 7.50% 7.50%
Expected long-term rate of return
on plan assets 9.00 9.00 9.00 9.00
Rate of increase in compensation levels 4.50 4.50 4.50 5.00
International Benefit Plans
Discount rate 5.25% 5.75% 5.75% 6.00%
Expected long-term rate of return
on plan assets 7.50 7.50 7.50 7.50
Rate of increase in compensation levels 3.50 3.50 3.50 3.50
Other Benefit Plans
-------------------------------------------------------
U.S. Benefit Plans 2003 2002 2001 2000
- ------------------------------------------------ ---------- ---------- ---------- ----------
Discount rate 6.00% 6.75% 7.50% 7.50%
Expected long-term
rate of return on plan assets 9.00 9.00 9.00 9.00
Rate of increase in compensation levels 4.50 4.50 4.50 5.00
International Benefit Plans
Discount rate 6.00% 6.75% 6.75% 6.75%
Expected long-term rate of return on plan assets - - - -
Rate of increase in compensation levels 4.25 4.25 4.25 4.25
The expected long-term rate of return on plan assets assumptions are determined
using a building block approach, considering historical averages and real
returns of each asset class. In certain countries, where historical returns are
not meaningful, consideration is given to local market expectations of long-term
returns.
50
The following table displays the assumed health care trend rates, for all
individuals:
Worldwide Benefit Plans 2003 2002
- ------------------------------------------------ ---------- ----------
Health care trend rate assumed for next year 10.00% 7.75%
Rate to which the cost trend
rate is assumed to decline (ultimate trend) 4.50% 4.50%
Year the rate reaches the ultimate trend rate 2010 2009
A one-percentage-point change in assumed health care cost trend rates would have
the following effect:
One-Percentage- One-Percentage-
(Dollars in Millions) Point Increase Point Decrease
- --------------------------------- --------------- ---------------
Worldwide Benefit Plans
Total interest and service cost $ 15 $ (12)
Postretirement benefit obligation 159 (132)
The following table sets forth information related to the benefit obligation and
the fair value of plan assets at year-end 2003 and 2002 for the Company's
defined benefit retirement plans and other postretirement plans:
Retirement Plans Other Benefit Plans
(Dollars in Millions) ----------------------- -----------------------
Change in Benefit Obligation 2003 2002 2003 2002
- ------------------------------- --------- --------- --------- ---------
Projected benefit obligation
- beginning of year $ 6,051 5,026 1,015 782
Service cost 325 249 28 23
Interest cost 391 354 70 59
Plan participant contributions 20 18 - -
Amendments 110 17 1 -
Actuarial losses 714 478 261 190
Divestitures & acquisitions (3) (4) - 8
Curtailments & settlements (1) (6) - -
Benefits paid from plan (268) (246) (55) (50)
Effect of exchange rates 341 165 9 3
Projected benefit obligation
- end of year $ 7,680 6,051 1,329 1,015
Change in Plan Assets
Plan assets at fair value
- beginning of year $ 4,705 4,355 34 48
Actual return on plan assets 963 (611) 9 (12)
Company contributions 393 1,074 49 47
Plan participant contrib. 20 18 - -
Divestitures - (2) - (49)
Benefits paid from plan assets (258) (232) (53) -
Effect of exchange rates 227 103 - -
Plan assets at fair value
- end of year $ 6,050 4,705 39 34
Strategic asset allocations are determined by country based on the nature of the
liabilities and considering the demographic composition of the plan participants
(average age, years of service and active versus retiree status). The Company's
plans are considered non-mature plans and the long-term strategic asset
allocations are consistent with these types of plans. Emphasis is placed on
diversifying equities on a broad basis combined with currency matching of the
fixed income assets. Derivatives are used primarily to hedge currency exposure.
The Company is not expected to have to fund its U.S. retirement plans in 2004 in
order to meet minimum statutory funding requirements. International plans will
be funded in accordance with local regulations. Additional discretionary
contributions will be made when deemed appropriate to meet the long-term
obligations of the plans. In certain countries other than the United States, the
funding of pension plans is not a common practice as funding provides no
economic benefit. Consequently, the Company has several pension plans which are
not funded.
The Company expects to contribute $62 million to its other benefit plans during
2004 to meet current year medical claim obligations.
The following table displays the projected future contributions to the Company's
U.S. unfunded retirement plans:
After
(Dollars in Millions) 2004 2005 2006 2007 2008 2008
- ------------------------- -------- -------- -------- -------- -------- --------
U.S. Retirement Plans
Unfunded retirement plans $ 19 20 22 23 26 735
51
The Company's retirement plan asset allocation at the end of 2003 and 2002 and
target allocations for 2004 are as follows:
Percent of Target
Plan Assets Allocation
----------- ----------
(Dollars in Millions) 2003 2002 2004
- ------------------------------ ----------- ---------- ----------
U.S. Retirement Plans
Equity securities 78% 67% 75%
Debt securities 22 33 25
Total plan assets 100% 100% 100%
International Retirement Plans
Equity securities 67% 62% 75%
Debt securities 32 37 25
Real estate and other 1 1 -
Total plan assets 100% 100% 100%
The Company's other benefit plans are unfunded except for U.S. life insurance
contract assets of $39 million and $34 million at December 28, 2003 and December
29, 2002, respectively.
The fair value of Johnson & Johnson common stock directly held in plan assets
was $363 million (6.0% of total plan assets) at December 28, 2003, and $384
million (8.2% of total plan assets) at December 29, 2002.
Amounts recognized in the Company's balance sheet consist of the following:
Retirement Plans Other Benefit Plans
----------------------- -----------------------
(Dollars in Millions) 2003 2002 2003 2002
- ----------------------- --------- --------- --------- ---------
Plan assets at
fair value $ 6,050 4,705 39 34
Projected benefit
obligation 7,680 6,051 1,329 1,015
Funded status (1,630) (1,346) (1,290) (981)
Unrecognized
actuarial
losses 1,749 1,588 336 92
Unrecognized prior
service cost 133 124 (12) (18)
Unrecognized net
transition asset - (4) - -
Total recognized in the
consolidated
balance sheet $ 252 362 (966) (907)
Retirement Plans Other Benefit Plans
----------------------- -----------------------
(Dollars in Millions) 2003 2002 2003 2002
- ------------------------- --------- --------- --------- ---------
Book reserves $ (862) (643) (966) (907)
Prepaid benefits 1,021 959 - -
Intangible assets 29 13 - -
Accumulated comprehensive
income 64 33 - -
Total recognized in the
consolidated
balance sheet $ 252 362 (966) (907)
The accumulated benefit obligation for all U.S. and international defined
benefit retirement plans was $6.5 billion and $5.1 billion at December 28, 2003
and December 29, 2002, respectively.
A minimum pension liability adjustment is required when the actuarial present
value of accumulated benefits obligation (ABO) exceeds the fair value of plan
assets and accrued pension liabilities. The minimum pension liabilities
(intangible assets and accumulated comprehensive income) in 2003 and 2002 of $93
million and $46 million, respectively, relate primarily to plans outside of the
U.S. The increase in the minimum liability included in comprehensive income was
$31 million and $18 million in 2003 and 2002, respectively.
Plans with accumulated benefit obligations in excess of plan assets consist of
the following:
Retirement Plans
-----------------------
(Dollars in Millions) 2003 2002
- --------------------- --------- ---------
Accumulated benefit
obligation $ (1,328) (953)
Projected benefit
obligation (1,729) (1,024)
Plan assets at
fair value 591 305
On December 8, 2003, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 was enacted that introduces a prescription drug
benefit under Medicare as well as a subsidy to sponsors of retiree health care
benefit plans. The Company has elected to defer the recognition of the Act until
such time when the authoritative guidance is issued. Any measures of the
accumulated postretirement benefit obligation or net periodic postretirement
benefit cost in the Company's financial statements do not reflect the effect of
the Act.
52
14 Marketable Securities
December 28, 2003
---------------------------------------------------
Un- Un-
real- real- Est
Net ized ized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
Money market funds $ 1,559 - - 1,559
Commercial paper 330 - - 330
Time deposits 663 - - 663
Government securities
and obligations 2,844 1 - 2,845
Bank notes 22 - - 22
Corporate debt
securities 2,235 - - 2,235
Total current
marketable
securities $ 7,653 1 - 7,654
Government
securities 25 - - 25
Bank notes 6 - - 6
Corporate debt
securities 6 - - 6
Investments held
in trust 47 - - 47
Total non-current
marketable
securities $ 84 - - 84
December 29, 2002
---------------------------------------------------
Un- Un-
real- real- Est
Net ized ized Fair
Cost Gains Losses Value
--------- --------- --------- --------
Money market funds $ 701 - - 701
Commercial paper 35 - - 35
Time deposits 754 - - 754
Government securities
and obligations 1,976 3 - 1,979
Bank notes 18 - - 18
Corporate debt securities 2,791 6 - 2,797
Total current
marketable securities $ 6,275 9 - 6,284
Government securities 14 - - 14
Bank notes 27 - - 27
Corporate debt securities - - - -
Investments held
in trust 80 - - 80
Total non-current
marketable securities $ 121 - - 121
Current marketable securities include $3.5 billion and $1.7 billion that are
classified as cash equivalents on the balance sheet at December 28, 2003, and
December 29, 2002, respectively.
15 Financial Instruments
The Company follows the provisions of SFAS 133 requiring that all derivative
instruments be recorded on the balance sheet at fair value.
As of December 28, 2003, the balance of deferred net losses on derivatives
included in accumulated other comprehensive income was $180 million after-tax.
For additional information, see Note 12. The Company expects that substantially
all of this amount 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 is 18 months.
For the year ended December 28, 2003, the net impact of the hedges'
ineffectiveness to the Company's financial statements was insignificant. For the
year ended December 28, 2003, the Company has recorded a net gain of $4 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 12 for disclosures of movements in Accumulated Other Comprehensive
Income.
53
Concentration of Credit Risk
The Company invests its excess cash in both deposits with major banks throughout
the world and other high quality money market instruments. Refer to Note 14 for
additional information. The Company has a policy of making investments only with
commercial institutions that have at least an A (or equivalent) credit rating.
These investments generally mature within six months, and the Company has not
incurred any related losses.
16 Savings Plan
The Company has voluntary 401(k) savings plans designed to enhance the existing
retirement programs covering eligible employees. The Company matches a
percentage of each employee's contributions consistent with the provisions of
the plan for which he/she is eligible.
In the U.S. salaried plan, one-third of the Company match is paid in Company
stock under an employee stock ownership plan (ESOP) unless the employee chooses
to redirect his or her investment. In 1990, to establish the ESOP, the Company
loaned $100 million to the ESOP Trust to purchase shares of the Company stock on
the open market. In exchange, the Company received a note, the balance of which
is recorded as a reduction of shareholders' equity.
Total Company contributions to the plans were $128 million in 2003, $111 million
in 2002 and $96 million in 2001.
17 Mergers, Acquisitions and Divestitures
Certain businesses were acquired for $2.8 billion in cash and $323 million of
liabilities assumed during 2003. These acquisitions were accounted for by the
purchase method and, accordingly, results of operations have been included in
the accompanying consolidated financial statements from their respective dates
of acquisition.
The 2003 acquisitions included: Link Spine Group, Inc., a privately owned
corporation with exclusive worldwide rights to the CHARITE Artificial Disc;
Scios Inc. a biopharmaceutical company with a marketed product for
cardiovascular disease
53
and research projects focused on auto-immune diseases; 3-Dimensional
Pharmaceuticals, Inc., a company with a technology platform focused on the
discovery and development of therapeutic small molecules; OraPharma, Inc., a
specialty pharmaceutical company focused on the development and
commercialization of unique oral therapeutics; and certain assets of Orquest,
Inc., a privately held biotechnology company focused on developing
biologically-based implants for orthopaedics and spine surgery.
The excess of purchase price over the estimated fair value of tangible assets
acquired amounted to $1.8 billion and has been allocated to identifiable
intangibles and goodwill. Approximately $918 million has been identified as the
value of in-process research and development (IPR&D) primarily associated with
the acquisition of Link Spine Group, Inc. and Scios Inc.
The IPR&D charge related to the Link Spine acquisition was $170 million and is
associated with the CHARITE Artificial Disc. The CHARITE Artificial Disc is
marketed in more than 30 countries outside the U.S, and a Premarket Approval
Application was filed with U.S. Food and Drug Administration on February 17,
2004. The value of the IPR&D was calculated with the assistance of a third party
appraiser using cash flow projections discounted for the risk inherent in such
projects. A probability of success factor of 95% was used to reflect inherent
clinical and regulatory risk. The discount rate was 19%. On a preliminary basis,
the purchase price for the Link Spine acquisition was allocated to the tangible
and identifiable intangible assets acquired and liabilities assumed based on
their estimated fair values at the acquisition date. The excess of the purchase
price over the fair values of assets and liabilities acquired was approximately
$84 million and was allocated to goodwill. The Company expects that
substantially all of the amount allocated to goodwill will not be deductible for
tax purposes.
The IPR&D charge related to Scios was $730 million and is largely associated
with its p-38 kinase inhibitor program. The value of the IPR&D was calculated
with the assistance of a third party appraiser using cash flow projections
discounted for the risk inherent in such projects using a 16% probability of
success factor and a 9% discount rate. On a preliminary basis, the purchase
price for the Scios Inc. acquisition was allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed based on their
estimated fair values at the acquisition date. Identifiable intangible assets
included patents and trademarks valued at approximately $1.5 billion. The excess
of the purchase price over the fair values of assets and liabilities acquired
was approximately $440 million and was allocated to goodwill. The Company
expects that substantially all of the amount allocated to goodwill will not be
deductible for tax purposes.
The remaining IPR&D was associated with Orquest, Inc., and 3-Dimensional
Pharmaceuticals, Inc., with charges of $11 million and $7 million, respectively.
In both cases the value of the IPR&D was calculated with the assistance of a
third party appraiser.
Certain businesses were acquired for $478 million in cash and liabilities
assumed of $72 million during 2002. These acquisitions were accounted for by the
purchase method, and, accordingly, results of operations have been included in
the accompanying consolidated financial statements from their respective dates
of acquisition.
The 2002 acquisitions included Tibotec-Virco N.V., a privately-held
biopharmaceutical company focused on developing anti-viral treatments; Micro
Typing Systems, Inc., a manufacturer of reagents and supplier of distributed
instruments known as the ID-Micro Typing System and Obtech Medical AG, a
privately-held company that markets an adjustable gastric band for the treatment
of morbid obesity.
The excess of purchase price over the estimated fair value of tangible assets of
the acquired entities amounted to $325 million and has been allocated to
identifiable intangibles and goodwill. Approximately $189 million has been
identified as the value of IPR&D associated with the Tibotec-Virco N.V. and
Obtech Medical AG acquisitions.
The IPR&D charge related to Tibotec-Virco N.V. was $150 million and is
associated with two early stage HIV compounds. The value of the IPR&D was
calculated with the assistance of a third party appraiser using cash flow
projections discounted for the risk inherent in such projects using probability
of success factors ranging from 30-33%. The discount rate was 9%.
The IPR&D charge related to Obtech Medical AG was $39 million and is associated
with the development of the current Swedish Adjustable Gastric Band (SAGB) for
use in the United States as well as development of a next generation technology
platform. The value of the IPR&D was calculated with the assistance of a third
party appraiser using cash flow projections discounted for the risk inherent in
such projects using a 70% probability of success factor and a 20% discount rate.
Supplemental pro forma information for 2003 and 2002 per SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, are not
provided as the impact of the aforementioned acquisitions did not have a
material effect on the Company's results of operations, cash flows or financial
position.
On June 22, 2001, Johnson & Johnson and ALZA Corporation (ALZA) completed the
merger between the two companies. This transaction was accounted for as a
pooling-of-interests. ALZA had approximately 239 million shares outstanding (286
million on a fully diluted basis) that were exchanged for approximately 234
million shares of Johnson & Johnson common stock. On a diluted basis when
adjusted for stock options and convertible debt, the total number of Johnson &
Johnson shares issued was approximately 280 million. Holders of ALZA common
stock received 0.98 of a share of Johnson & Johnson common stock, valued at
$52.39 per share.
ALZA is a research-based pharmaceutical company with leading drug delivery
technologies. The company applies its delivery technologies to develop
pharmaceutical products with enhanced therapeutic value for Johnson & Johnson
affiliate portfolios and for many of the world's leading pharmaceutical
companies.
Certain businesses were acquired for $1.9 billion during 2001 ($0.6 billion in
cash and liabilities assumed and 24.5 million shares of the Company's common
stock issued from Treasury valued at $1.3 billion). These acquisitions were
accounted for by the purchase method, and, accordingly, results of operations
have been included in the accompanying consolidated financial statements from
their respective dates of acquisition.
54
The 2001 acquisitions included Inverness Medical Technology Inc., the supplier
of LifeScan's electrochemical products for blood glucose monitoring following
the spin-off of the non-diabetes businesses; Heartport Inc., a company that
develops and manufactures products for less invasive open chest and minimally
invasive heart operations, including stopped heart and beating heart procedures;
TERAMed Corporation, an early-stage medical device company that is developing
endovascular stent-graft systems for the minimally invasive treatment of
abdominal aortic aneurysms and peripheral occlusive disease; BabyCenter, L.L.C.,
an Internet content and commerce company devoted to supporting a community of
expectant and new mothers; and the VIACTIV product line, a chewable calcium
supplement, from the Mead Johnson Nutritionals Division of Bristol-Myers Squibb.
Inverness Medical Technology was acquired to enhance control of the primary
supplier of LifeScan blood glucose monitoring products and will allow for the
achievement of operational synergies. The acquisition also provides key
technology for the development of future products.
Approximately $105 million has been identified as the value of IPR&D associated
with the Inverness Medical Technology and TERAMed Corporation acquisitions. The
IPR&D charge is primarily related to Inverness projects for minimally invasive
testing, continuous monitoring and insulin delivery. The value of the IPR&D was
calculated with the assistance of a third party appraiser using cash flow
projections discounted for the risk inherent in such projects using probability
of success factors ranging from 25-40%. The discount rate used was 12%.
Divestitures in 2003, 2002 and 2001 did not have a material effect on the
Company's results of operations, cash flows or financial position.
18 Legal Proceedings
Product Liability Litigation
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 433 such cases currently pending,
including the claims of approximately 5,850 plaintiffs. In the active cases, 410
individuals 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 (tolling agreements) 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 were 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. An effort to appeal that ruling
has been denied. 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 the
Multi-District Litigation have said they are preserving their right to appeal
that ruling, and other complaints filed against Janssen and the Company include
class action allegations, which could be the basis for future attempts to have
classes certified.
On February 5, 2004, Janssen announced that it had reached an agreement in
principle with the Plaintiffs Steering Committee (PSC), of the PROPULSID Federal
Multi-District Litigation (MDL), to resolve federal lawsuits related to
PROPULSID. There are approximately 4,000 individuals included in the Federal MDL
of whom approximately 300 are alleged to have died from use of the drug. The
agreement becomes effective once 85 percent of the death claims, and 75 percent
of the remainder, agree to the terms of the settlement. In addition, 12,000
individuals who have not filed lawsuits, but whose claims are the subject of
tolling agreements suspending the running of the statutes of limitations against
those claims, must also agree to participate in the settlement before it will
become effective. Those agreeing to participate in the settlement will submit
medical records to an independent panel of physicians who will determine whether
the claimed injuries were caused by PROPULSID and otherwise meet the standards
for compensation. If those standards are met, a court-appointed special master
will determine compensatory damages. Janssen will pay as compensation a minimum
of $69.5 million and a maximum of $90 million, depending upon the number of
plaintiffs who enroll in the program. Janssen will also establish an
administrative fund not to exceed $15 million, and will pay legal fees to the
PSC up to $22.5 million, subject to court approval.
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
55
and the Company believe they have adequate self-insurance reserves and
commercially available excess insurance with respect to these cases. In
communications to the Company, the excess insurance carriers have raised certain
defenses to their liability under the policies and to date have declined to
reimburse Janssen and the Company for PROPULSID-related costs despite demand for
payment. However, in the opinion of the Company, those defenses are pro forma
and lack substance and the carriers will honor their obligations under the
policies either voluntarily or after litigation. The Company recently commenced
arbitration against Allianz Underwriters Insurance Company, which issued the
first layer of applicable excess insurance coverage, to obtain reimbursement of
PROPULSID-related costs.
The Company's Ethicon, Inc. subsidiary has over the last several years had a
number of claims and lawsuits filed against it relating to VICRYL sutures. The
actions allege that the sterility of VICRYL sutures was compromised by
inadequacies in Ethicon's systems and controls causing patients who were exposed
to these sutures to incur infections which would not otherwise have occurred.
Ethicon on several occasions recalled batches of VICRYL sutures in light of
questions raised about sterility but does not believe any contamination of
suture products in fact occurred. In November 2003, a trial judge in West
Virginia certified for class treatment all West Virginia residents who had
VICRYL sutures implanted during Class I or II surgeries from May 1, 1994 to
December 31, 1997. The certification is subject to later challenge following the
conclusion of discovery. No trial date has been set in this matter and Ethicon
has been and intends to continue vigorously contesting liability.
Affirmative Stent Patent Litigation
In patent infringement actions tried in Delaware Federal Court in late 2000,
Cordis Corporation, a subsidiary of Johnson & Johnson, obtained verdicts of
infringement and patent validity, and damage awards, against Boston Scientific
Corporation and Medtronic AVE, Inc., based on a number of Cordis vascular 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 were unenforceable owing to alleged inequitable conduct before
the patent office.
In March and May 2002, the district judge issued post trial rulings that
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. On August 12, 2003, the
Court of Appeals for the Federal Circuit found the trial judge erred in vacating
the verdict against Medtronic AVE and remanded the case to the trial judge for
further proceedings. Medtronic AVE's motion for reconsideration by the panel and
for reconsideration by the full court was denied on October 3, 2003 and its
request to stay the return of the mandate to the trial court pending the filing
of a request for a writ of certiorari to the United States Supreme Court was
denied on October 10, 2003. Medtronic AVE filed its petition for a writ of
certiorari to the United States Supreme Court on January 2, 2004. Cordis filed
motions before the trial court on October 14, 2003 to reinstate the verdicts
against both Medtronic AVE and Boston Scientific and to award interest and enter
injunctions against the stent products at issue in those two cases (the GFX and
MicroStent stents of Medtronic AVE and the NIR stent of Boston Scientific) and
colorable variations thereof. Medtronic AVE and Boston Scientific are resisting
reinstatement of these verdicts and will likely attempt to appeal to the Court
of Appeals for the Federal Circuit once judgments are entered.
In January 2003, Cordis filed an additional patent infringement action against
Boston Scientific in Delaware Federal Court accusing its Express2 and TAXUS
stents of infringing one of the Cordis patents involved in the earlier actions
against Boston Scientific and Medtronic AVE. In February 2003, Cordis moved in
that action for a preliminary injunction seeking to bar the introduction of the
TAXUS stent based on that patent. On November 21, 2003, the district judge
denied that request for a preliminary injunction and Cordis filed an appeal with
the Court of Appeals for the Federal Circuit. A decision by the Federal Circuit
is expected in the 2nd or 3rd quarter of 2004. Cordis also has pending in
Delaware Federal Court another action against Medtronic AVE accusing Medtronic
AVE of infringement on stent products introduced by Medtronic AVE subsequent to
its GFX and MicroStent products, subject to the earlier action referenced above.
In early June 2003, an arbitration panel in Chicago, in a preliminary ruling,
found in favor of Cordis in its arbitration against ACS/Guidant involving
infringement by ACS/Guidant of a Cordis stent patent. On August 19, 2003, the
panel confirmed that ruling, rejecting the challenge of ACS/Guidant. Under the
terms of an earlier agreement between Cordis and ACS/Guidant, the arbitration
panel's ruling obligated ACS/Guidant to make a payment of $425 million to Cordis
which was made in the fiscal fourth quarter of 2003. As a result of resolving
this matter, in the fiscal fourth quarter, $230 million was recorded in other
income and expense (approximately $142 million after tax) relating to past
periods. The balance of the award, $195 million (approximately $120 million
after tax), will be recognized in income in future periods over the estimated
remaining life of the intellectual property. No additional royalties for
ACS/Guidant's continued use of the technology and no injunction are involved.
Patent Litigation Against Various Johnson & Johnson Operating Companies
The products of various Johnson & Johnson operating companies are the subject of
various patent lawsuits, which could potentially affect the ability of those
operating companies to sell those products, or require the payment of past
damages and future royalties. The following patent lawsuits concern important
products of Johnson & Johnson operating companies: Boston Scientific and Medinol
Ltd. v. Cordis Corporation: This action, filed in Delaware Federal Court in
December 1999, charged infringement by the Bx VELOCITY and other Cordis stent
products of certain patents owned by Medinol and licensed by Boston Scientific.
The case was tried to a jury in
56
September 2002, and resulted in verdicts for Cordis of non-infringement and
invalidity, except with respect to a minor stent product as to which the jury
found infringement and awarded damages of $9 million. Medinol filed an appeal
from this result, which was affirmed by the Court of Appeal for the Federal
Circuit on January 15, 2004. Medtronic AVE v. Cordis Corporation: This action,
filed in April 2002 in federal district court in Texas and thereafter
transferred to the federal district court in Delaware, asserts certain patents
owned by Medtronic AVE against the Cordis Bx VELOCITY Stent, which is also the
stent structure used in the CYPHER drug-eluting product. The federal district
court in Delaware recently reversed its prior decision to stay this lawsuit
pending the outcome of arbitration between the parties on the issue of whether
Cordis is licensed under the patents asserted against it by Medtronic AVE.
Boston Scientific Corporation (BSC) v. Cordis Corporation: This action, filed in
Delaware Federal Court in March 2003, asserts that the CYPHER drug-eluting Stent
infringes several patents assigned to Boston Scientific. Boston Scientific seeks
damages and a permanent injunction. Boston Scientific Corporation (BSC) v.
Cordis Corporation: This action, filed in Delaware Federal Court in December
2003, asserts that the Cordis CYPHER drug- eluting Stent infringes several
patents assigned to BSC by NeoRx pertaining to pharmaceutical compounds for use
on stents. BSC is seeking damages and a permanent injunction. Medinol Ltd. v.
Cordis Europe NV (Netherlands) and Medinol Ltd. v. Cordis Holding Belgium
B.V.B.A. and Janssen Pharmaceutica N.V. (Belgium): On July 3, 2003, the Appeal
Court of the Hague overturned a lower court and granted Medinol, an Israeli
stent manufacturer, a preliminary injunction based on patent infringement
prohibiting Cordis from making or selling the Bx VELOCITY and CYPHER Stents in
the Netherlands. The injunction became effective on August 26, 2003. In Belgium,
Medinol has filed a patent infringement suit based on the same patent it
asserted in the Netherlands, and moved for a preliminary injunction seeking to
prevent the defendants from making or selling the Bx VELOCITY and CYPHER Stents
there. That motion was denied by the trial court on November 10, 2003. Medinol
has appealed. Cordis currently uses a Janssen Pharmaceutica facility in Belgium
to coat CYPHER Stents with sirolimus principally for the ex-U.S. market. Rockey
v. Cordis Corporation: This is an action against Cordis by the heirs of Dr.
Rockey concerning a patent he licensed to Cordis in 1996, shortly before Cordis
was acquired by Johnson & Johnson. The plaintiffs assert that Dr. Rockey's
patent, which expires in February 2004, covers all stent products ever marketed
by Cordis and seek a 10% royalty on those sales. Trial of the action, which is
pending in federal court in Miami, Florida, is scheduled for March 2004.
On February 24, 2004, ASC/Guidant and Cordis Corporation entered into a
strategic alliance for the co-promotion of drug-eluting stents. As a result of
this agreement, all pending litigation between the companies has been settled.
With respect to all of these matters, the Johnson & Johnson operating company
involved is vigorously defending against the claims of infringement and
disputing where appropriate the validity and enforceability of the patent claims
asserted against it.
Litigation Against Filers of Abbreviated New Drug Applications (ANDAs)
The following lawsuits are against generic firms that filed Abbreviated New Drug
Applications (ANDAs) seeking to market generic forms of products sold by various
subsidiaries of the Company prior to expiration of the applicable patents
covering those products. These ANDAs typically include allegations of
non-infringement, invalidity and unenforceability of these patents. In the event
the subsidiary of the Company involved is not successful in these actions, the
firms involved will then introduce generic versions of the product at issue
resulting in very substantial market share and revenue losses for the product of
the Company's subsidiary. Ortho-McNeil Pharmaceutical, Inc. and Daiichi, Inc. v.
Mylan Laboratories and Ortho-McNeil Pharmaceutical, Inc. and Daiichi, Inc. v.
Teva Pharmaceutical: These matters, the first of which was filed in February
2002 in federal court in West Virginia and the second in June 2002 in federal
court in New Jersey, concern the efforts of Mylan and Teva to invalidate and
establish non-infringement and unenforceability of the patent covering LEVAQUIN
(levofloxacin) tablets. The patent is owned by Daiichi and exclusively licensed
to Ortho-McNeil. The first phase of the trial of the Mylan case concluded in
December 2003 and the second phase should be concluded in May 2004. No trial
date has been set in the Teva matter. Ortho-McNeil Pharmaceutical, Inc. and
Daiichi v. Bedford Laboratories: This matter was filed in federal district court
in New Jersey in April 2003 and involves the effort of Bedford to invalidate and
assert non-infringement and unenforceability of the same Daiichi patent on
LEVAQUIN involved in the above proceedings. In this case, however, Bedford is
challenging the patent's application to its products which it asserts are
equivalent to LEVAQUIN injection pre-mix and injection vials, rather than
tablets. Ortho-McNeil Pharmaceutical, Inc. and Daiichi v. American
Pharmaceutical Partners and Sicor Pharmaceutical: In December 2003, Ortho-McNeil
Pharmaceutical, Inc. and Daiichi filed suits in the federal district court in
New Jersey against American Pharmaceutical Partners and Sicor Pharmaceutical in
respect of ANDAs filed by those entities involving the same Daiichi patent on
LEVAQUIN for injection pre-mix and single use vials. Janssen Pharmaceutica Inc.
and ALZA Corporation v. Mylan Laboratories: This action, filed in federal
district court in Vermont in January 2002, concerns Mylan's effort to invalidate
and assert non-infringement and unenforceability of ALZA's patent covering the
DURAGESIC (fentanyl transdermal system) product. Trial concluded in September
2003 and post-trial briefing was completed in December 2003. Mylan has stated
publicly that it intends to launch its generic to DURAGESIC in July 2004 even if
it loses the case in district court because it asserts Janssen and ALZA
forfeited the benefits of the FDA grant of pediatric exclusivity by filing their
lawsuit late. Janssen and ALZA vigorously dispute this contention. Janssen
Pharmaceutica N.V. v. EON Labs Manufacturing: This action was filed in federal
court in the Eastern District of New York in April 2001 and concerns EON's
effort to invalidate and establish non-infringement of Janssen's patent covering
SPORANOX (itraconozole). No trial date has yet been scheduled.
57
Ortho-McNeil Pharmaceutical, Inc. v. Kali Laboratories, Inc.: This lawsuit was
filed in federal court in New Jersey in November 2002 and concerns the attempt
of Kali to invalidate and establish non-infringement of Ortho-McNeil's patent
covering ULTRACET (tramadol/acetaminophen) tablets. No trial date has been set
for this case. ALZA Corporation v. Mylan Laboratories: This action was filed in
federal district court in West Virginia in May 2003 and concerns Mylan's effort
to invalidate and assert non-infringement of an ALZA patent covering the
Ortho-McNeil product DITROPAN XL (oxybutynin chloride). Trial has been scheduled
for February 2005 in this case. ALZA Corporation v. IMPAX Laboratories: This
action was filed in federal court in California in September 2003 and concerns
Impax's effort to invalidate and assert non-infringement of the same ALZA patent
covering DITROPAN XL involved in the above Mylan case. No trial date has been
set in this matter. Ortho-McNeil Pharmaceutical, Inc. v. Barr Laboratories,
Inc.: This action, filed in federal district court in New Jersey in October
2003, concerns the effort of Barr Laboratories to assert non-infringement,
invalidity and unenforceability of Ortho-McNeil's patent on ORTHO TRI-CYCLEN LO
(norgestimate/ethinyl estradiol), an oral contraceptive product. Janssen
Pharmaceutica N.V. v. Mylan Pharmaceuticals Inc.: This action, filed in federal
district court in New Jersey in December 2003, concerns Mylan's effort to
invalidate the Janssen patent covering RISPERDAL (risperidone) tablets. Janssen
Pharmaceutica N.V. v. Dr. Reddy's Laboratories, Inc.: This action, filed in
federal district court in New Jersey, concerns Dr. Reddy's efforts to invalidate
the same Janssen patent covering RISPERDAL tablets as in the immediately
preceding Mylan case. Eisai Inc. v. Dr. Reddy's Laboratories, Inc.: This action,
filed by Janssen's U.S. co-promotion partner Eisai Inc. in federal court in New
York, concerns Dr. Reddy's effort to invalidate and assert non-infringement of
an Eisai patent covering ACIPHEX (rabeprazole sodium) tablets. No trial date has
been set. Eisai Inc. v. Teva Pharmaceuticals USA: This action, also filed by
Janssen's U.S. co-promotion partner Eisai Inc., concerns Teva's efforts to
invalidate and assert non-infringement of the same Eisai patent involved in the
immediately preceding Dr. Reddy's case. No trial date has been set in that
matter. Eisai Inc. v. Mylan Pharmaceuticals Inc.: In January 2004, Janssen's
U.S. co-promotion partner Eisai Inc. filed this action in federal district court
in New York against Mylan Pharmaceuticals Inc. regarding Mylan's efforts to
invalidate and assert non-infringement of the same Eisai patent covering ACIPHEX
tablets as in the above Dr. Reddy's and Teva cases. No trial date has been set.
Janssen Pharmaceutica Inc. is not a party to the Eisai actions. With respect to
all of the above matters, the Johnson & Johnson operating company involved is
vigorously defending the validity and enforceability and asserting the
infringement of its own or its licensor's patents.
Average Wholesale Price (AWP) Litigation
Johnson & Johnson and its pharmaceutical operating companies, along with
numerous other pharmaceutical companies, are defendants in a series of lawsuits
in state and federal courts involving allegations that the pricing and marketing
of certain pharmaceutical products amounted to fraudulent and otherwise
actionable conduct because, among other things, the companies allegedly reported
an inflated Average Wholesale Price ("AWP") for the drugs at issue. Most of
these cases, both federal actions and state actions removed to federal court,
have been consolidated for pre-trial purposes in a Multi-District Litigation
(MDL) in federal court in Boston, Massachusetts. The plaintiffs in these cases
include classes of private persons or entities that paid for any portion of the
purchase of the drugs at issue based on AWP, and state government entities that
made Medicaid payments for the drugs at issue based on AWP.
Ethicon Endo-Surgery, Inc., a Johnson & Johnson operating company which markets
endoscopic surgical instruments, and the Company, are named defendants in a
North Carolina state court class action lawsuit alleging AWP inflation and
improper marketing activities against TAP Pharmaceuticals. Ethicon Endo-Surgery,
Inc. is a defendant based on claims that several of its former sales
representatives are alleged to have been involved in arbitrage of a TAP drug.
The allegation is that these sales representatives persuaded certain physicians
in states where the drug's price was low to purchase from TAP excess quantities
of the drug and then resell it in states where its price was higher. Ethicon
Endo-Surgery, Inc. and the Company deny any liability for the claims made
against them in this case and are vigorously defending against it. The trial
judge recently certified a national class of purchasers of the TAP product at
issue and trial is likely in 2004.
Other
The New York State Attorney General's office and the Federal Trade Commission
issued subpoenas in January and February 2003 seeking documents relating to the
marketing of sutures and endoscopic instruments by the Company's Ethicon, Inc.
and Ethicon Endo-Surgery, Inc. subsidiaries. The Connecticut Attorney General's
office also issued a subpoena for the same documents. These subpoenas focus on
the bundling of sutures and endoscopic instruments in contracts offered to Group
Purchasing Organizations and individual hospitals in which discounts are
predicated on the hospital achieving specified market share targets for both
categories of products. The operating companies involved are responding to the
subpoenas.
On June 26, 2003, the Company received a request for records and information
from the U.S. House of Representatives' Committee on Energy and Commerce in
connection with its investigation into pharmaceutical reimbursements and rebates
under Medicaid. The Committee's request focuses on the drug REMICADE
(infliximab), marketed by the Company's Centocor, Inc. subsidiary. On July 2,
2003, Centocor received a request that it voluntarily provide documents and
information to the criminal division of the U.S. Attorney's Office, District of
New Jersey, in connection with its investigation into various Centocor marketing
practices. Both the Company and Centocor are responding to these requests for
documents and information.
On August 1, 2003, the Securities and Exchange Commission (SEC) advised the
Company of its informal investigation under the Foreign Corrupt Practices Act of
allegations of payments to Polish governmental officials by U.S. pharmaceutical
companies. On November 21, 2003, the SEC advised the company the investigation
had become formal and issued a subpoena for the information previously requested
in an informal fashion, plus other background documents. The Company and its
operating units in Poland are responding to these requests.
On December 8, 2003, the Company's Ortho-McNeil Pharmaceutical unit received a
subpoena from the United States Attorney's office in Boston, Massachusetts
seeking documents relating to the marketing, including alleged off-label market-
58
ing, of the drug TOPAMAX (topiramate) which is approved for anti-epilepsy
therapy. Ortho-McNeil is cooperating in responding to the subpoena.
On January 20, 2004, the Company's Janssen unit received a subpoena from the
Office of the Inspector General of the United States Office of Personnel
Management seeking documents concerning any and all payments to physicians in
connection with sales and marketing of, and clinical trials for, RISPERDAL from
1997 to 2002. Janssen is cooperating in responding to the subpoena.
In 2002, the Company recorded $150 million in damages and $85 million in legal
fees and costs in connection with an arbitration proceeding filed in 1995
involving the Company's Ortho Biotech subsidiary and Amgen, Ortho Biotech's
licensor of U.S. non-dialysis rights to PROCRIT (Epoetin alfa), in which Amgen
sought to terminate Ortho Biotech's U.S. license rights and collect substantial
damages. This proceeding was based on alleged deliberate PROCRIT sales by Ortho
Biotech during the early 1990's into Amgen's reserved dialysis market. On
October 18, 2002, the arbitrator issued his decision rejecting Amgen's request
to terminate the license and finding no material breach of the license. However,
the arbitrator found that conduct by Ortho Biotech in the early 1990's which was
subsequently halted by Ortho Biotech amounted to a non-material breach of the
license and awarded Amgen $150 million in damages which the Company accrued in
the third quarter of 2002. On January 24, 2003, the arbitrator ruled that Amgen
was the "prevailing party" in this arbitration, entitling it to an award of
reasonable attorney's fees and costs and the Company accrued $85 million in the
fourth quarter of 2002 in connection with this claim.
After a remand from the Federal Circuit Court of Appeals in January 2003, a
partial retrial was commenced in October and concluded in November 2003 in
Boston, Massachusetts in the action Amgen v. Transkaryotic Therapies, Inc. (TKT)
and Aventis Pharmaceutical, Inc. The matter is a patent infringement action
brought by Amgen against TKT, the developer of a gene-activated EPO product, and
Aventis, which holds marketing rights to the TKT product, asserting that TKT's
product infringes various Amgen patent claims. TKT and Aventis dispute
infringement and are seeking to invalidate the Amgen patents asserted against
them. The district court has issued preliminary rulings that upheld the district
court's initial findings in 2001. A further opinion from the district court is
expected in the second quarter of 2004. Further proceedings and an appeal will
follow. The Amgen patents at issue in the case are exclusively licensed to Ortho
Biotech Inc., a Johnson & Johnson operating company, in the U.S. for
non-dialysis indications. Ortho Biotech Inc. is not a party to the action.
The Company is also involved in a number of other patent, trademark and other
lawsuits incidental to its business. The ultimate legal and financial liability
of the Company in respect to all claims, lawsuits and proceedings referred to
above cannot be estimated with any certainty. However, in the opinion of
management, based on its examination of these matters, its experience to date
and discussions with counsel, the ultimate outcome of these legal proceedings,
net of liabilities already accrued in the Company's consolidated balance sheet,
is not expected to have a material adverse effect on the Company's consolidated
financial position, although the resolution in any reporting period of one or
more of these matters could have a significant impact on the Company's results
of operations and cash flows for that period.
19 Earnings Per Share
The following is a reconciliation of basic net earnings per share to diluted net
earnings per share for the years ended December 28, 2003, December 29, 2002 and
December 30, 2001:
(Shares in Millions) 2003 2002 2001
- ----------------------------------------------------- ----------- --------- ---------
Basic earnings per share $ 2.42 2.20 1.87
Average shares outstanding - basic 2,968.1 2,998.3 3,033.8
Potential shares exercisable under stock option plans 166.6 188.3 166.6
Less: shares repurchased under treasury stock method (141.4) (146.9) (121.8)
Convertible debt shares 14.8 14.4 20.7
Adjusted average shares outstanding - diluted 3,008.1 3,054.1 3,099.3
Diluted earnings per share $ 2.40 2.16 1.84
Diluted earnings per share calculation includes the dilution effect of
convertible debt: a decrease in interest expense of $15 million, $12 million and
$25 million after tax for years 2003, 2002 and 2001, respectively.
Diluted earnings per share excludes 47 million shares underlying stock options
for 2003 and 1 million shares underlying stock options for each of the years
2002 and 2001 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.
20 Capital and Treasury Stock
Changes in treasury stock were:
Treasury Stock
(Dollars in Millions Except -----------------------
Number of Shares in Thousands) Shares Amount
- -------------------------------------------- --------- ---------
Balance at December 31, 2000 105,218 $ 342
Employee compensation and stock option plans (30,581) (1,444)
Conversion of subordinated debentures (30,061) (183)
Repurchase of common stock 51,244 2,742
Business combinations (23,193) (64)
Balance at December 30, 2001 72,627 1,393
Employee compensation and stock option plans (22,720) (1,295)
Conversion of subordinated debentures (5,742) (353)
Repurchase of common stock 107,382 6,382
Balance at December 29, 2002 151,547 6,127
Employee compensation and stock option plans (21,729) (1,160)
Conversion of subordinated debentures (83) (4)
Repurchase of common stock 22,134 1,183
Balance at December 28, 2003 151,869 $ 6,146
Shares of common stock issued were 3,119,842,000 shares at the end of 2003, 2002
and 2001.
59
21 Selected Quarterly Financial Data (Unaudited)
Selected unaudited quarterly financial data for the years 2003 and 2002 are
summarized below:
(Dollars in Millions
Except Per Share Data)
2003
---------------------------------------------------
First Second Third Fourth
Qtr(1) Qtr(2) Qtr Qtr(3)
--------- --------- --------- ---------
Segment sales to customers
Consumer $ 1,791 1,819 1,841 1,979
Pharmaceutical 4,666 4,884 4,835 5,134
Med Devices and
Diagnostics 3,364 3,629 3,779 4,141
Total sales $ 9,821 10,332 10,455 11,254
Gross profit 7,099 7,366 7,475 7,746
Earnings before provision for
taxes on income 2,929 2,056 2,949 2,374
Net earnings 2,070 1,210 2,072 1,845
Basic net earnings per share $ .70 .41 .70 .62
Diluted net earnings per share $ .69 .40 .69 .62
(Dollars in Millions
Except Per Share Data)
2002
---------------------------------------------------
First Second Third Fourth
Qtr Qtr(4) Qtr(5) Qtr(6)
--------- --------- --------- ---------
Segment sales to customers
Consumer 1,604 1,649 1,661 1,650
Pharmaceutical 4,181 4,258 4,277 4,435
Med Devices and
Diagnostics 2,958 3,166 3,141 3,318
Total sales 8,743 9,073 9,079 9,403
Gross profit 6,286 6,491 6,468 6,606
Earnings before provision for
taxes on income 2,621 2,428 2,393 1,849
Net earnings 1,834 1,654 1,725 1,384
Basic net earnings per share .60 .55 .58 .47
Diluted net earnings per share .59 .54 .57 .46
(1) The first quarter of 2003 includes an after tax charge of $15 million for
In-Process Research and Development (IPR&D) costs.
(2) The second quarter of 2003 includes an after tax charge of $900 million for
IPR&D costs.
(3) The fourth quarter of 2003 includes after tax income of $142 million for an
arbitration ruling on stent patents and the cost of the retirement enhancement
program of $61 million.
(4) The second quarter of 2002 includes an after tax charge of $189 million for
IPR&D costs.
(5) The third quarter of 2002 includes an after tax charge of $92 million for an
Amgen arbitration settlement.
(6) The fourth quarter of 2002 includes an after tax charge of $54 million for
an Amgen arbitration settlement.
Report of Independent Auditors
To the Shareholders and Board of Directors of
Johnson & Johnson:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, consolidated statements of equity and
consolidated statements of cash flows present fairly, in all material respects,
the financial position of Johnson & Johnson and Subsidiaries at December 28,
2003 and December 29, 2002, and the results of their operations and their cash
flows for each of the three years in the period ended December 28, 2003 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, the Company has adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, effective December 31, 2001.
/s/ PRICEWATERHOUSECOOPERS LLP
- ----------------------------------
PricewaterhouseCoopers LLP
New York, New York
January 19, 2004, except for the fifth and thirteenth paragraphs in Note 18 for
which the dates are February 5, 2004 and February 24, 2004, respectively
60
Segments of Business(1)
Johnson & Johnson and Subsidiaries
Sales to Customers(2)
-------------------------------------
(Dollars in Millions) 2003 2002 2001
- ---------------------------- --------- --------- ---------
Consumer
- United States $ 3,968 3,605 3,449
International 3,463 2,959 2,871
Total 7,431 6,564 6,320
Pharmaceutical
- United States 13,271 11,919 10,240
International 6,246 5,232 4,611
Total 19,517 17,151 14,851
Med Devices and Diag -
United States 8,035 6,931 6,136
International 6,879 5,652 5,010
Total 14,914 12,583 11,146
Worldwide total $ 41,862 36,298 32,317
Operating Profit
-------------------------------------
(Dollars in Millions) 2003(5) 2002(6) 2001(7)
- ---------------------------- --------- --------- ---------
Consumer $ 1,393 1,229 1,004
Pharmaceutical 5,896 5,787 4,928
Medical Devices
and Diagnostics 3,370 2,489 2,001
Segments total 10,659 9,505 7,933
Expenses not allocated
to segments(3) (351) (214) (35)
Worldwide total $ 10,308 9,291 7,898
Identifiable Assets
-------------------------------------
(Dollars in Millions) 2003 2002 2001
- ---------------------------- --------- --------- ---------
Consumer $ 5,371 5,056 4,209
Pharmaceutical 15,351 11,112 10,591
Medical Devices
and Diagnostics 16,082 15,052 13,645
Segments total 36,804 31,220 28,445
General corporate(4) 11,459 9,336 10,043
Worldwide total $ 48,263 40,556 38,488
Additions to Property,
Plant & Equipment
-------------------------------------
(Dollars in Millions) 2003 2002 2001
- ---------------------------- --------- --------- ---------
Consumer $ 229 222 230
Pharmaceutical 1,236 1,012 749
Medical Devices
and Diagnostics 639 713 621
Segments total 2,104 1,947 1,600
General corporate 158 152 131
Worldwide total $ 2,262 2,099 1,731
Depreciation and
Amortization
-------------------------------------
(Dollars in Millions) 2003 2002 2001
- ---------------------------- --------- --------- ---------
Consumer $ 246 244 263
Pharmaceutical 765 557 492
Medical Devices
and Diagnostics 761 776 801
Segments total 1,772 1,577 1,556
General corporate 97 85 49
Worldwide total $ 1,869 1,662 1,605
Sales to Customers(2)
-------------------------------------
(Dollars in Millions) 2003 2002 2001
- ---------------------------- --------- --------- ---------
United States $ 25,274 22,455 19,825
Europe 9,483 7,636 6,687
Western Hemisphere
excluding U.S. 2,236 2,018 2,070
Asia-Pacific, Africa 4,869 4,189 3,735
Worldwide total $ 41,862 36,298 32,317
61
Long-Lived Assets
-------------------------------------
(Dollars in Millions) 2003 2002 2001
- ---------------------------- --------- --------- ---------
United States $ 15,527 12,854 11,922
Europe 5,193 4,712 3,632
Western Hemisphere
excluding U.S. 772 622 640
Asia-Pacific, Africa 605 603 433
Segments total 22,097 18,791 16,627
General corporate 448 383 319
Other non long-lived assets 25,718 21,382 21,542
Worldwide total $ 48,263 40,556 38,488
(1) See Management's Discussion and Analysis, page 28 for a description of the
segments in which the Company does business.
(2) Export sales and intersegment sales are not significant. Sales to three
distributors accounted for 10.5%, 9.0% and 9.1% in 2003 and 10.3%, 9.8% and 9.2%
in 2002. These sales were concentrated in the Pharmaceutical segment. Sales of
PROCRIT/EPREX accounted for 9.5%, 11.8% and 10.6% of total Company revenues for
2003, 2002 and 2001, respectively.
(3) Amounts not allocated to segments include interest income/expense, minority
interest and general corporate income and expense.
(4) General corporate includes cash and marketable securities.
(5) Includes $737 million In-Process Research & Development (IPR&D) in the
Pharmaceutical segment and $181 million of IPR&D and $230 million of an
arbitration ruling on stent patents in the Medical Devices and Diagnostics
segment.
(6) Includes $150 million of IPR&D, $150 million and $85 million of costs
related to an arbitration settlement on PROCRIT in the Pharmaceutical segment
and $39 million of IPR&D in the Medical Devices and Diagnostics segment.
(7) Includes $147 million of ALZA merger costs in the Pharmaceutical segment and
$105 million of IPR&D.
61
Summary of Operations and Statistical Data 1993-2003(1)
Johnson & Johnson and Subsidiaries
(Dollars in Millions Except Per Share Figures)
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Sales to customers
- Domestic $ 25,274 22,455 19,825 17,316 15,532
Sales to customers
- International 16,588 13,843 12,492 11,856 11,825
Total sales 41,862 36,298 32,317 29,172 27,357
Cost of products sold 12,176 10,447 9,581 8,957 8,539
Selling, marketing
and admin expenses 14,131 12,216 11,260 10,495 10,065
Research expense 4,684 3,957 3,591 3,105 2,768
Purchased in-process
research and develop 918 189 105 66 -
Interest income (177) (256) (456) (429) (266)
Interest expense,
net of
portion capitalized 207 160 153 204 255
Other (income)
expense, net (385) 294 185 (94) 119
31,554 27,007 24,419 22,304 21,480
Earnings before
provision for taxes on income 10,308 9,291 7,898 6,868 5,877
Provision for taxes on income 3,111 2,694 2,230 1,915 1,604
Net earnings 7,197 6,597 5,668 4,953 4,273
Percent of sales to customers 17.2 18.2 17.5 17.0 15.6
Diluted net earnings per
share of common stock* 2.40 2.16 1.84 1.61 1.39
Percent return on
average Shareholders' equity 29.0 28.1 25.4 26.5 27.0
Percent increase over previous year:
Sales to customers 15.3 12.3 10.8 6.6 14.9
Diluted net earnings
per share 11.1 17.4 14.3 15.8 36.3
Supplementary expense data:
Cost of materials
and services(2) 18,568 16,540 15,333 14,113 13,922
Total employment costs 10,005 8,450 7,749 7,085 6,537
Depreciation and amortization 1,869 1,662 1,605 1,592 1,510
Maint and repairs(3) 395 360 372 327 322
Total tax expense(4) 4,078 3,497 2,995 2,619 2,271
Supplementary balance sheet data:
Property, plant and
equipment, net 9,846 8,710 7,719 7,409 7,155
Additions to property,
plant and equipment 2,262 2,099 1,731 1,689 1,822
Total assets 48,263 40,556 38,488 34,245 31,064
Long-term debt 2,955 2,022 2,217 3,163 3,429
Operating cash flow 10,595 8,176 8,864 6,903 5,920
Common stock information*
Dividends paid per share .925 .795 .70 .62 .55
Shareholders' equity
per share 9.05 7.65 7.95 6.77 5.70
Market price per share
(year-end close) 50.62 53.11 59.86 52.53 46.63
Average shares
outstanding (millions)
- basic 2,968.1 2,998.3 3,033.8 2,993.5 2,978.2
- diluted 3,008.1 3,054.1 3,099.3 3,099.2 3,100.4
Employees (thousands) 110.6 108.3 101.8 100.9 99.8
* Adjusted to reflect the 2001 two-for-one stock split.
(1) All periods have been adjusted to include the effects of the ALZA merger.
(2) Net of interest and other income.
(3) Also included in cost of materials and services category.
(4) Includes taxes on income, payroll, property and other business taxes.
62
(Dollars in Millions
Except Per
Share Figures)
1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
Sales to customers
- Domestic $ 12,901 11,814 10,851 9,065 7,731 7,121
Sales to customers
- International 10,910 10,708 10,536 9,472 7,723 6,756
Total sales 23,811 22,522 21,387 18,537 15,454 13,877
Cost of products sold 7,700 7,350 7,185 6,352 5,393 4,908
Selling, marketing and
administrative expenses 8,525 8,185 7,848 6,950 5,901 5,364
Research expense 2,506 2,373 2,109 1,788 1,416 1,296
Purchased in-process
research and development 298 108 - - 37 -
Interest income (302) (263) (196) (151) (85) (104)
Interest expense, net of
portion capitalized 186 179 176 184 182 165
Other (income) expense, net 565 248 122 70 (5) (71)
19,478 18,180 17,244 15,193 12,839 11,558
Earnings before
provision for taxes on income 4,333 4,342 4,143 3,344 2,615 2,319
Provision for
taxes on income 1,232 1,237 1,185 926 654 533
Net earnings 3,101 3,105 2,958 2,418 1,961 1,786
Percent of sales to
customers 13.0 13.8 13.8 13.0 12.7 12.9
Diluted net earnings per
share of common stock* 1.02 1.02 .98 .84 .69 .63
Percent return on average
shareholders' equity 22.2 24.6 27.2 27.6 28.4 30.1
Percent Increase over previous year:
Sales to customers 5.7 5.3 15.4 19.9 11.4 2.0
Diluted net Earnings per share - 4.1 16.7 21.7 9.5 85.3
Supplementary expense data:
Cost of materials and
services(2) 11,779 11,702 11,341 9,984 8,104 7,168
Total employment costs 5,908 5,586 5,447 4,849 4,401 4,181
Depreciation and amortization 1,335 1,117 1,047 886 754 649
Maintenance and repairs(3) 286 270 285 257 222 205
Total tax expense(4) 1,881 1,824 1,753 1,458 1,132 957
Supplementary balance sheet
data:
Property, plantand equipment,
net 6,767 6,204 6,025 5,544 5,230 4,717
Additions to property,
plant and equipment 1,610 1,454 1,427 1,307 979 1,001
Total assets 28,966 23,615 22,248 19,355 17,027 13,372
Long-term debt 2,652 2,084 2,347 2,702 2,776 1,761
Operating cash flow 5,106 4,210 4,001 3,436 2,984 2,202
Common stock information*
Dividends paid per share .49 .425 .368 .32 .283 .253
Shareholders' equity per
share 4.93 4.51 4.07 3.46 2.76 2.16
Market price per share
(year-end close) 41.94 32.44 25.25 21.38 13.69 11.19
Average shares Outstanding
(millions)
- basic 2,973.6 2,951.9 2,938.0 2,820.1 2,796.9 2,816.6
- diluted 3,082.7 3,073.0 3,046.2 2,890.0 2,843.2 2,840.8
Employees (thousands) 96.1 92.6 91.5 84.2 83.4 83.2
* Adjusted to reflect the 2001 two-for-one stock split.
(1) All periods have been adjusted to include the effects of the ALZA merger.
(2) Net of interest and other income.
(3) Also included in cost of materials and services category.
(4) Includes taxes on income, payroll, property and other business taxes.
62