Contents
26 Management's Discussion and
Analysis of Results
32 Consolidated Financial Statements
35 Notes to Consolidated Financial
Statements
43 Report of Management
43 Independent Auditor's Report
44 Segments of Business and
Geographic Areas
45 Summary of Operations and
Statistical Data 1987-1997
Financials
25
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Overview
Record sales of $22.63 billion reinforced the Company's position as the world's
most comprehensive and broadly-based manufacturer of health care products. Sales
increased by 4.7% over 1996, despite the impact of the stronger dollar which
depressed sales growth by 4.0%. This marked the sixty-fifth consecutive year of
positive sales growth. The Company also achieved record profitability as
earnings grew to $3.3 billion, up 14.4% over 1996 and posted a record net income
margin for 1997 of 14.6%. The solid performance of new products introduced over
the past few years as well as cost efficiencies have enabled the Company to
attain these record sales and profitability levels.
The Company's investment in research and development continues to drive
the growth in new products. During 1997, the Company invested $2.14 billion, or
9.5% of sales, in research and development, the highest level in the Company's
history. This spending emphasizes the Company's commitment to achieving
significant advances in health care through the discovery and development of
innovative, knowledge based, cost effective products that prolong and enhance
the quality of life.
During 1997, the Company continued initiatives to streamline its
businesses worldwide and to make the organization more cost efficient. The 1997
gross profit margin improved from 67.5% to 68.4%, while selling, marketing and
administrative expenses as a percent to sales continued to fall from 38.8% to
38.5%. Over the past two years, the improvement in gross margins and reduced
operating expenses has resulted in cost savings of nearly $600 million on an
annual basis.
Earnings in 1997 generated $4.34 billion in cash from operations. When
combined with $3.89 billion in cash generated from operations in 1996, this
total of $8.23 billion in cash financed capital investments and all of the
Company's cash requirements during the past two years. This enabled the Company
to reduce net debt by $2.12 billion to a net cash position (cash and current
marketable securities net of debt) of $1.06 billion.
The worldwide health care market continues to be transformed as customers
have become more knowledgeable and demand even greater value. Simultaneously,
the market place has become increasingly more competitive. The Company believes
that it is well positioned to meet these challenges by providing innovative and
unique products through its commitment to research and development.
Additionally, our organizational structure of decentralized management and
dedicated employees along with our strong Credo values will enable us to provide
our customers with innovative products and services that create value.
Sales and Earnings
In 1997, worldwide sales increased 4.7% to $22.63 billion compared to increases
of 14.7% and 19.8% in 1996 and 1995, respectively. Excluding the impact of
foreign currencies, worldwide sales increased 8.7%, 16.5%, and 16.7% in 1997,
1996 and 1995, respectively.
Sales to Customers
--------------------------------------------------------------------------------
Millions of Dollars
[Graphic Omitted]
Worldwide net earnings for 1997 were $3.3 billion, reflecting a 14.4%
increase over 1996. Worldwide basic net earnings per share for 1997 equaled
$2.47, compared with $2.17 for 1996, adjusted to reflect the 1996 two-for-one
stock split, an increase of 13.8%. Worldwide diluted net earnings per share were
$2.41, compared with 1996 diluted net earnings per share of $2.12, adjusted to
reflect the 1996 two-for-one stock split, an increase of 13.7%. The net income
margin for 1997 was 14.6%, the highest in the Company's history.
Worldwide net earnings for 1996 were $2.89 billion, or basic net earnings
per share of $2.17 on a split-adjusted basis, representing increases over 1995
of 20.1% and 16.7%, respectively. Diluted net earnings per share were $2.12 for
1996 representing an increase of 16.5% over 1995. In 1995, worldwide net
earnings were $2.4 billion, or basic net earnings per share of $1.86 on a
split-adjusted basis, representing increases over 1994 of 19.8% and 19.2%,
respectively. Diluted net earnings per share were $1.82 for 1995 representing an
increase of 18.2% over 1994.
Average shares of common stock outstanding in 1997 were 1.34 billion
compared with 1.33 billion and 1.29 billion in 1996 and 1995, respectively, on a
split-adjusted basis.
Net Earnings
--------------------------------------------------------------------------------
Millions of Dollars
[Graphic Omitted]
Sales by domestic companies were $11.76, $10.9 and $9.19 billion in 1997,
1996 and 1995, representing increases of 7.9%, 18.6% and 17.6%, respectively.
The increase in domestic sales in 1997 was driven by the strong performance of
products introduced in the past few years and the continued expansion of base
businesses.
Sales by international companies were $10.87, $10.72 and $9.65 billion in
1997, 1996 and 1995, representing increases of 1.4%, 11.1% and 21.8%,
respectively. Excluding the impact of the relative strength or weakness of the
dollar over the past three years compared to international currencies,
international company sales increased 9.5%, 14.6% and 15.6% in 1997, 1996 and
1995, respectively.
26
All geographic areas throughout the world posted strong operational gains
during 1997. Excluding the effect of the stronger U.S. dollar on foreign
currencies, sales increased 6.8% in Europe, 7.2% in the Western Hemisphere
(excluding the U.S.) and 17.6% in the Asia-Pacific, Africa regions.
The Company achieved an annual compound growth rate of 10.9% for worldwide
sales for the ten-year period since 1987 with domestic and international sales
growing at rates of 10.9% and 11.0%, respectively. For the same ten-year period,
worldwide net earnings achieved an annual growth rate of 14.8%, while basic
earnings per share grew at a rate of 15.2%. For the last five years, excluding
the cumulative effects of accounting changes in 1992, annual compound growth
rates for sales, net earnings and basic earnings per share were 10.5%, 15.2% and
14.9%, respectively.
Common Stock Market Prices
The Company's common stock is listed on the New York Stock Exchange under the
symbol JNJ. The approximate number of shareowners of record at year-end 1997 was
156,800. The composite market price ranges for Johnson & Johnson common stock
during 1997 and 1996, adjusted to reflect the 1996 two-for-one stock split,
were:
Cash Dividends Paid
The Company increased its dividends in 1997 for the thirty-fifth consecutive
year. Cash dividends paid were $.85 per share in 1997 compared with
split-adjusted dividends of $.735 and $.64 per share in 1996 and 1995,
respectively. The dividends were distributed as follows:
On January 2, 1998, the Board of Directors declared a regular cash dividend of
$.22 per share, paid on March 10, 1998 to shareowners of record on February 17,
1998.
The Company expects to continue the practice of paying regular cash
dividends.
Costs and Expenses
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 were as follows:
Research expense as a percent of sales for the Pharmaceutical segment was
16.7%, 15.2% and 15.3% in 1997, 1996 and 1995, respectively, while averaging
5.5%, 5.6% and 5.4% in the other two segments.
Research Expense
--------------------------------------------------------------------------------
Millions of Dollars
[Graphic Omitted]
Advertising expenses worldwide, which are comprised of television, radio and
print media, were $1.26 billion in 1997, $1.26 billion in 1996 and $1.03 billion
in 1995. Additionally, significant expenditures were incurred for promotional
activities such as couponing and performance allowances.
The Company believes that its operations comply in all material respects
with applicable environmental laws and regulations. The Company or its
subsidiaries are parties to a number of proceedings brought under the
Comprehensive Environmental Response, Compensation, and Liability Act, commonly
known as Superfund, and comparable state laws, in which the primary relief
sought is the cost of past and future remediation. While it is not feasible to
predict or determine the outcome of these proceedings, in the opinion of the
Company, such proceedings would not have a material adverse effect on the
results of operations, cash flows or financial position of the Company.
Statement of Position No. 96-1, "Environmental Remediation Liabilities,"
requires that environmental remediation liabilities be accrued when the criteria
of Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies," are met. The new standard that
was adopted in 1997 has not had a material effect on the Company's results of
operations, cash flows or financial position.
Worldwide sales do not reflect any significant degree of seasonality;
however, spending has been heavier in the fourth quarter of each year than in
other quarters. This reflects increased spending decisions, principally for
advertising and research grants.
The worldwide effective income tax rate was 27.8% in 1997, 28.4% in 1996
and 27.6% in 1995. The decrease in the 1997 worldwide effective tax rate was
primarily due to a greater proportion of taxable income derived from lower tax
rate countries. See page 37 for additional information.
A summary of operations and related statistical data for the years
1987-1997 can be found on page 45.
27
Distribution of Sales Revenues
The distribution of sales revenues for 1997, 1996 and 1995 were:
Liquidity and Capital Resources
Cash generated from operations and selected borrowings provide the major sources
of funds for the growth of the business, including working capital, additions to
property, plant and equipment and acquisitions. Cash and current marketable
securities totaled $2.9 billion at the end of 1997 as compared with $2.14
billion at the end of 1996.
Total unused credit available to the Company approximates $3.2 billion,
including $1.2 billion of credit commitments with various worldwide banks, $800
million of which expires on October 2, 1998 and $400 million on October 6, 2002.
The Company issued no medium term notes or public long-term debt during
1997. At December 28, 1997, the Company had $2.29 billion remaining on its shelf
registration of $2.59 billion. A summary of borrowings can be found on page 36.
Total borrowings at the end of 1997 and 1996 were $1.84 billion and $2.28
billion, respectively. In 1997 net cash (cash and current marketable securities
net of debt) was $1.06 billion. In 1996 net debt (debt net of cash and current
marketable securities) was $146 million. Total debt represented 13.0% and 17.4%
of total capital (shareowners' equity and total debt) in 1997 and 1996,
respectively. Shareowners' equity per share at the end of 1997 was $9.19
compared with $8.13 at year-end 1996, an increase of 13.0%.
Financial Instruments
The Company uses financial instruments to manage the impact of interest rate and
foreign exchange rate changes on earnings and 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
gain or loss on the underlying transaction. A 10% appreciation of the U.S.
Dollar from December 28, 1997 market rates would increase the unrealized value
of the Company's forward contracts by $178 million. Conversely, a 10%
depreciation of the U.S. Dollar from December 28, 1997 market rates would
decrease the unrealized value of the Company's forward contracts by $216
million. In either scenario, the gain or loss on the forward contract is offset
by the gain or loss on the underlying transaction and therefore has no impact on
future earnings and cash flows.
The Company also enters into interest rate and currency swap contracts to
manage the Company's exposure to interest rate changes and hedge foreign
currency denominated debt. The impact of a 1% change in interest rates on the
Company's interest rate sensitive financial instruments is immaterial.
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 and in any event would be immaterial. See
pages 36, 40 and 41 for additional information.
Changing Prices and Inflation
Johnson & Johnson is aware that its products are used in a setting 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 1980-1996, 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) for the period. This was true
again in 1997.
Inflation rates, even though moderate in many parts of the world during
1997, 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.
Year 2000
The Company has reviewed its critical information systems for YEAR 2000
compliance and has initiated plans to remedy any deficiencies in a timely
manner. As a result of the review and action plan, the Company believes the cost
of such reme-dial corrective actions are not material to the Company's financial
position, results of operations or cash flows.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" that
establishes standards for reporting and display of an alternative income
measurement and its components in a full set of general-purpose financial
statements. This statement is effective for fiscal years beginning after
December 15, 1997. The Company will adopt SFAS 130 in 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" that establishes standards for the reporting
of
28
information about operating segments in annual financial statements.
Additionally, it requires that enterprises report selected information about
operating segments in interim financial reports issued to shareowners. This
statement is effective for periods beginning after December 15, 1997 and the
Company will adopt SFAS 131 for fiscal year 1998.
Segments of Business
Financial information for the Company's three worldwide business segments is
summarized below. Refer to page 44 for additional information on segments of
business.
Sales by Segment of Business
--------------------------------------------------------------------------------
Millions of Dollars
[Graphic Omitted]
[The following information was represented as a bar graph
in the printed material.]
Operating Profit by Segment of Business
--------------------------------------------------------------------------------
Millions of Dollars
[Graphic Omitted]
[The following information was represented as a bar graph
in the printed material.]
Consumer
The Consumer segment's principal products are personal care and hygienic
products, including oral and baby care products, first aid products,
nonprescription drugs, sanitary protection products and adult skin and hair care
products. Major brands include ACT Fluoride Rinse; BAND-AID Brand Adhesive
Bandages; CAREFREE Panty Shields; JOHNSON'S CLEAN & CLEAR skin care products;
IMODIUM A-D, an antidiarrheal; JOHNSON'S Baby line of products; JOHNSON's pH 5.5
skin and hair care products; MONISTAT, a remedy for vaginal yeast infections;
MYLANTA gastrointestinal products and PEPCID AC Acid Controller from the Johnson
& Johnson o Merck Consumer Pharmaceuticals Co.; NEUTROGENA skin and hair care
products; NICOTROL smoking cessation products; o.b. Tampons; PENATEN and NATUSAN
baby care products; PIZ BUIN and SUNDOWN sun care products; REACH toothbrushes;
RoC skin care products; SHOWER TO SHOWER personal care products; STAYFREE and
SURE & NATURAL sanitary protection products; and the broad family of TYLENOL
acetaminophen products. These products are marketed principally to the general
public and distributed both to wholesalers and directly to independent and chain
retail outlets.
Consumer segment sales in 1997 were $6.5 billion, an increase of 2.1% over
1996. Sales by domestic companies accounted for 49.9% of the total segment,
while international companies accounted for 50.1%. This growth was led by strong
performance in the NEUTROGENA, RoC and CLEAN & CLEAR skin care franchises as
well as adult and children's MOTRIN, IMODIUM Advanced Formula and LACTAID.
During the year, the Company announced a licensing agreement with Raisio Group
of Finland for the North American marketing rights (as well as a letter of
intent for the worldwide marketing rights) to a dietary ingredient, stanol
ester, which is patented for use in reducing cholesterol. The Company also
established an alliance with Takeda Chemical Industries in Japan for the sale
and distribution of OTC products beginning with several forms of TYLENOL.
Consumer segment sales in 1996 were $6.36 billion, an increase of 9.1%
over 1995. Sales by domestic companies accounted for 49.7% of the total segment,
while international companies accounted for 50.3%. The sales growth was led by
the strong performance of the OTC pharmaceutical business. PEPCID AC, a product
of the Johnson & Johnson o Merck Consumer Pharmaceuticals Co., and TYLENOL,
despite heavy competition, remain the dominant brands in their respective
categories. A strong performance by the adult skin and hair care franchise,
which includes the Neutrogena and RoC businesses, also contributed to the growth
in sales.
Consumer segment sales in 1995 were $5.83 billion, an increase of 11% over
1994. Sales by domestic companies accounted for 49% of the total segment, while
international companies accounted for 51%. Growth was led by the addition of the
Neutrogena line of high quality skin and hair care products, which was acquired
in the third quarter of 1994; the U.S. launch of PEPCID AC Acid Controller, by
Johnson & Johnson o Merck Consumer Pharmaceuticals Co., and continued growth in
international markets, most notably Brazil. In addition to PEPCID AC, Children's
MOTRIN, a nonprescription children's fever and pain reliever that lasts up to
eight hours, was introduced as an over-the-counter product.
Acquisitions and divestitures during 1997 and 1996 are described in more
detail on page 41.
Pharmaceutical
The Pharmaceutical segment represents over 50% of the Company's operating profit
for all segments. This segment's principal worldwide franchises are in the
allergy, antibacterial, antifungal, antianemia, central nervous system,
contraceptive, dermatology, gastrointestinal, and pain management
29
fields. These products are distributed both directly and through wholesalers for
use by health care professionals and the general public.
Prescription drugs include DURAGESIC, a transdermal patch for chronic
pain; EPREX (sold in the U.S. as PROCRIT), a biotechnology derived version of
the human hormone erythropoietin, which stimulates red blood cell production;
ERGAMISOL, a colon cancer drug; FLOXIN and LEVAQUIN, both antibacterials;
HISMANAL, the once-a-day less sedating antihistamine; IMODIUM, an antidiarrheal;
LEUSTATIN, for hairy cell leukemia; MOTILIUM, a gastrointestinal mobilizer;
NIZORAL, SPORANOX and TERAZOL, antifungals; ORTHOCLONE OKT-3, for reversing the
rejection of kidney, heart and liver transplants, ORTHO-NOVUM group of oral
contraceptives; PREPULSID (sold in the U.S. as PROPULSID), a gastrointestinal
prokinetic; RETIN-A, a dermatological cream for acne; RENOVA, a dermatological
cream for photo aging; RISPERDAL, an antipsychotic drug; and ULTRAM, a centrally
acting prescription analgesic for moderate to moderately severe pain.
Johnson & Johnson markets more than 90 prescription drugs around the
world, with 50% of the sales generated outside the United States. Twenty-six
drugs sold by the Company had 1997 sales in excess of $50 million, with 17 of
them in excess of $100 million.
Pharmaceutical segment sales in 1997 were $7.7 billion, an increase of
7.1% over 1996. This growth reflects the strong performance of RISPERDAL,
PROCRIT, PROPULSID, ULTRAM, DURAGESIC, and LEVAQUIN, a new anti-infective
launched in 1997.
At year-end 1997, the Company received approval from the FDA for REGRANEX
(becaplermin), the first biologic treatment proven to increase the incidence of
healing in diabetic foot ulcers. This wound healing agent utilizes a
genetically-engineered human platelet-derived growth factor to actively
stimulate the body to grow new tissue.
In the fourth quarter, the Company announced a licensing agreement for the
rights to a novel class of compounds for the treatment of pain and inflammation.
These compounds include selective Cox-2 inhibitors and offer advantages over
currently available drugs that have gastrointestinal side effects.
Pharmaceutical segment sales in 1996 were $7.19 billion, an increase of
14.6% over 1995. Domestic sales advanced 24.4%, while international sales
advanced 7.2%. The worldwide growth was attributable to the outstanding
performances of PROCRIT, RISPERDAL, SPORANOX, PROPULSID, ULTRAM, and DURAGESIC.
Pharmaceutical segment sales in 1995 were $6.27 billion, an increase of
21.6% over 1994. Domestic sales advanced 25.9%, while international sales rose
18.6%. The worldwide sales growth reflected the outstanding performances of
RISPERDAL, PROPULSID, SPORANOX, DURAGESIC and PROCRIT. Additionally, ULTRAM,
launched in late March, was also an important contributor to sales growth.
Significant research activities continued in the Pharma-ceutical segment,
increasing to $1.28 billion in 1997, or $186 million over 1996. This represents
16.7% of 1997 Pharmaceutical sales and a compound annual growth rate of
approximately 15.0% for the five-year period since 1992.
Pharmaceutical research is led by two worldwide organizations, Janssen
Research Foundation, headquartered in Belgium and the R.W. Johnson
Pharmaceutical Research Institute, headquartered in the United States.
Additional research is conducted through a collaboration with the James Black
Foundation in London, England.
Professional
The Professional segment includes suture and mechanical wound closure products,
minimally invasive surgical instruments, diagnostic products, cardiology
products, medical equipment and devices, disposable contact lenses, surgical
instruments, joint replacements and products for wound management and infection
prevention. These products are used principally in professional fields by
physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics.
Distribution to these markets is done both directly and through surgical supply
and other dealers.
Worldwide sales of $8.4 billion in the Professional segment represented an
increase of 4.5% over 1996. Sales growth continued to be fueled by the excellent
performance of Ethicon Endo-Surgery's minimally invasive surgical instruments,
Johnson & Johnson Professional's orthopaedic business, Vistakon's disposable
contact lenses and LifeScan's blood glucose monitoring systems. The
interventional cardiology market experienced growth in 1997 due in part to its
widely accepted use in the medical community as a standard of care. This growth
has attracted a number of new entrants to the market making it much more
challenging and competitive. The Asia-Pacific and Central Europe regions
contributed significantly to the overall increase in the Professional segment.
Of the 1997 Professional segment sales, domestic and international companies
accounted for 55% and 45% of the total, respectively.
There were several business combinations in the Professional segment
during 1997. These included Biopsys Medical, Inc., a maker of products for the
diagnosis and management of breast cancer; Biosense, Inc., a leader in medical
sensor technology for use in diagnostic and therapeutic interventional
procedures; Gynecare, Inc., a maker of minimally invasive medical devices for
the treatment of uterine disorders, and Innotech, Inc., a manufacturer of
equipment for high quality prescription eyeglass lenses.
At year-end 1997, three new products were approved for marketing by the
FDA. The Palmaz-Schatz Crown Stent, mounted on the PowerGrip Stent Delivery
System, was approved for use in treating plaque build-up and blockages in
coronary arteries. It offers significant flexibility in reaching difficult
lesions while retaining exceptional radial strength. Gynecare's ThermaChoice
Uterine Balloon Therapy System was approved for the treatment of excessive
menstrual bleeding in women. This eight-minute, minimally invasive, outpatient
procedure is a safe and effective alternative to hysterectomies and eliminates
the need for general anesthesia. In addition, Indigo's LaserOptic Treatment
System was approved for the treatment of symptoms of enlarged prostate in men,
otherwise known as benign prostatic hyperplasia. The system is a portable unit
that combines fiber
30
optics with diode laser technology and allows the surgeon to quickly destroy a
precise area of the prostate.
In 1996, Professional segment sales increased 19.8% over 1995, to $8.07
billion. The sales growth includes the full year impact of the merger with
Cordis Corporation in early 1996, and the continued growth of the interventional
cardiology business. Strong growth in the Asia-Pacific region also contributed
to the increase in the Professional segment, as did excellent performances by
LifeScan's blood glucose monitors, Vistakon's disposable contact lenses, Ethicon
Endo-Surgery's minimally invasive surgical instruments and Johnson & Johnson
Professional's orthopaedic business. Of the 1996 Professional segment sales,
domestic and international companies accounted for 54.3% and 45.7% of the total,
respectively.
In 1995, Professional segment sales increased 26.5% over 1994, to $6.74
billion. Sales growth was fueled by the rapid market acceptance of the
PALMAZ-SCHATZ Coronary Stent due to its efficacy in reducing restenosis, the
recurring blockage of arteries following balloon angioplasty. LifeScan's blood
glucose monitoring systems, Vistakon's disposable contact lenses, Ethicon
Endo-Surgery's minimally invasive surgical instruments and Johnson & Johnson
Clinical Diagnostics, the diagnostic business acquired from Eastman Kodak in
November 1994.
Acquisitions and divestitures during 1997 and 1996 are described in more
detail on page 41.
Geographic Areas
The Company further categorizes its sales and operating profit by major
geographic area as presented for the years 1997 and 1996:
Operating profit reported above is before deduction of taxes on income and
certain income and expense items not allocated to segments, such as interest
expense, minority interests and general corporate income and expense.
See page 44 for additional information on geographic areas.
Sales by Geographic Area of Business
--------------------------------------------------------------------------------
Millions of Dollars
[Graphic Omitted]
[The following information was represented as a bar graph
in the printed material.]
Operating Profit by Geographic Area of Business
--------------------------------------------------------------------------------
Millions of Dollars
[Graphic Omitted]
[The following information was represented as a bar graph
in the printed material.]
Description of Business
The Company, which employees 90,500 employees worldwide, is engaged in the
manufacture and sale of a broad range of products in the health care field in
virtually all countries of the world. The Company's primary interest, both
historically and currently, has been in products related to health and
well-being.
The Company is organized on the principle of decentralized management. The
Executive Committee of Johnson & Johnson is the principal management group
responsible for the operations of the Company. In addition, three Executive
Committee members are Chairmen of Group Operating Committees, which are
comprised of managers who represent key operations within the group, as well as
management expertise in other specialized functions. These Committees oversee
and coordinate the activities of domestic and international companies related to
each of the Consumer, Pharmaceutical and Professional businesses. Operating
management of each company is headed by a Chairman, President, General Manager
or Managing Director who reports directly or indirectly through a Company Group
Chairman.
In line with this policy of decentralization, each international
subsidiary is, with some exceptions, managed by citizens of the country where it
is located. The Company's international business is conducted by subsidiaries
manufacturing in 35 countries outside the United States and selling in over 175
countries throughout the world.
In all its product lines, the Company competes with companies both large
and small, located in the U.S. and abroad. Competition is strong in all lines
without regard to the number and size of the competing companies involved.
Competition in research, involving the development of new products and processes
and the improvement of existing products and processes, is particularly
significant and results from time to time 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 in multiple sales forces. In
addition, the winning and retention of customer acceptance of the Company's
consumer products involves heavy expenditures for advertising, promotion, and
selling.
31
Consolidated Balance Sheet Johnson & Johnson and Subsidiaries
See Notes to Consolidated Financial Statements
32
Consolidated Statement of Earnings Johnson & Johnson and Subsidiaries
Consolidated Statement of Common Stock, Retained Earnings and Treasury Stock
See Notes to Consolidated Financial Statements
33
Consolidated Statement of Cash Flows Johnson & Johnson and Subsidiaries
See Notes to Consolidated Financial Statements
34
Notes to Consolidated Financial Statements Johnson & Johnson and Subsidiaries
1 Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Johnson & Johnson
and subsidiaries. Intercompany accounts and transactions are eliminated.
Cash Equivalents
The Company considers securities with maturities of three months or less, when
purchased, to be cash equivalents.
Revenue Recognition
The Company recognizes revenue from product sales when the goods are shipped and
title passes to the customer.
Inventories
Inventories are stated at the lower of cost (determined principally by the
first-in, first-out method) or market.
Depreciation of Property
The Company utilizes the straight-line method of depreciation for financial
statement purposes for all additions to property, plant and equipment placed in
service after January 1, 1989. Property, plant and equipment placed in service
prior to January 1, 1989 is generally depreciated using an accelerated method.
Intangible Assets
The excess of the cost over the fair value of net assets of purchased businesses
is recorded as goodwill and is amortized on a straight-line basis over periods
of 40 years or less. The cost of other acquired intangibles is amortized on a
straight-line basis over their estimated useful lives. The Company continually
evaluates the carrying value of goodwill and other intangible assets. Any
impairments would be recognized when the expected future operating cash flows
derived from such intangible assets is less than their carrying value.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. This standard, adopted in 1996, did not have a
material effect on the Com-pany's results of operations, cash flows or financial
position.
Financial Instruments
Gains and losses on foreign currency hedges of existing assets or liabilities,
or hedges of firm commitments, are deferred and recognized in income as part of
the related transaction.
Unrealized gains and losses on currency swaps which hedge third party debt
are classified in the balance sheet as other assets or liabilities. Interest
expense under these agreements, and the respective debt instruments that they
hedge, are recorded at the net effective interest rate of the hedged
transaction.
In the event of early termination of a currency swap contract that hedges
third party debt, the gain or loss on the swap contract is amortized over the
remaining life of the related transaction. If the underlying transaction
associated with a swap, or other derivative contract, is accounted for as a
hedge and is terminated early, the related derivative contract is terminated
simultaneously and any gains or losses would be included in income immediately.
Advertising
Costs associated with advertising are expensed in the year in- curred.
Advertising expenses worldwide, which are comprised of television, radio and
print media, were $1.26 billion, $1.26 billion and $1.03 billion in 1997, 1996
and 1995, respectively.
Income Taxes
The Company intends to continue to reinvest its undistributed international
earnings to expand its international operations; therefore, no tax has been
provided to cover the repatriation of such undistributed earnings. At December
28, 1997 and December 29, 1996 the cumulative amount of undistributed
international earnings was approximately $5.9 billion and $5.5 billion,
respectively.
Net Earnings Per Share
At year-end 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 that requires the reporting of both basic and diluted earnings
per share. Basic earnings per share is computed by dividing net income available
to common shareowners by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Prior periods have been restated
to reflect the new standard. All share and per share amounts have also been
restated to reflect prior year stock splits.
Risks and Uncertainties
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported. Actual results are not
expected to differ materially 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 1998, the
fiscal year consists of 53 weeks.
Reclassification
Certain prior year amounts have been reclassified to conform with current year
presentation.
2 Inventories
At the end of 1997 and 1996, inventories were comprised of:
35
3 Property, Plant and Equipment
At the end of 1997 and 1996, property, plant and equipment at cost and
accumulated depreciation consisted of:
The Company capitalizes interest expense as part of the cost of construction of
facilities and equipment. Interest expense capitalized in 1997, 1996 and 1995
was $40, $55 and $70 million, 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 reserve accounts, respectively. The difference, if any, between the net
asset value and the proceeds is adjusted to income.
4 Borrowings
The components of long-term debt are as follows:
(1) The principal amounts of these debt issues include the effect of foreign
currency movements. Such debt was converted to fixed or floating rate U.S.
dollar liabilities via interest rate and currency swaps. Unrealized currency
gains (losses) on currency swaps are not included in the basis of the related
debt transactions and are classified in the balance sheet as other assets
(liabilities).
(2) Weighted average effective rate.
(3) Represents 5% Deutsche Mark notes due 2001 issued by a Japanese subsidiary
and converted to a 1.98% fixed rate yen note via an interest rate and currency
swap.
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 $1.2 billion of credit commitments with various worldwide
banks, $800 million of which will expire on October 2, 1998 and $400 million on
October 6, 2002. Borrowings under the credit line agreements will bear interest
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.
The Company's shelf registration filed with the Securities and Exchange
Commission enables the Company to issue up to $2.59 billion of unsecured debt
securities, and warrants to purchase debt securities, under its medium term note
(MTN) program. No MTN's were issued during 1997. At December 28, 1997, the
Company had $2.29 billion remaining on its shelf registration. The Company did
not issue any long-term public debt in 1997.
Short-term borrowings and current portion of long-term debt amounted to
$714 million at the end of 1997. These borrowings are composed of $115 million
equivalent of 11.25% Italian Lire notes, $72 million 4.5% currency indexed
notes, $65 million MTN's and $462 million of local borrowings, principally by
international subsidiaries.
Aggregate maturities of long-term obligations for each of the next five
years commencing in 1998 are:
5 Intangible Assets
At the end of 1997 and 1996, the gross and net amounts of intangible assets,
consisting primarily of patents, trademarks and goodwill, were:
6 Income Taxes
The provision for taxes on income consists of:
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.
36
Temporary differences and carryforwards for 1997 are as follows:
A comparison of income tax expense at the federal statutory rate of 35% in 1997,
1996 and 1995, to the Company's effective tax rate is as follows:
The reduction in the 1997 worldwide effective tax rate was primarily due to a
greater proportion of taxable income derived from lower tax rate countries.
During 1997, the Company had subsidiaries operating in Puerto Rico under a
grant for tax relief expiring December 31, 2007. The Omnibus Budget
Reconciliation Act of 1993 includes a change in the tax code which will reduce
the benefit the Company receives from its operations in Puerto Rico by 60%
gradually over a five-year period. The Small Business Job Protection Act of 1996
repealed the Puerto Rico tax credit; however, the Company, as an existing credit
claimant, may claim the credit for an additional 10 year period. In addi-tion,
the Company has subsidiaries manufacturing in Ireland under an incentive tax
rate expiring on December 31, 2010.
7 International Currency Translation
For translation of its international 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 separate component of shareowners' equity. 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, principally Latin America, which are reflected in
operating results.
An analysis of the changes during 1997 and 1996 in the separate component
of shareowners' equity for cumulative currency translation adjustments follows:
Net currency transaction and translation gains and losses included in other
expense were after-tax losses of $27 million in 1997, after-tax gains of $2
million in 1996, and after-tax losses of $14 million in 1995.
8 International Subsidiaries
The following amounts are included in the consolidated financial statements for
international subsidiaries:
International sales to customers were $10,872, $10,721, and $9,652 million for
1997, 1996 and 1995, respectively.
9 Rental Expense and Lease Commitments
Rentals of space, vehicles, manufacturing equipment and office and data
processing equipment under operating leases amounted to approximately $235
million in 1997, $237 million in 1996 and $227 million in 1995.
The approximate minimum rental payments required under operating leases
that have initial or remaining noncancellable lease terms in excess of one year
at December 28, 1997 are:
Commitments under capital leases are not significant.
37
10 Common Stock, Stock Option Plans and Stock Compensation Agreements
At December 28, 1997, the Company had stock option plans that may grant options
to employees and non-employee directors. Under the 1995 Employee Stock Option
Plan and the 1997 Non-Employee Directors' Plan, the Company may grant up to 56
million shares of common stock to its employees. The shares outstanding are from
the Company's 1986, 1991 and 1995 Employee Stock Option Plans, the 1997
Non-Employee Directors' Plan and the Mitek, Cordis, Biosense and Gynecare Stock
Option Plans.
Stock options expire in ten years from the date granted and vest over
service periods that range from two to six years. Shares available for future
grants amounted to 22.7 million, 32.9 million and 40.1 million in 1997, 1996 and
1995, respectively.
A summary of the status of the Company's stock option plans as of December
28, 1997, December 29, 1996 and December 31, 1995 and changes during the years
ending on those dates is presented below:
* Adjusted to reflect the 1996 two-for-one stock split.
In January 1996, the Company adopted the provisions of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," that
calls for companies to measure employee stock compensation expense based on the
fair value method of accounting. However, as allowed by the Statement, the
Company elected the continued use of Accounting Principle Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," with pro forma disclosure of
net income and earnings per share determined as if the fair value method had
been applied in measuring compensation cost. Had the fair value method been
applied, net income would have been reduced by $30 million or $.02 basic
earnings per share in 1997 and $16 million or $.01 basic earnings per share in
1996. In 1995, net income would have been reduced by $2 million with no change
to basic earnings per share. These calculations only take into account the
options issued since January 1, 1995. The average fair value of options granted
during 1997, 1996 and 1995 was $17.50, $13.37 and $10.96, respectively. The fair
value was estimated using the Black-Scholes option pricing model based on the
weighted average assumptions of: risk-free interest rate of 5.89% for 1997,
6.11% for 1996 and 5.65% for 1995; volatility of 21.5% for 1997, 18.2% for 1996
and 17.8% for 1995; expected life of 5.3 years for 1997, 7 years for 1996 and
1995; and dividend yield of 1.43% for 1997, 1.48% for 1996 and 1.90% for 1995.
The following table summarizes stock options outstanding and exercisable
at December 28, 1997:
(a) Average contractual life remaining in years
11 Certificates of Extra Compensation
The Company has a deferred compensation program for senior management and other
key personnel. The value of units awarded under the program is related to the
net asset value of the Company and historical earning power of its common stock.
Amounts earned under the program are payable only after employment with the
Company has ended.
12 Segments of Business and Geographic Areas
See page 44 for information on segments of business and geographic areas.
13 Retirement and Pension Plans
The Company sponsors various retirement and pension plans, including defined
benefit, defined contribution and termination indemnity plans, which cover most
employees worldwide.
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. The Company's objective in funding its domestic plans is to accumulate
funds sufficient to provide for all accrued benefits. International subsidiaries
have plans under which funds are deposited with trustees, annuities are
purchased under group contracts, or reserves are provided.
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.
38
Net pension expense for the Company's defined benefit plans for 1997, 1996
and 1995 included the following components:
The net periodic pension cost attributable to domestic plans and included above
was $50 million in 1997, $84 million in 1996 and $43 million in 1995.
The following tables provide the domestic assumptions and the range of
international assumptions, which are based on the economic environment of each
applicable country, used to develop net periodic pension cost and the actuarial
present value of projected benefit obligations:
The following table sets forth the actuarial present value of benefit
obligations and funded status at year-end 1997 and 1996 for the Company's
defined benefit plans:
39
14 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). In 1990, to
establish the ESOP, the Company loaned $100 million to the ESOP Trust to
purchase shares of Company stock on the open market. In exchange, the Company
received a note, the balance of which is recorded as a reduction of shareowners'
equity.
Total Company contributions to the plans were $58 million in 1997, $50
million in 1996 and $45 million in 1995.
15 Other Postretirement Benefits
The Company provides postretirement benefits, primarily health care, to all
domestic retired employees and their dependents. Most international employees
are covered by government-sponsored programs and the cost to the Company is not
significant. The Company does not fund retiree health care benefits in advance
and has the right to modify these plans in the future.
The net periodic postretirement benefit costs included the following
components:
The plans' status as of year-end 1997 and 1996 was as follows:
The postretirement benefit obligation was determined by application of the terms
of the various plans, together with relevant actuarial assumptions. Health care
cost trends are projected at annual rates grading from 10% for employees under
age 65 and 7% for employees over age 65 down to 5% for both groups by the year
2008 and beyond. The effect of a 1% annual increase in these assumed cost trend
rates would increase the accumulated postretirement benefit obligation at
year-end by $85 million and the service and interest cost components of the net
periodic postretirement benefit cost for 1997 by a total of $9 million.
Assumptions used to develop net periodic postretirement benefit cost and
the actuarial present value of projected postretirement benefit obligations were
as follows:
The Company also provides postemployment benefits to qualified former or
inactive employees. The Company does not fund these benefits and has the right
to modify these plans in the future.
16 Financial Instruments
Derivative Financial Instrument Risk
The Company uses derivative financial instruments to manage the impact of
interest rate and foreign exchange rate changes on earnings and cash flows. The
Company does not enter into financial instruments for trading or speculative
purposes.
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 and in any event would be immaterial.
Interest Rate and Foreign Exchange Risk Management
The Company uses interest rate and currency swaps to manage interest rate and
currency risk primarily related to borrowings. Interest rate and currency swap
agreements that hedge third party debt mature with these borrowings and are
described in Note 4.
The Company enters into forward foreign exchange contracts maturing within
five years to protect the value of existing foreign currency assets and
liabilities and to hedge future foreign currency product costs. The Company has
forward exchange contracts outstanding at year-end in various currencies,
principally in U.S. Dollars, Belgian Francs and Swiss Francs. In addition, the
Company has currency swaps outstanding, principally in U.S. Dollars, Belgian
Francs
40
and French Francs. Unrealized gains and losses, based on dealer quoted market
prices, from hedging firm commitments are presented in the following table:
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents and current and non-current
marketable securities approximates fair value of these instruments. In addition
the carrying amount of long-term investments, long-term debt, interest rate and
currency swaps (used to hedge third party debt) approximates fair value of these
instruments for 1997 and 1996.
The fair value of current and non-current marketable securities, long-term
debt and interest rate and currency swap agreements were estimated based on
quotes obtained from brokers for those or similar instruments. The fair value of
long-term investments were estimated based on quoted market prices at year-end.
Concentration of Credit Risk
The Company invests its excess cash in both deposits with major banks throughout
the world and other high quality short-term liquid money market instruments
(commercial paper, government and government agency notes and bills, etc.). 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.
The Company sells a broad range of products in the health care field in
most countries of the world. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base. Ongoing credit evaluations of customers' financial
condition are performed and, generally, no collateral is required. The Company
maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations.
17 Mergers, Acquisitions and Divestitures
During 1997, certain businesses were merged with Johnson & Johnson at a value,
net of cash, of $737 million. The mergers have been accounted for as poolings of
interests; prior period financial statements have not been restated since the
effect of these mergers would not materially effect previously issued financial
statements. The 1997 mergers included Biopsys Medical, Inc., Biosense, Inc. and
Gynecare, Inc. Biopsys Medical, Inc. is an innovator and marketer of the
MAMMOTOME Breast Biopsy System. The MAMMOTOME System is a minimally invasive
procedure for breast cancer diagnosis, which requires only local anesthetic and
is performed on an outpatient basis. Biosense, Inc. is a leader in developing
medical sensor technology and is developing several applications that will
facilitate a variety of diagnostic and therapeutic interventional and
cardiovascular procedures. Gynecare, Inc. is the developer and marketer of
innovative, minimally invasive medical devices utilized in the treatment of
uterine disorders.
Certain businesses were acquired for $180 million during 1997 and the
purchase method of accounting was employed. The most significant 1997
acquisition was Innotech, Inc., a developer and marketer of eyeglass lens
products, desktop lens casting systems and related consumables that enable eye
care professionals and optical retailers to custom fabricate high quality
prescription eyeglass lenses at the point of sale.
The excess of purchase price over the estimated fair value of 1997
acquisitions amounted to $157 million. This amount has been allocated to
identifiable intangibles and goodwill. Pro forma information is not provided for
1997 since the impact of the acquisitions does not have a material effect on the
Company's results of operations, cash flows or financial position.
Divestitures in 1997 did not have a material effect on the Company's
results of operations, cash flows or financial position.
On February 23, 1996, Johnson & Johnson and Cordis Corporation completed
the merger between the two companies. Cordis is a leader in angiography and
angioplasty (balloon catheters). The merger has been accounted for as a pooling
of interests; however, prior period financial statements have not been restated
as the effect of reflecting data relating to this merger would not materially
effect previously issued financial statements.
Johnson & Johnson issued 2.2584 shares of stock, on a split-adjusted
basis, for each share of Cordis stock. The exchange ratio resulted from dividing
$109 (exchange value of Cordis shares) by the average of the closing prices for
Johnson & Johnson shares for the 10 days prior to the merger. At the time of the
merger, Cordis had approximately 17.6 million shares outstanding on a fully
diluted basis, resulting in a total value, net of cash, of approximately $1.8
billion.
During 1996 certain business were acquired for $233 million. The 1996
acquisitions include Indigo Medical, Inc., a pioneer in the use of advanced, low
cost diode lasers for interstitial thermotherapy and the exercise of our option
to purchase the trademarks of Lactaid, Inc., producer of the natural dairy
digestive supplement LACTAID.
The excess of purchase price over the estimated fair value of 1996
acquisitions amounted to $205 million. This amount has been allocated to
identifiable intangibles and goodwill. Pro forma information is not provided for
1996 as the impact of the acquisitions does not have a material effect on the
Company's results of operations, cash flows or financial position.
Divestitures in 1996 did not have a material effect on the Company's
results of operations, cash flows or financial position.
41
18 Pending Legal Proceedings
The Company is involved in numerous product liability cases in the United
States, many of which concern adverse reactions to drugs and medical devices.
The damages claimed are substantial, and while the Company is confident of the
adequacy of the warnings 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.
Additionally, the Company, along with numerous other pharmaceutical
manufacturers and distributors, is a defendant in a large number of individual
and class actions brought by retail pharmacies in state and federal courts under
the antitrust laws. These cases assert price discrimination and price-fixing
violations resulting from an alleged industry-wide agreement to deny retail
pharmacists price discounts on sales of brand name prescription drugs. The
Company believes the claims against the Company in these actions are without
merit and is defending them vigorously.
Further, the Company, together with another contact lens manufacturer, a
trade association and various individual defendants, is a defendant in several
consumer class actions and an action brought by multiple State Attorneys General
on behalf of consumers alleging violations of federal and state antitrust laws.
These cases assert that enforcement of the Company's long-standing policy of
selling contact lenses only to licensed eye care professionals is a result of an
unlawful conspiracy to eliminate alternative distribution channels from the
disposable contact lens market. The Company believes that these actions are
without merit and is defending them vigorously.
The Company is also involved in a number of patent, trademark and other
lawsuits incidental to its business.
The Company believes that the above proceedings in the aggregate would not
have a material adverse effect on its results of operations, cash flows or
financial position.
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, 1997, December 29, 1996 and
December 31, 1995:
20 Selected Quarterly Financial Data (Unaudited)
Selected unaudited quarterly financial data for the years 1997 and 1996 is
summarized below:
*Adjusted to reflect the 1996 two-for-one stock split
42
Report of Management
The management of Johnson & Johnson is responsible for the integrity and
objectivity of the accompanying financial statements and related information.
The statements have been prepared in conformity with generally accepted
accounting principles, and include amounts that are based on our best judgements
with due consideration given to materiality.
Management maintains a system of internal accounting controls monitored by
a corporate staff of professionally trained internal auditors who travel
worldwide. This system is designed to provide reasonable assurance, at
reasonable cost, that assets are safeguarded and that transactions and events
are recorded properly. While the Company is organized on the principles of
decentralized management, appropriate control measures are also evidenced by
well-defined organizational responsibilities, management selection, development
and evaluation processes, communicative techniques, financial planning and
reporting systems and formalized procedures.
It has always been the policy and practice of the Company to conduct its
affairs ethically and in a socially responsible manner. This responsibility is
characterized and reflected in the Company's Credo and Policy on Business
Conduct that are distributed throughout the Company. Management maintains a
systematic program to ensure compliance with these policies.
Coopers & Lybrand L.L.P., independent auditors, is engaged to audit our
financial statements. Coopers & Lybrand L.L.P. obtains and maintains an
understanding of our internal controls and conducts such tests and other
auditing procedures considered necessary in the circumstances to express their
opinion in the report that follows.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with the independent auditors, management and
internal auditors to review their work and confirm that they are properly
discharging their responsibilities. In addition, the independent auditors, the
General Counsel and the Vice President, Internal Audit are free to meet with the
Audit Committee without the presence of management to discuss the results of
their work and observations on the adequacy of internal financial controls, the
quality of financial reporting and other relevant matters.
/s/ Ralph S. Larsen /s/ Robert J. Darretta
Ralph S. Larsen Robert J. Darretta
Chairman, Board of Directors Vice President, Finance
and Chief Executive Officer and Chief Financial Officer
Independent Auditor's Report
To the Shareowners and Board of Directors of Johnson & Johnson:
We have audited the accompanying consolidated balance sheet of Johnson & Johnson
and subsidiaries as of December 28, 1997 and December 29, 1996, and the related
consolidated statement of earnings, consolidated statement of common stock,
retained earnings and treasury stock, and consolidated statement of cash flows
for each of the three years in the period ended December 28, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Johnson &
Johnson and subsidiaries as of December 28, 1997 and December 29, 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 28, 1997, in conformity with generally accepted accounting
principles.
/s/ Cooper & Lybrand L.L.P.
New York, New York
January 19, 1998
43
Segments of Business(1) Johnson & Johnson and Subsidiaries
Geographic Areas
(1) See Management's Discussion and Analysis, pages 29 to 31, for a
description of the segments in which the Company does business.
(2) Export sales and intersegment sales are not significant. No single
customer represents 10% or more of total sales.
(3) Expenses not allocated to segments include interest expense, minority
interests and general corporate income and expense.
44
Summary of Operations and Statistical Data 1987-1997 Johnson & Johnson and
Subsidiaries
* Adjusted to reflect the 1996 two-for-one stock split
(1) Excluding the cumulative effect of accounting changes of $595
million. -1992 earnings percent of sales to customers before accounting
changes is 11.8%.
-1992 earnings percent return on average shareowners' equity
before accounting changes is 28.5%.
-1993 basic net earnings per share percent increase over prior
year before accounting change is 11.4%; 1992 is 12.3%.
(2) Excluding Latin America non-recurring charges of $125 million.
-1990 net earnings percent of sales to customers before
non-recurring charges is 11.3%.
-1990 percent return on average shareowners' equity before
non-recurring charges is 27.6%.
-1991 basic net earnings per share percent increase over prior
year before non-recurring charges is 15.3%; 1990 is 17.3%.
(3) Excluding one-time charges of $380 million in 1986, 1987 basic net
earnings per share percent increase over prior year before one-time
charges is 22.2%.
(4) Includes Latin America non-recurring charge of $36 million for the
liquidation of Argentine debt and $104 million writedown in other expenses
for permanent impairment of certain assets and operations in Latin
America.
(5) Net of interest and other income.
(6) Also included in cost of materials and services category.
(7) Includes taxes on income, payroll, property and other business taxes.
45