-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EpzLzyBtgzui4r/q+51/Al2Y7bWP5RxOR+hV2DLdwLMirPwqIuY+flNM3BoURnpj 6xf3N2QeJqsXwQBbW0hO9Q== 0000950123-05-003140.txt : 20050315 0000950123-05-003140.hdr.sgml : 20050315 20050315162648 ACCESSION NUMBER: 0000950123-05-003140 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20050102 FILED AS OF DATE: 20050315 DATE AS OF CHANGE: 20050315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JOHNSON & JOHNSON CENTRAL INDEX KEY: 0000200406 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 221024240 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03215 FILM NUMBER: 05682010 BUSINESS ADDRESS: STREET 1: ONE JOHNSON & JOHNSON PLZ CITY: NEW BRUNSWICK STATE: NJ ZIP: 08933 BUSINESS PHONE: 7325242454 10-K 1 y06203e10vk.txt FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 2, 2005 COMMISSION FILE NUMBER 1-3215 JOHNSON & JOHNSON (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW JERSEY 22-1024240 (State of (I.R.S. Employer Incorporation) Identification No.) ONE JOHNSON & JOHNSON PLAZA NEW BRUNSWICK, NEW JERSEY 08933 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (732) 524-0400 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, Par Value $1.00 New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ] The aggregate market value of the common stock held by non-affiliates (computed by reference to the price at which the common stock was last sold) as of the last business day of the registrant's most recently completed second fiscal quarter was approximately $161 billion. On March 1, 2005 there were 2,973,666,464 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and Portions of registrant's annual report to shareholders for III: fiscal year 2004 (the "Annual Report"). Parts I and III: Portions of registrant's proxy statement for its 2005 annual meeting (the "Proxy Statement").
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ITEM PAGE - ---- ---- 1. Business.................................................... 1 General................................................... 1 Segments of Business...................................... 1 Consumer.................................................. 1 Pharmaceutical............................................ 1 Medical Devices and Diagnostics........................... 2 Geographic Areas.......................................... 2 Raw Materials............................................. 2 Patents and Trademarks.................................... 2 Seasonality............................................... 3 Competition............................................... 3 Research.................................................. 3 Environment............................................... 3 Regulation................................................ 3 Available Information..................................... 4 2. Properties.................................................. 4 3. Legal Proceedings........................................... 5 4. Submission of Matters to a Vote of Security Holders......... 5 Executive Officers of the Registrant...................... 5 PART II 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.................................................. 7 6. Selected Financial Data..................................... 8 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.......................... 8 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 8 8. Financial Statements and Supplementary Data................. 8 9. Changes in and Disagreements on Accounting and Financial Disclosure.................................................. 8 9A. Controls and Procedures..................................... 8 PART III 10. Directors and Executive Officers of the Registrant.......... 9 11. Executive Compensation...................................... 9 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 10 13. Certain Relationships and Related Transactions.............. 10 14. Principal Accountant Fees and Services...................... 10 PART IV 15. Exhibits, Financial Statement Schedules..................... 10 Signatures.................................................. 12 Report of Independent Registered Public Accounting Firm on Financial Statement Schedule................................ 14 Exhibit Index............................................... 15
PART I ITEM 1. BUSINESS GENERAL Johnson & Johnson, employing approximately 109,900 people worldwide, is engaged in the manufacture and sale of a broad range of products in the health care field. Johnson & Johnson has over 200 subsidiaries that conduct business in virtually all countries of the world. Johnson & Johnson's primary interest, both historically and currently, has been in products related to human health and well-being. Johnson & Johnson was organized in the State of New Jersey in 1887. Johnson & Johnson is organized on 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 in which it is located. SEGMENTS OF BUSINESS Johnson & Johnson's worldwide business is divided into three segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. Additional information required by this item is incorporated herein by reference to the narrative and tabular (but not the graphic) descriptions of segments and operating results under "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 28 through 38 and 64 of Johnson & Johnson's Annual Report to Shareholders for fiscal year 2004 which is filed as Exhibit 13 to this Report on Form 10-K. CONSUMER 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 over-the-counter pharmaceutical and nutritional products. Major brands include AVEENO skin care products; BAND-AID Brand Adhesive Bandages; CAREFREE Pantiliners; CLEAN & CLEAR teen skin care products; JOHNSON'S Baby line of products; MOTRIN IB ibuprofen products; PEPCID AC Acid Controller from Johnson & Johnson - Merck Consumer Pharmaceuticals Co.; NEUTROGENA skin and hair care products; RoC skin care products; SPLENDA, a no calorie sweetener; STAYFREE sanitary protection products; and the broad family of TYLENOL acetaminophen 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. PHARMACEUTICAL The Pharmaceutical segment's principal worldwide franchises are in the antifungal, anti-infective, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, psychotropic (central nervous system) and urology fields. These products are distributed both directly and through wholesalers and health care professionals for use by prescription by the general public. Key products in the Pharmaceutical segment include: PROCRIT (Epoetin alfa, sold outside the U.S. as EPREX), a biotechnology derived product that stimulates red blood cell production; DURAGESIC (fentanyl transdermal system, sold abroad as DUROGESIC), a treatment for chronic pain that offers a novel delivery system; RISPERDAL (risperidone) and RISPERDAL CONSTA (risperidone long-acting injection), for treatment of the symptoms of schizophrenia; REMICADE (infliximab), a novel monoclonal antibody therapy indicated to treat the symptoms of Crohn's disease, rheumatoid arthritis and ankylosing spondylitis; LEVAQUIN (levofloxacin) and FLOXIN (ofloxacin), both in the anti-infective field; TOPAMAX (topiramate), an anti-epileptic and migraine prevention treatment; ORTHO EVRA (norelgestromin/ethinyl estradiol transdermal system), the first contraceptive patch approved by the Food and Drug Administration (FDA) and ORTHO TRI-CYCLEN LO (norgestimate/ethinyl estradiol), a low dose oral contraceptive; DOXIL (doxorubicin), a cancer treatment; DITROPAN XL (oxybutynin chloride), for the treatment of overactive bladder; REMINYL (galantamine HBr), for patients with mild to moderate Alzheimer's disease; NATRECOR (nesiritide), a novel agent approved for congestive heart failure; VELCADE (bortezomib), an oncology treatment; and CONCERTA (methylphenidate HCl) a product for the treatment of attention deficit hyperactivity disorder. MEDICAL DEVICES AND DIAGNOSTICS The Medical Devices and Diagnostics segment includes a broad range of products used by or under the direction of physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics. These products include Ethicon's wound care and women's health products; Ethicon Endo-Surgery's minimally invasive surgical products; Cordis' circulatory disease management products; LifeScan's blood glucose monitoring products; Ortho-Clinical Diagnostics' professional diagnostic products; DePuy's orthopaedic joint reconstruction, spinal and sports medicine products and Vistakon's disposable contact lenses. Distribution to these health care professional markets is done both directly and through surgical supply and other dealers. GEOGRAPHIC AREAS The international business of Johnson & Johnson is conducted by subsidiaries located in 56 countries outside the United States, which are selling products in virtually all countries throughout the world. The products made and sold in the international business include many of those described above under "Business -- Consumer, Pharmaceutical and Medical Devices and Diagnostics." However, the principal markets, products and methods of distribution in the international business vary with the country and the culture. The products sold in international business include not only those which were developed in the United States but also those which were developed by subsidiaries abroad. Investments and activities in some countries outside the United States are subject to higher risks than comparable U.S. activities because the investment and commercial climate is influenced by restrictive economic policies and political uncertainties. RAW MATERIALS Raw materials essential to Johnson & Johnson's operating companies' businesses are generally readily available from multiple sources. PATENTS AND TRADEMARKS Johnson & Johnson has made a practice of obtaining patent protection on its products and processes where possible. Johnson & Johnson owns or is licensed under a number of patents relating to its products and manufacturing processes, which in the aggregate are believed to be of material importance in the operation of its business. Sales of the Company's two largest products, PROCRIT and RISPERDAL, each accounted for over 5% of Johnson & Johnson's total revenues for 2004. Accordingly, the patents related to these products are believed to be material in relation to Johnson & Johnson as a whole. During 2004 and 2005, DURAGESIC (fentanyl transdermal system) in the United States and EPREX in international markets have lost or will lose their basic patent protection and will be subject to generic competition. The pediatric exclusivity for the DURAGESIC patent expired in the U.S. in January 2005. The first generic version of DURAGESIC has been launched. Foreign patent protection related to DURAGESIC will expire during 2005. The Company expects that DURAGESIC sales will decline in 2005 as compared to 2004. During 2004, patents related to EPREX in certain international markets expired. Generic competition will be limited in the near term due to the lack of biologically equivalent compounds. Sales of DURAGESIC and EPREX accounted for over 7% of Johnson & Johnson's worldwide sales in 2004. There are no other major product patents that are scheduled to expire during the next 2 years. Johnson & Johnson has made a practice of selling its products under trademarks and of obtaining protection for these trademarks by all available means. Johnson & Johnson's trademarks are protected by registration in the United States and other countries where its products are marketed. Johnson & Johnson considers these trademarks in the aggregate to be of material importance in the operation of its business. 2 SEASONALITY 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. COMPETITION In all of their product lines, Johnson & Johnson companies compete with companies both large and small, located in the United States 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 Johnson & Johnson'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 products of Johnson & Johnson's consumer businesses involve heavy expenditures for advertising, promotion and selling. RESEARCH Research activities are important to all segments of Johnson & Johnson's business. Major research facilities are located not only in the United States but also in Australia, Belgium, Brazil, Canada and the United Kingdom. The costs of Johnson & Johnson's worldwide research activities relating to the development of new products, the improvement of existing products, technical support of products and compliance with governmental regulations for the protection of the consumer amounted to $5,203, $4,684 and $3,957 million for fiscal years 2004, 2003 and 2002, respectively. These costs are charged directly to income in the year in which incurred. All research was sponsored by Johnson & Johnson. ENVIRONMENT During the past year Johnson & Johnson companies were subject to a variety of federal, state and local environmental protection measures. Johnson & Johnson believes that its operations comply in all material respects with applicable environmental laws and regulations. Johnson & Johnson's compliance with these requirements did not and is not expected to have a material effect upon its capital expenditures, cash flows, earnings or competitive position. REGULATION Most of Johnson & Johnson's business is subject to varying degrees of governmental regulation in the countries in which operations are conducted, and the general trend is toward regulation of increasing stringency. In the United States, the drug, device, diagnostics and cosmetic industries have long been subject to regulation by various federal, state and local agencies, primarily as to product safety, efficacy, advertising and labeling. The exercise of broad regulatory powers by the Food and Drug Administration (the "FDA") continues to result in increases in the amounts of testing and documentation required for FDA clearance of new drugs and devices and a corresponding increase in the expense of product introduction. Similar trends toward product and process regulation are also evident in a number of major countries outside of the United States, especially in the European Economic Community where efforts are continuing to harmonize the internal regulatory systems. The costs of human health care have been and continue to be a subject of study, investigation and regulation by governmental agencies and legislative bodies in the United States and other countries. In the United States, attention has been focused on drug prices and profits and programs that encourage doctors to write prescriptions for particular drugs or recommend particular medical devices. Managed care has become a more potent force in the market place and it is likely that increased attention will be paid to drug and medical device pricing, appropriate drug and medical device utilization and the quality of health care. There is also 3 uncertainty as to the impact of the Medicare Prescription Drug, Improvement and Modernization Act which was enacted in the latter part of 2003. The regulatory agencies under whose purview Johnson & Johnson operates have administrative powers that may subject Johnson & Johnson to such actions as product recalls, seizure of products and other civil and criminal sanctions. In some cases Johnson & Johnson may deem it advisable to initiate product recalls voluntarily. In addition, sales, marketing and other business practices in the health care industry have come under increased scrutiny by government agencies and state attorney generals and resulting investigations and prosecutions carry the risk of significant civil and criminal penalties. While the Company's affiliates do not sell any COX-2 inhibitor medicines, the recent developments involving those medicines (such as Vioxx and Celebrex) are likely to have implications throughout the health care industry. AVAILABLE INFORMATION Copies of Johnson & Johnson's quarterly reports on Form 10-Q, annual report on Form 10-K and current reports on Form 8-K, and any amendments to the foregoing, will be provided without charge to any shareholder submitting a written request to the Secretary at the principal executive offices of the Company or by calling 800-328-9033. All of the Company's Securities and Exchange Commission ("SEC") filings are also available on the Company's Web site at www.investor.jnj.com/governance, as soon as reasonably practicable after having been electronically filed or furnished to the SEC. All SEC filings are also available at the SEC Web site at www.sec.gov. In addition, the Charters of the Audit Committee, the Compensation & Benefits Committee and the Nominating & Corporate Governance Committee of the Board of Directors and the Company's Principles of Corporate Governance, Policy on Business Conduct and Code of Business Conduct & Ethics for Directors and Executive Officers, are available at the www.investor.jnj.com/governance Web site address and will be provided without charge to any shareholder submitting a written request, as provided above. ITEM 2. PROPERTIES Johnson & Johnson and its worldwide subsidiaries operate 141 manufacturing facilities occupying approximately 19 million square feet of floor space. The manufacturing facilities are used by the industry segments of Johnson & Johnson's business approximately as follows:
SQUARE FEET SEGMENT (IN THOUSANDS) ------- -------------- Consumer.................................................... 4,970 Pharmaceutical.............................................. 6,499 Medical Devices and Diagnostics............................. 7,514 ------ Worldwide total................................... 18,983 ======
Within the United States, 7 facilities are used by the Consumer segment, 14 by the Pharmaceutical segment and 42 by the Medical Devices and Diagnostics segment. Johnson & Johnson's manufacturing operations outside the United States are often conducted in facilities which serve more than one segment of the business. 4 The locations of the manufacturing facilities by major geographic areas of the world are as follows:
NUMBER OF SQUARE FEET GEOGRAPHIC AREA FACILITIES (IN THOUSANDS) --------------- ---------- -------------- United States............................................... 63 6,602 Europe...................................................... 36 7,445 Western Hemisphere excluding U.S.A.......................... 15 2,784 Africa, Asia and Pacific.................................... 27 2,152 --- ------ Worldwide Total................................... 141 18,983 === ======
In addition to the manufacturing facilities discussed above, Johnson & Johnson maintains numerous office and warehouse facilities throughout the world. Research facilities are also discussed in Item 1 under "Business -- Research." Johnson & Johnson generally seeks to own its manufacturing facilities, although some, principally in locations abroad, are leased. Office and warehouse facilities are often leased. Johnson & Johnson's properties are maintained in good operating condition and repair and are well utilized. For information regarding lease obligations see Note 4 "Rental Expense and Lease Commitments" under "Notes to Consolidated Financial Statements" on page 46 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K. Segment information on Additions to Property, Plant & Equipment is contained on page 64 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K. ITEM 3. LEGAL PROCEEDINGS The information set forth in Note 18 "Legal Proceedings" under "Notes to Consolidated Financial Statements" on pages 56 through 61 of the Annual Report is incorporated herein by reference and filed as Exhibit 13 to this Report on Form 10-K. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT Listed below are the executive officers of Johnson & Johnson as of March 14, 2005, each of whom, unless otherwise indicated below, has been an employee of the Company or its affiliates and held the position indicated during the past five years. There are no family relationships between any of the executive officers, and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected. At the annual meeting of the Board of Directors, the executive officers are elected by the Board to hold office for one year and until their respective successors are elected and qualified, or until earlier resignation or removal. 5 Information with regard to the directors of the Company, including those of the following executive officers who are directors, is incorporated herein by reference to pages 3 through 9 of Johnson & Johnson's Proxy Statement dated March 16, 2005 (the "Proxy Statement").
NAME AGE POSITION ---- --- -------- Robert J. Darretta..................... 58 Vice Chairman, Board of Directors; Member, Executive Committee; Chief Financial Officer Russell C. Deyo........................ 55 Member, Executive Committee; Vice President, General Counsel and Chief Compliance Officer(a) Michael J. Dormer...................... 53 Member, Executive Committee; Worldwide Chairman, Medical Devices(b) Kaye I. Foster-Cheek................... 46 Member, Executive Committee; Vice President, Human Resources(c) Colleen A. Goggins..................... 50 Member, Executive Committee; Worldwide Chairman, Consumer & Personal Care Group(d) JoAnn Heffernan Heisen................. 55 Member, Executive Committee; Vice President, Chief Information Officer(e) Per A. Peterson, M.D., Ph.D. .......... 60 Member, Executive Committee; Chairman, Pharmaceuticals Research & Development(f) Christine A. Poon...................... 52 Vice Chairman; Member, Executive Committee; Worldwide Chairman, Medicines & Nutritionals Joseph C. Scodari...................... 52 Member, Executive Committee; Worldwide Chairman, Pharmaceuticals Group(g) Nicholas J. Valeriani.................. 48 Member, Executive Committee; Worldwide Chairman, Cardiovascular Devices and Diagnostics(h) William C. Weldon...................... 56 Chairman, Board of Directors; Chief Executive Officer; Chairman, Executive Committee
- --------------- (a) Mr. R. C. Deyo joined the Company in 1985 and became Associate General Counsel in 1991. He became a Member of the Executive Committee and Vice President, Administration in 1996 and Vice President, General Counsel and Chief Compliance Officer in April 2004. (b) Mr. M. J. Dormer joined the Company in 1998 as Company Group Chairman, Worldwide Franchise Chairman for DePuy and Codman, when the Company acquired DePuy, Inc. At the time of that acquisition, he had been Chief Operating Officer of DePuy, Inc. since 1996. Mr. Dormer became a Member of the Executive Committee and Franchise Group Chairman for Medical Devices in 2001. In April 2002, Mr. Dormer was named Worldwide Chairman, Medical Devices Group. (c) Ms. K. I. Foster-Cheek joined the Company in 2003 as Vice President, Human Resources for the Johnson & Johnson Consumer Products Companies. In March 2004, she was named Vice President, Human Resources for the Consumer & Personal Care Group and was named a member of the Human Resources Leadership Team and the Consumer & Personal Care Group Operating Committee. Ms. Foster-Cheek became a Member of the Executive Committee and Vice President, Human Resources for the Company in January 2005. Prior to joining the Company, Ms. Foster-Cheek served in various human resources management positions with Pfizer for 13 years, most recently supporting its pharmaceutical business in Japan, Asia, Africa, Middle East and Latin America. (d) Ms. C. A. Goggins joined the Company in 1981 and held various positions before becoming President of Personal Products Company in 1994. She was named President of Johnson & Johnson Consumer Products Company in 1995 and Company Group Chairman, North America, Johnson & Johnson Consumer Products in 1998. Ms. Goggins became a Member of the Executive Committee and Worldwide Chairman, Consumer & Personal Care Group in 2001. (e) Ms. J. H. Heisen joined the Company in 1989 and became Treasurer in 1991 and Controller in 1995. She became a Member of the Executive Committee and Vice President, Chief Information Officer in 1997. (f) Dr. P. A. Peterson joined the Company in 1994 as Vice President, Drug Discovery of The R.W. Johnson Pharmaceutical Research Institute. He was named Group Vice President of The Pharmaceutical 6 Research Institute in April 1998 and its President in November 1998. In 2000, Dr. Peterson was named Chairman, Pharmaceuticals Research & Development. Dr. Peterson became a Member of the Executive Committee in 2001. (g) Mr. J. C. Scodari joined the Company in 1999 as President of Centocor when the Company acquired Centocor. At the time of that acquisition, he had been the President and Chief Operating Officer of Centocor and a member of Centocor's Board of Directors since December 1997. In March 2001, he was named Company Group Chairman for the North American pharmaceutical business, and became a member of the Pharmaceuticals Group Operating Committee. In March 2003, Mr. Scodari was named Company Group Chairman, Biopharmaceutical Businesses. Mr. Scodari was named Worldwide Chairman, Pharmaceuticals Group and became a Member of the Executive Committee on March 1, 2005. (h) Mr. N. J. Valeriani joined the Company in 1978 and held various positions before becoming President of Ethicon Endo-Surgery, Inc. in 1997. In January 2001 he was named Company Group Chairman for Ethicon Endo-Surgery with additional responsibility for the Johnson & Johnson Medical Products Medical Devices and Diagnostics business in Canada. He became Worldwide Franchise Chairman for the DePuy Franchise in 2002. Mr. Valeriani became a Member of the Executive Committee and Vice President, Human Resources in September 2003. In February 2004 he assumed additional responsibilities as Worldwide Chairman, Diagnostics. In January 2005, Mr. Valeriani was appointed as the Worldwide Chairman, Cardiovascular Devices and Diagnostics and relinquished his Human Resources responsibilities. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES As of March 1, 2005, there were approximately 187,840 record holders of Common Stock of the Company. The other information called for by this item is incorporated herein by reference to: the material captioned "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Share Repurchase & Dividends" on page 35 and "Common Stock Market Prices" on page 38; Note 10 under the "Notes to Consolidated Financial Statements" on pages 49 and 50 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K; and the "Equity Compensation Plan Information" on pages 32 and 33 of the Proxy Statement. The following table provides information with respect to Common Stock share purchases by the Company during fiscal 2004. Stock purchases are made as part of a systematic plan to meet the Company's compensation programs.
TOTAL NUMBER OF SHARES AVERAGE PRICE PAID FISCAL MONTH PURCHASED PER SHARE - ------------ ---------------------- ------------------ December 29, 2003 through January 25, 2004....... 2,256,500 $52.19 January 26, 2004 through February 22, 2004....... 3,950,600 $53.77 February 23, 2004 through March 28, 2004......... 1,458,500 $52.63 March 29, 2004 through April 25, 2004............ 925,000 $52.03 April 26, 2004 through May 23, 2004.............. 1,836,200 $54.78 May 24, 2004 through June 27, 2004............... 3,678,000 $55.46 June 28, 2004 through July 25, 2004.............. 1,334,300 $55.52 July 26, 2004 through August 22, 2004............ 1,130,000 $55.29 August 23, 2004 through September 26, 2004....... 1,553,300 $57.19 September 27, 2004 through October 24, 2004...... 1,510,600 $56.72 October 25, 2004 through November 21, 2004....... 2,001,100 $59.86 November 22, 2004 through January 2, 2005........ 3,087,700 $62.69
7 ITEM 6. SELECTED FINANCIAL DATA The information called for by this item is incorporated herein by reference to the material captioned "Summary of Operations and Statistical Data 1994-2004" on page 65 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information called for by this item is incorporated herein by reference to the narrative and tabular (but not the graphic) material included in the material captioned "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 28 through 38 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information called for by this item is incorporated herein by reference to the material captioned "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources" on pages 34 through 35 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item is incorporated herein by reference to the Audited Consolidated Financial Statements and Notes thereto and the material captioned "Report of Independent Registered Public Accounting Firm" on pages 39 through 63 of the Annual Report, which are filed as Exhibit 13 to this Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS. At the end of the fiscal fourth quarter, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures. The Company's disclosure controls and procedures are designed to ensure that the Company records, processes, summarizes and reports in a timely manner the information the Company must disclose in its reports filed under the Securities Exchange Act. William C. Weldon, Chairman and Chief Executive Officer, and Robert J. Darretta, Vice Chairman and Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Weldon and Darretta concluded that, as of the date of their evaluation, the Company's disclosure controls and procedures were effective. INTERNAL CONTROL. Management's Report on Internal Control over Financial Reporting is included in this Report on Form 10-K in this Item 9A. During the fiscal quarter ended January 2, 2005, there were no significant changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. Under Section 404 of The Sarbanes-Oxley Act of 2002, management is required to assess the effectiveness of the Company's internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company's internal control over financial reporting is effective. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company's financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with 8 respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company's management has assessed the effectiveness of the Company's internal control over financial reporting as of January 2, 2005. In making this assessment, the Company used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control-Integrated Framework." These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The Company's assessment included extensive documenting, evaluating and testing the design and operating effectiveness of its internal control over financial reporting. Based on the Company's processes and assessment, as described above, management has concluded that, as of January 2, 2005, the Company's internal control over financial reporting was effective. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of January 2, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in the "Report of Independent Registered Public Accounting Firm" on page 63 of the Annual Report, which is incorporated herein by reference. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by this item is incorporated herein by reference to (a) the material under the caption "Election of Directors -- Nominees" on pages 3 through 9 of the Proxy Statement, (b) the material in Part I hereof under the caption "Executive Officers of the Registrant," (c) the discussion of the Audit Committee under the heading "Directors' Fees, Committees and Meetings" on pages 10 through 12 of the Proxy Statement and (d) the material under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 13 of the Proxy Statement. The Company's Policy on Business Conduct, which covers all employees (including the Chief Executive Officer, Chief Financial Officer and Controller), meets the requirements of the SEC Rules promulgated under Section 406 of the Sarbanes-Oxley Act of 2002. The Policy on Business Conduct is available on the Company's Web site at www.jnj.com. Copies of the Policy on Business Conduct are available to shareholders without charge upon written request to the Secretary at the Company's principal address. Any substantive amendment to the Policy on Business Conduct or any waiver of the Policy granted to the Chief Executive Officer, the Chief Financial Officer or the Controller will also be posted on the Company's Web site at www.jnj.com within five business days (and retained on the Web site for at least one year). In addition, the Company has adopted a Code of Business Conduct & Ethics for Members of the Board of Directors and Executive Officers. The Code of Business Conduct & Ethics for Directors and Executive Officers is available on the Company's Web site at www.jnj.com. Copies of the Code of Business Conduct & Ethics are available to shareholders without charge upon written request to the Secretary at the Company's principal address. Any substantive amendment to the Code or any waiver of the Code granted to any member of the Board of Directors or any Executive Officer will also be posted on the Company's Web site at www.jnj.com within five business days (and retained on the Web site for at least one year). ITEM 11. EXECUTIVE COMPENSATION The information called for by this item is incorporated herein by reference to the following sections of the Proxy Statement: "Election of Directors -- Directors' Fees, Committees and Meetings" on pages 10 through 12; "Compensation & Benefits Committee Report on Executive Compensation" on pages 15 through 19; "Shareholder Return Performance Graphs" on pages 20 and 21; and "Executive Compensation" on pages 22 through 26. 9 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this item is incorporated herein by reference to the material captioned "Election of Directors -- Stock Ownership/Control" on page 9 of the Proxy Statement, and Note 10 under the "Notes to Consolidated Financial Statements" on pages 49 and 50 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information called for by this item is incorporated herein by reference to the material under the headings "Appointment of Independent Auditors" and "Pre-Approval of Audit and Non-Audit Services" on pages 34 through 36 of the Proxy Statement. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report 1. Financial Statements The following Audited Consolidated Financial Statements and Notes thereto and the Report of Independent Registered Public Accounting Firm on pages 39 through 63 of the Annual Report are incorporated herein by reference and filed as Exhibit 13 to this Report on Form 10-K: Consolidated Balance Sheets at end of Fiscal Years 2004 and 2003 Consolidated Statements of Earnings for Fiscal Years 2004, 2003 and 2002 Consolidated Statements of Equity for Fiscal Years 2004, 2003 and 2002 Consolidated Statements of Cash Flows for Fiscal Years 2004, 2003 and 2002 Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 2. Financial Statement Schedules Schedule II -- Valuation and Qualifying Accounts Schedules other than those listed above are omitted because they are not required or are not applicable. 3. Exhibits Required to be Filed by Item 60l of Regulation S-K The information called for by this item is incorporated herein by reference to the Exhibit Index in this report. 10 JOHNSON & JOHNSON AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FISCAL YEARS ENDED JANUARY 2, 2005, DECEMBER 28, 2003 AND DECEMBER 29, 2002 (DOLLARS IN MILLIONS)
BALANCE AT BALANCE AT BEGINNING PAYMENTS/ END OF OF PERIOD ACCRUALS OTHER PERIOD ---------- -------- --------- ---------- 2004 Accrued rebates, returns and promotions(1)........ $2,622 7,514(2) (7,351) 2,785 Reserve for doubtful accounts..................... 192 29 (15) 206 Reserve for cash discounts........................ 55 736 (729) 62 ------ ------ ------ ----- $2,869 8,279 (8,095) 3,053 ====== ====== ====== ===== 2003 Accrued rebates, returns and promotions(1)........ $2,035 5,850 (5,263) 2,622 Reserve for doubtful accounts..................... 191 28 (27) 192 Reserve for cash discounts........................ 62 597 (604) 55 ------ ------ ------ ----- $2,288 6,475 (5,894) 2,869 ====== ====== ====== ===== 2002 Accrued rebates, returns and promotions(1)........ $1,403 3,931 (3,299) 2,035 Reserve for doubtful accounts..................... 197 53 (59) 191 Reserve for cash discounts........................ 74 627 (639) 62 ------ ------ ------ ----- $1,674 4,611 (3,997) 2,288 ====== ====== ====== =====
- --------------- (1) Includes reserve for customer rebates of $488, $314 and $274 at January 2, 2005, December 28, 2003 and December 29, 2002 respectively. (2) Includes $170 related to the reversal of previously estimated performance-based rebate allowances in managed care contracts. Certain prior year amounts have been reclassified to conform with current year presentation. 11 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 9, 2005 JOHNSON & JOHNSON -------------------------------------- (Registrant) By /s/ W. C. WELDON ------------------------------------ W. C. Weldon, Chairman, Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ W. C. WELDON Chairman, Board of Directors and March 9, 2005 - ------------------------------------------ Chief Executive Officer, and W. C. Weldon Director (Principal Executive Officer) /s/ R. J. DARRETTA Vice Chairman, Board of Directors; March 9, 2005 - ------------------------------------------ Chief Financial Officer and Director R. J. Darretta (Principal Financial Officer) /s/ S. J. COSGROVE Controller March 8, 2005 - ------------------------------------------ S. J. Cosgrove /s/ G. N. BURROW Director March 11, 2005 - ------------------------------------------ G. N. Burrow /s/ M. S. COLEMAN Director March 12, 2005 - ------------------------------------------ M. S. Coleman /s/ J. G. CULLEN Director March 11, 2005 - ------------------------------------------ J. G. Cullen /s/ M. J. FOLKMAN Director March 11, 2005 - ------------------------------------------ M. J. Folkman /s/ A. D. JORDAN Director March 14, 2005 - ------------------------------------------ A. D. Jordan /s/ A. G. LANGBO Director March 9, 2005 - ------------------------------------------ A. G. Langbo
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SIGNATURE TITLE DATE --------- ----- ---- /s/ S. L. LINDQUIST Director March 9, 2005 - ------------------------------------------ S. L. Lindquist /s/ L.F. MULLIN Director March 9, 2005 - ------------------------------------------ L.F. Mullin /s/ S. S REINEMUND Director March 11, 2005 - ------------------------------------------ S. S Reinemund /s/ D. SATCHER Director March 14, 2005 - ------------------------------------------ D. Satcher /s/ H. B. SCHACHT Director March 14, 2005 - ------------------------------------------ H. B. Schacht
13 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE To the Shareholders and Board of Directors of Johnson & Johnson: Our audits of the consolidated financial statements, of management's assessment of the effectiveness of internal control over financial reporting and of the effectiveness of internal control over financial reporting referred to in our report dated February 28, 2005, appearing in the 2004 Annual Report to Shareholders of Johnson & Johnson (which report, consolidated financial statements and assessment are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP - ------------------------------------------------ PricewaterhouseCoopers LLP New York, New York March 11, 2005 14 EXHIBIT INDEX
REG. S-K EXHIBIT TABLE DESCRIPTION ITEM NO. OF EXHIBIT - ------------- ----------- 3(a)(i) Restated Certificate of Incorporation dated April 26, 1990 -- Incorporated herein by reference to Exhibit 3(a) of the Registrant's Form 10-K Annual Report for the year ended December 30, 1990. 3(a)(ii) Certificate of Amendment to the Restated Certificate of Incorporation of the Company dated May 20, 1992 -- Incorporated herein by reference to Exhibit 3(a) of the Registrant's Form 10-K Annual Report for the year ended January 3, 1993. 3(a)(iii) Certificate of Amendment to the Restated Certificate of Incorporation of the Company dated May 21, 1996 -- Incorporated herein by reference to Exhibit 3(a)(iii) of the Registrant's Form 10-K Annual Report for the year ended December 29, 1996. 3(a)(iv) Certificate of Amendment to the Restated Certificate of Incorporation of the Company effective May 22, 2001 -- Incorporated herein by reference to Exhibit 3 of the Registrant's Form 10-Q Quarterly Report for the quarter ended July 1, 2001. 3(b) By-Laws of the Company, as amended effective June 11, 2001 -- Incorporated herein by reference to Exhibit 99.2 of the Registrant's Form 10-Q Quarterly Report for the quarter ended July 1, 2001. 4(a) Upon the request of the Securities and Exchange Commission, the Registrant will furnish a copy of all instruments defining the rights of holders of long term debt of the Registrant. 10(a) Stock Option Plan for Non-Employee Directors -- Incorporated herein by reference to Exhibit 10(a) of the Registrant's Form 10-K Annual Report for the year ended December 29, 1996.* 10(b) 2000 Stock Option Plan (as amended) -- Incorporated herein by reference to Exhibit 10(b) of the Registrant's Form 10-K Annual Report for the year ended December 29, 2002.* 10(c) 1995 Stock Option Plan (as amended) -- Incorporated herein by reference to Exhibit 10(b) of the Registrant's Form 10-K Annual Report for the year ended January 3, 1999.* 10(d) 1991 Stock Option Plan (as amended) -- Incorporated herein by reference to Exhibit 10(c) of the Registrant's Form 10-K Annual Report for the year ended December 28, 1997.* 10(e) 2000 Stock Compensation Plan -- Incorporated herein by reference to Exhibit 10(e) of the Registrant's Form 10-K Annual Report for the year ended December 31, 2000.* 10(f) Executive Incentive Plan (as amended) -- Incorporated herein by reference to Exhibit 10(f) of the Registrant's Form 10-K Annual Report for the year ended December 31, 2000.* 10(g) Domestic Deferred Compensation (Certificate of Extra Compensation) Plan (as amended) -- Incorporated herein by reference to Exhibit 10(g) of the Registrant's Form 10-K Annual Report for the year ended December 28, 2003.* 10(h) Deferred Fee Plan for Non-Employee Directors (as amended) -- Filed with this document.* 10(i) Executive Income Deferral Plan (as amended) -- Incorporated herein by reference to Exhibit 10(i) of the Registrant's Form 10-K Annual Report for the year ended December 28, 2003.* 10(j) Excess Savings Plan -- Incorporated herein by reference to Exhibit 10(j) of the Registrant's Form 10-K Annual Report for the year ended December 29, 1996.* 10(k) Supplemental Retirement Plan -- Incorporated herein by reference to Exhibit 10(h) of the Registrant's Form 10-K Annual Report for the year ended January 3, 1993.* 10(l) Executive Life Insurance Plan -- Incorporated herein by reference to Exhibit 10(i) of the Registrant's Form 10-K Annual Report for the year ended January 3, 1993.*
15
REG. S-K EXHIBIT TABLE DESCRIPTION ITEM NO. OF EXHIBIT - ------------- ----------- 10(m) Stock Option Gain Deferral Plan -- Incorporated herein by reference to Exhibit 10(m) of the Registrant's Form 10-K Annual Report for the year ended January 2, 2000.* 10(n) Estate Preservation Plan -- Incorporated herein by reference to Exhibit 10(n) of the Registrant's Form 10-K Annual Report for the year ended January 2, 2000.* 10(o) Letter Agreement dated June 24, 2002 between the Company and Mr. R. S. Larsen with respect to post-employment arrangements -- Incorporated herein by reference to Exhibit 10(o) of the Registrant's Form 10-K Annual Report for the year ended December 29, 2002.* 10(p) Consulting Agreement between the Company and Dr. Judah Folkman, member of the Board -- Incorporated herein by reference to Exhibit 10(p) of the Registrant's Form 10-K Annual Report for the year ended December 29, 2002.* 10(q) Summary of compensation arrangements for Named Executive Officers and Directors -- Filed with this document.* 12 Statement of Computation of Ratio of Earnings to Fixed Charges -- Filed with this document. 13 -- Pages 28 through 66 of the Company's Annual Report to Shareholders for fiscal year 2004 (only those portions of the Annual Report incorporated by reference in this report are deemed "filed") -- Filed with this document. 21 Subsidiaries -- Filed with this document. 23 Consent of Independent Registered Public Accounting Firm -- Filed with this document. 31(a) Certification of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 -- Filed with this document. 31(b) Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 -- Filed with this document. 32(a) Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 -- Furnished with this document. 32(b) Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 -- Furnished with this document. 99(b) Cautionary Statement pursuant to Private Securities Litigation Reform Act of 1995: "Safe Harbor" for Forward-Looking Statements -- Filed with this document.
- --------------- * Management contracts and compensatory plans and arrangements required to be filed as Exhibits to this form pursuant to Item 15(a) of this Report on Form 10-K. A copy of any of the Exhibits listed above will be provided without charge to any shareholder submitting a written request specifying the desired exhibit(s) to the Secretary at the principal executive offices of the Company. 16 EX-10.H 2 y06203exv10wh.txt DEFERRED FEE PLAN FOR DIRECTORS (AS AMENDED) EXHIBIT 10 (h) JOHNSON & JOHNSON DEFERRED FEE PLAN FOR DIRECTORS (Amended as of February 14, 2005) 1. Purpose. The purpose of the Johnson & Johnson Deferred Fee Plan for Directors (the "Plan") is to provide outside Directors of Johnson & Johnson (the "Company") the opportunity to defer receipt of compensation earned as a Director to a date following termination of such service. The provision of such an opportunity is designed to aid the Company in attracting and retaining as members of its Board of Directors persons whose abilities, experience and judgment can contribute to the well being of the Company. 2. Effective Date. The original effective date of the Plan was January 1, 1983. The Plan was amended in its entirety, effective as of January 1, 1995 and again as of December 5, 1996. 3. Eligibility. Any Director of the Company who is not also an Employee of the Company or any related company shall be eligible to participate in the Plan. 4. Deferred Compensation Account. A deferred compensation account shall be established for each Director. 5. Amount of Deferral. Each participant (effective retroactive to January 1, 2005) may elect to defer receipt of all or a specified part of any cash compensation payable to the participant for serving on the Board of Directors or for serving on committees of the Board of Directors of the Company. An amount equal to all deferred compensation will be credited to the participant's deferred compensation account on a quarterly basis as of the dividend payment date in each quarter (the "Payment Date"). In the event that there shall not be a dividend payment date in any quarter, then the Payment Date shall be deemed to be the last business day of such quarter. 6. Deferred Compensation Account - Hypothetical Investment Options. (a) Unless otherwise specified by the participant pursuant to the terms of paragraph (b) of this Section 6, all amounts elected to be deferred under this Plan for any calendar year ("Deferrals") shall be credited to the participant's deferred compensation account, converted into equivalent units of Johnson & Johnson Common Stock ("Company Stock") and adjusted as if the compensation deferred had been invested in Company Stock as of the Payment Date, until the date of final payment pursuant to Section 9 hereof ("Company Stock Equivalent Units"). The number of Company Stock Equivalent Units shall be determined by dividing the amount of compensation payable by the average of the high and low price of the Company Stock as traded on the New York Stock Exchange on the trading day immediately prior to the Payment Date, as reported by Bloomberg (or another financial reporting service selected by the Company in its sole discretion). The number of Company Stock Equivalent Units included in a participant's deferred compensation account shall be adjusted to reflect dividends and the value of such account shall be adjusted to reflect increases or decreases in market value which would have resulted had funds equal to the balance of the participant's deferred compensation account been invested in Company Stock. Nothing herein obligates the Company to purchase any such Company Stock; and if such Company Stock is purchased, it shall remain the sole property of the Company. (b) At the election of each participant, to be made as provided for in Section 7, each deferred compensation account will be credited with interest from the Payment Date, until the date of final payment pursuant to Section 9 hereof, at a rate equal to the annual rate of growth of investment in the Johnson & Johnson Certificate of Extra Compensation Plan (the "CEC Plan"), for the prior year provided, however, that the computation of said growth rate shall not include dividend equivalents paid under the CEC Plan. The election permitted under this Section 6(b) shall not be available to any participant who becomes a participant in the Plan after December 31, 1995. (c) With respect to Company Stock Equivalent Units in a deferred compensation account, the Company shall credit such account on each dividend payment date declared with respect to the Company's Stock, a number of Company Stock Equivalent Units equal to: (i) the product of (y) the dividend per share of the Company's Stock which is payable as of the dividend payment date, multiplied by (z) the number of Company Stock Equivalent Units credited to such account as of the applicable dividend record date, divided by (ii) the average of the high and low price of the Company Stock as traded on the New York Stock Exchange on the trading day immediately prior to the dividend payment date, as reported by Bloomberg (or another financial reporting service selected by the Company in its sole discretion). Fractional Company Stock Equivalent Units shall be carried forward and fractional dividend equivalent units shall be payable thereon. (d) All account balances in Company Stock Equivalent Units from the Company's Retirement Plan for Nonemployee Directors which have been transferred to his/her deferred compensation account under this Plan, as of January 1, 1995, by reason of the termination of such Retirement Plan, shall be treated for purposes of this Plan as Deferrals. 7. Time of Election of Deferral. A participant may change (i) the amount of compensation deferred and/or (ii) the option elected under Section 6 with respect to his/her account and deferrals for subsequent years, once annually in December by completing forms provided by the Company for that purpose. Any such change shall become effective on January 1 of the following year. If a participant elects to change his/her investment option available under Section 6, the participant's account shall be valued as of December 31 with that value being entered into his/her account under the new investment option as of the following January 1 (except if such change is to Company Stock Equivalent Units, the first trading day following such January 1 shall be used). 8. Value of Deferred Compensation Account. The value of each participant's deferred compensation account shall, as the case may be, include compensation deferred, interest credited thereon, if any, and any adjustments for dividends, and increases or decreases in the market value of Company Stock, pursuant to the option selected under Section 6 or as otherwise required under the Plan. If the Company Stock does not trade on any date a calculation of Common Stock Equivalent Units is to be made under the Plan, the next preceding date on which such stock was traded shall be utilized. 9. Payment of Deferred Compensation. Upon a participant's completion of service as a member of the Board of Directors (the "Completion Date"), each participant (or in the event of the participant's death, the named beneficiary or his/her estate) shall be entitled to receive in cash in a lump sum the value of his/her deferred compensation account as of the Completion Date, unless such participant has elected, pursuant to the provisions of Section 10 below, to further defer payment of his/her deferred compensation account beyond such Completion Date. Company Stock Equivalent Units shall be valued at the average of the high and low price of the Company's Stock as traded on the New York Stock Exchange on the trading day immediately prior to such date, as reported by Bloomberg (or another financial reporting service selected by the Company in its sole discretion). No withdrawal may be made from the participant's deferred compensation account prior to the Completion Date. The value of a participant's deferred compensation account shall, subject to any further election made pursuant to Section 10 below, be paid as soon as practicable following the Completion Date or death. 10. Further Deferral Election. In addition to the deferral elections referred to above, a participant may also elect (in the manner provided for below) to continue to defer the receipt of his/her deferred compensation account beyond his/her Completion Date. The value of a participant's account on his/her Completion Date may be deferred for up to 10 taxable years following such Completion Date. If installments are elected, the first installment payment may be made immediately at the Completion Date or be deferred for up to 10 taxable years. Installment payments will be made annually (in the manner described below) in approximately equal amounts (i.e. the balance of the account). The minimum number of installments is two and the maximum number is 10 provided, however, that all payments shall be made within ten (10) years of the Completion Date. A participant may elect to defer up to 100% of the value of his/her account at the Completion Date; or any percentage increment less than that. All deferred or installment payments shall be made in cash. The following additional rules shall apply: a) Immediate Lump Sum Payment. The participant will receive the full value of his/her account in the calendar month of his/her Completion Date. b) Deferred Lump Sum Payment. The participant will receive the full value of his/her account on or about January 15 of the year he/she elects to receive payment in. c) Immediate Commencement of Installments. The participant will receive the first installment in the calendar month of his/her Completion Date. All subsequent installments on or about January 15 of each year. d) Deferred Commencement of Installments. The participant will receive the first and all subsequent installments on or about January 15 of each year. e) In the event of death of a participant, the Company will make payment in full of the balance of an account, as soon as administratively practical in a single lump sum payment to the designated beneficiary or his/her estate. f) In making any payment due on or about January 15, the value of a participant's account on the first trading day of such month shall be utilized. Any and all deferrals following a Completion Date shall be invested in Company Stock Equivalent Units described in Section 6(a) above. To the extent a participant's account was credited with the annual growth rate of an investment in the CEC Plan (as described in Section 6(b) above), such account shall be converted to Common Stock Equivalent units as of the Completion Date. An election by a participant to defer payment or elect installments of all or a part of his/her deferred compensation account beyond the Completion Date must be made a minimum of twelve (12) months prior to such Completion Date. Any such election may be revised or revoked up to twelve (12) months prior to such Completion Date; after such time any election may not be revoked or otherwise revised. Notwithstanding the above and upon implementation of the Plan, an exception has been made for participants having a Completion Date during 1997. For such participants, the deferral and or installment election must be made a minimum of three (3) months and in the calendar year prior to the Completion Date. For example, a participant having a Completion Date of April 1, 1997, must make the deferral and/or installment election no later than December 31, 1996. Any such election to defer and/or receive installment payments may only be revised or revoked prior to the last permissible date for making such election. After such time the election may not be revoked or otherwise revised. An election to defer payment and/or be paid in installments beyond a Completion Date is effective only when filed with Extra Compensation Services on the form utilized for such purposes. Any election made after the required deadline shall be disregarded. 11. Designation of Beneficiary. Each participant may, from time to time, by writing filed with the Secretary of the Company, designate any legal or natural person or persons (who may be designated contingently or successively) to whom payments of a participant's deferred compensation account are to be made if a participant dies prior to the receipt of payment of such account. A beneficiary designation will be effective only if the signed form is filed with the Secretary of the Company while the participant is alive and will cancel all beneficiary designation forms filed earlier. If a participant fails to designate a beneficiary as provided above, or if all designated beneficiaries die before the participant or before complete payment of the deferred compensation account, such account shall be paid to the estate of the last to die of the participant and designated beneficiaries as soon as practicable after such death. 12. Participant's Rights Unsecured. The right of any participant to receive payment under the provisions of the Plan shall be an unsecured claim against the general assets of the Company, and no provisions contained in the Plan shall be construed to give any participant or beneficiary at any time a security interest in any deferred compensation account or any other asset in trust with the Company for the benefit of any participant or beneficiary. 13. Statement of Account. A statement will be sent to participants as soon as practical following the end of each year as to the value of his/her deferred compensation account as of December 31 of such year. 14. Assignability. No right to receive payments hereunder shall be transferable or assignable by a participant or a beneficiary, except by will or by the laws of descent and distribution. 15. Administration of the Plan. The Plan shall be administered by a Committee appointed by and responsible to the Board of Directors. The Committee shall consist of no less than three Directors of the Company. The Committee shall act by vote or written consent of a majority of its members. 16. Amendment or Termination of Plan. This Plan may at any time or from time to time be amended, modified or terminated by the Compensation Committee of the Board of Directors or the Board of Directors of the Company. No amendment, modification or termination shall, without the consent of a participant, adversely affect such participant's accruals in his deferred compensation accounts. 17. Governing Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of New Jersey. EX-10.Q 3 y06203exv10wq.txt SUMMARY OF COMPENSATION EXHIBIT 10 (q) Summary of Compensation Arrangements for Named Executive Officers and Directors Compensation Arrangements for Named Executive Officers Following is a description of the compensation arrangements that have been approved by the Compensation & Benefits Committee (the "Compensation Committee") on February 14, 2005 for the Company's Chief Executive Officer and the other four most highly compensated executive officers in 2004 (the "Named Executive Officers"). The Compensation Committee approved the following base salaries, effective March 1, 2005, for the Named Executive Officers: William C. Weldon, Chairman/CEO $1,600,000 Robert J. Darretta, Vice Chairman/CFO $ 990,000 Chris Poon, Vice Chairman/Worldwide Chairman, $ 925,000 Medicines & Nutritionals Group Per A. Peterson, Chairman, R&D, Pharmaceuticals Group $ 807,000 Russell C. Deyo, Vice President, General Counsel $ 710,000
The Compensation Committee has approved the following bonus payments for performance in 2004 (comprised of cash and the fair market value of Common Stock awards on February 14, 2005): Mr. Weldon $2,500,000 Mr. Darretta $ 874,500 Ms. Poon $ 856,000 Dr. Peterson $ 798,750 Mr. Deyo $ 689,000
The Compensation Committee has approved the following stock option grants under the Company's 2000 Stock Option Plan at an exercise price of $66.18, which was the fair market value of the Company's Common Stock on the date of grant. The options will become exercisable on February 15, 2008 and expire on February 13, 2015. Mr. Weldon 410,000 Mr. Darretta 160,000 Ms. Poon 185,000 Dr. Peterson 150,000 Mr. Deyo 125,000
The Compensation Committee has approved the following long term incentive plan awards in recognition of performance during 2004 under the Company's Certificate of Extra Compensation ("CEC") Program. Awards are not paid out until retirement or other termination of employment. As of the end of fiscal year 2004, the CEC value per unit was $19.71. The value of the CEC units is subject to increase or decrease based on the performance of the Company. Mr. Weldon 100,000 CEC Units Mr. Darretta 50,000 CEC Units Ms. Poon 100,000 CEC Units Dr. Peterson 120,000 CEC Units Mr. Deyo 95,000 CEC Units
Compensation Arrangements for Non-Employee Directors Each Non-Employee Director receives an annual fee of $85,000 for his or her services as director. In addition, directors receive $5,000 for service on a committee of the Board of Directors or $15,000 if chairperson of the committee. The Presiding Director is paid an annual fee of $10,000. Under the 2005 Long-Term Incentive Plan being submitted to the shareholders for approval at the 2005 Annual Meeting, each Non-Employee Director would receive non-retainer equity compensation each year in the form of restricted or deferred stock having a value of $100,000. Subject to shareholder approval of the 2005 Long-Term Incentive Plan, each Non-Employee Director will receive a grant of 1,511 shares of restricted stock, based upon the fair market value of the Common Stock of the Company on February 14, 2005. These shares of restricted stock will not be issued unless such Plan is approved by the shareholders. In addition, each future director will receive a one-time grant of 1,000 shares of Company Common Stock upon first becoming a member of the Board of Directors. EX-12 4 y06203exv12.txt STATEMENT OF COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12 JOHNSON & JOHNSON AND SUBSIDIARIES STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(1) (DOLLARS IN MILLIONS)
FISCAL YEAR ENDED ---------------------------------------------------------------------- JANUARY 2, DECEMBER 28, DECEMBER 29, DECEMBER 30, DECEMBER 31, 2005 2003 2002 2001 2000 ---------- ------------ ------------ ------------ ------------ Determination of Earnings: Earnings Before Provision for Taxes on Income............. $12,838 $10,308 9,291 7,898 6,868 Fixed Charges.................. 272 300 259 245 292 ------- ------- ----- ----- ----- Total Earnings as Defined.............. $13,110 $10,608 9,550 8,143 7,160 ======= ======= ===== ===== ===== Fixed Charges and Other: Rents.......................... 85 93 99 92 88 Interest Expense Before Capitalization of Interest.................... 323 315 258 248 301 ------- ------- ----- ----- ----- Total Fixed Charges.... $ 408 $ 408 357 340 389 ======= ======= ===== ===== ===== Ratio of Earnings to Fixed Charges........................ 32.13 26.00 26.75 23.95 18.41 ======= ======= ===== ===== =====
- --------------- (1) The ratio of earnings to fixed charges is computed by dividing the sum of earnings before provision for taxes on income and fixed charges by fixed charges. Fixed charges represent interest expense (before interest is capitalized), amortization of debt discount and an appropriate interest factor on operating leases. EX-13 5 y06203exv13.txt PAGES 28-66 OF ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 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 109,900 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 focus 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 directly to retailers, 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 circulatory disease management products; DePuy's orthopaedic joint reconstruction and spinal care 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' professional diagnostic products and Vision Care'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. 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 development and maintenance 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. New products introduced within the past five years accounted for over 35% of 2004 sales. In 2004, $5.2 billion or 11.0% of sales were invested in research and development, recognizing the importance of on-going development of new and differentiated products and services, and to sustain long term growth. 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. The Company is committed to developing global business leaders who can drive our growth objectives. Businesses are managed for the long term in order to sustain leadership positions and achieve growth that provides an enduring source of value to our 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. Results of Operations Analysis of Consolidated Sales In 2004, worldwide sales increased 13.1% to $47.3 billion, compared to increases of 15.3% in 2003 and 12.3% in 2002. These sales increases consist of the following:
Sales increase due to: 2004 2003 2002 Volume 8.7% 9.4 10.4 Price 1.0 1.3 1.7 Currency 3.4 4.6 0.2 Total 13.1% 15.3 12.3
Sales by U.S. companies were $27.7 billion in 2004, $25.3 billion in 2003 and $22.5 billion in 2002. This represents an increase of 9.9% in 2004, 12.6% in 2003 and 13.3% in 2002. Sales by international companies were $19.6 billion in 2004, $16.6 billion in 2003 and $13.8 billion in 2002. This represents an increase of 18.0% in 2004, 19.8% in 2003 and 10.8% in 2002. 28 [graph] For the last five years, the annual compound growth rates for worldwide, U.S. and international sales were 11.6%, 12.3% and 10.6%, respectively. The ten-year annual compound growth rates for worldwide, U.S. and international sales were 11.8%, 13.6% and 9.7%, respectively. [graph] All international geographic areas experienced double-digit sales growth during 2004, consisting of 17.6% in Europe, 15.8% in the Western Hemisphere (excluding the U.S.) and 19.9% in the Asia-Pacific, Africa regions. These sales gains include a positive impact of currency fluctuations between the U.S. dollar and foreign currencies in Europe of 10.5%, in the Western Hemisphere (excluding the U.S.) of 4.2% and in the Asia-Pacific, Africa region of 6.6%. In 2004, sales to our three largest distributors, Cardinal Distribution, McKesson HBOC and AmerisourceBergen Corp. accounted for 10.2%, 10.0% and 7.5%, respectively, of total revenues. In 2003 and 2002, sales to those distributors accounted for 9.1%, 10.5% and 9.0% and 9.2%, 9.8% and 10.3%, respectively, of total revenues. 2004 results benefited from the inclusion of a 53rd week. (See Note 1 for Annual Closing Date details.) The Company estimated that the fourth quarter growth rate was enhanced by approximately 2% and the year by approximately 0.5%. While the additional week added to sales, it also brought a full week's worth of operating costs; therefore the net earnings impact was negligible. [graph] Analysis of Sales by Business Segments Consumer Segment Consumer segment sales in 2004 were $8.3 billion, an increase of 12.1% over 2003, with operational growth accounting for 8.8% of the total growth and 3.3% due to positive currency fluctuations. U.S. Consumer segment sales were $4.2 billion, an increase of 6.5%. International sales were $4.1 billion, an increase of 18.7%, with 11.5% as a result of operations and 7.2% due to currency fluctuations over 2003. Consumer segment sales growth in 2004 was attributable to strong sales performance in the major franchises including over-the-counter (OTC) pharmaceutical and nutritional products, Skin Care and Baby & Kids Care. Over-the-counter pharmaceutical and nutritional products sales were $2.4 billion, an increase of 17.2% over 2003. Overall growth in this franchise primarily resulted from the rapid increase of SPLENDA No Calorie Sweetener in the tabletop category. The acquisition of Merck's equity stake in the European nonprescription pharmaceutical business was also a contributing factor to this increase, as it added 7.7% growth to the over-the-counter pharmaceuticals and nutritionals franchise. Major Consumer Franchise Sales:
% Change '04 vs '03 vs. (Millions of Dollars) 2004 2003 2002 '03 '02 OTC Pharmaceuticals & Nutritionals $2,395 2,044 1,800 17.2% 13.6 Skin Care 2,140 1,797 1,571 19.1 14.4 Women's Health 1,470 1,369 1,249 7.4 9.6 Baby & Kids Care 1,447 1,309 1,161 10.5 12.7 Other 881 912 783 (3.4) 16.5 Total $8,333 7,431 6,564 12.1% 13.2
29 In February 2004, the Company announced an agreement with Tate & Lyle related to the production of sucralose and the SPLENDA brand. This transaction was completed on April 2, 2004 and resulted in the Company being responsible for the worldwide sales and marketing of the tabletop category of SPLENDA Brand Sweetener and Tate & Lyle being responsible for the manufacturing of sucralose and the marketing of ingredient sales. This transaction reduced sales growth by 3.1% for the franchise. The Skin Care franchise sales in 2004 were $2.1 billion, representing a 19.1% increase over 2003. This was attributable to double-digit sales growth in RoC, AVEENO, CLEAN & CLEAR and NEUTROGENA brand products. The ADVANCED SOLUTIONS product line launched in 2004 was a key contributor in the growth of NEUTROGENA. The Baby & Kids Care franchise grew by 10.5% to $1.4 billion in 2004. Growth in this franchise was led by the success of the JOHNSON'S SOFTWASH and SOFTLOTION product lines and the BALMEX brand products acquired in 2003. Consumer segment sales in 2003 were $7.4 billion, an increase of 13.2% over 2002, with operational growth accounting for 9.4% of the total growth, and 3.8% due to a positive currency impact. U.S. sales increased by 10.1% while international sales increased by 17.0%, with 8.6% due to operational gains and a positive currency impact of 8.4% over 2002. 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%. Pharmaceutical Segment Pharmaceutical segment sales in 2004 were $22.1 billion, an increase of 13.4% over 2003, with 10.7% of this change due to operational growth and the remaining 2.7% increase related to the positive impact of currency. U.S. Pharmaceutical segment sales increased 12.7% while international Pharmaceutical segment sales increased 14.8%, which included 6.4% of operational growth and 8.4% related to the positive impact of currency. Pharmaceutical segment sales in 2004 include the benefit from adjustments related to previously estimated performance-based rebate allowances in managed care contracts. These adjustments were made based on a review of actual performance levels as achieved by customers, compared to expected performance levels. These favorable adjustments amounted to less than 1.0% of the Pharmaceutical segment's operational growth in 2004. The vast majority of the impact of this adjustment was in the hormonal contraceptive franchise. Pharmaceutical segment sales growth reflects the strong performance in many of the key pharmaceutical products, partially offset by the sales decline of PROCRIT (Epoetin alfa) and EPREX (Epoetin alfa), which were adversely affected by competition. Combined, PROCRIT and EPREX sales declined 9.9% in 2004 as compared to 2003. PROCRIT sales declined by 12.2% over 2003. The PROCRIT sales decrease was due to lower pricing and market share, partially offset by market growth. The Company continues in its efforts to stabilize market share and expand the market. A strong growth driver in the Pharmaceutical segment was RISPERDAL (risperidone), a medication that treats the symptoms of schizophrenia. RISPERDAL accounted for $3.1 billion in sales in 2004, with continued success of RISPERDAL CONSTA (risperidone) long-acting injection. REMICADE (infliximab), a novel monoclonal antibody therapy indicated to treat the symptoms of Crohn's disease and rheumatoid arthritis, also had strong growth. REMICADE sales were $2.1 billion in 2004, an increase of 24.1% over 2003. DURAGESIC (fentanyl transdermal system), with its novel delivery system for the treatment of chronic pain, continued to achieve outstanding results, growing 27.7% over 2003. The pediatric exclusivity for the DURAGESIC patent expired in the U.S. in January 2005. The first generic version of DURAGESIC has been launched. Additionally, an authorized generic version of DURAGESIC is currently being marketed for the Company. The Company expects that DURAGESIC sales will decline in 2005. See Note 18 for further discussion regarding this matter. TOPAMAX (topiramate), an antiepileptic that was recently approved for use in the prevention of migraines, had strong growth of 35.2% over 2003. LEVAQUIN (levofloxacin) and FLOXIN (ofloxacin) grew by 12.8% over 2003. During the fiscal fourth quarter, LEVAQUIN oral solution was approved as a new once a day formulation for the treatment of adults for currently approved indications and for anthrax prophylaxis. Major Pharmaceutical Product Revenues:
% Change '04 vs. '03 vs. (Millions of Dollars) 2004 2003 2002 '03 '02 PROCRIT/EPREX (Epoetin alfa) $ 3,589 3,984 4,269 (9.9)% (6.7) RISPERDAL (risperidone) 3,050 2,512 2,146 21.4 17.1 REMICADE (infliximab) 2,145 1,729 1,297 24.1 33.4 DURAGESIC (fentanyl transdermal system) 2,083 1,631 1,203 27.7 35.6 TOPAMAX (topiramate) 1,410 1,043 687 35.2 51.7 LEVAQUIN/FLOXIN (levofloxacin/ofloxacin) 1,296 1,149 1,032 12.8 11.3 Hormonal Contraceptives 1,278 1,175 1,003 8.8 17.1 ACIPHEX/PARIET (rabeprazole sodium) 1,116 966 697 15.5 38.6 Other 6,161 5,328 4,817 15.6 10.6 Total $22,128 19,517 17,151 13.4% 13.8
The hormonal contraceptive franchise accounted for $1.3 30 billion in sales, with strong growth by ORTHO EVRA (norelgestromin/ethinyl estradiol), the first contraceptive patch approved by the FDA, and ORTHO TRI-CYCLEN LO, (norgestimate/ethinyl estradiol) a low dose oral contraceptive. These sales increases were partially offset by reduced sales of ORTHO TRI-CYCLEN (norgestimate/ethinyl estradiol), as a result of generic competition in 2004. There was also strong growth in various other products, including VELCADE (bortezomib), an oncology treatment; DITROPAN XL (oxybutynin), for the treatment of overactive bladder; REMINYL (galantamine HBr), a treatment for patients with mild to moderate Alzheimer's disease; and NATRECOR (nesiritide), a novel agent approved for congestive heart failure. CONCERTA (methylphenidate HCl), a product for the treatment of attention deficit hyperactivity disorder, sales continued to grow despite the lack of patent exclusivity in the U.S. At present, the FDA has not approved any generic version that is substitutable for CONCERTA. Abbreviated New Drug Applications, (ANDAs), for generic versions of CONCERTA are pending and may be approved at any time. 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. Pharmaceutical segment sales in 2002 were $17.2 billion, an increase of 15.5% over 2001, with 14.8% due to operational growth and 0.7% due to currency fluctuations. U.S. sales increased by 16.4% while international sales grew 13.5% over 2001. This included a 2.4% positive impact of currency and operational growth of 11.1%. Medical Devices and Diagnostics Segment Worldwide, the Medical Devices and Diagnostics segment achieved sales of $16.9 billion in 2004, representing an increase over the prior year of 13.2%, with operational growth of 9.0% and a positive impact from currency of 4.2%. U.S. sales increased 6.9% while international sales increased 20.7%, with 11.4% from operations and 9.3% from currency. Strong sales growth in the Medical Devices and Diagnostics segment was led by multiple franchises. The DePuy franchise reported $3.4 billion in sales, which represents 13.7% growth over the prior year. Double-digit growth in DePuy's orthopaedic joint reconstruction unit led the increase for this franchise. Strong performance was also reported in DePuy's spine unit and Mitek sports medicine products. The Cordis franchise was a key contributor to the segment results with reported sales of $3.2 billion, an increase of 18.7% over the prior year. The primary driver of the sales growth for 2004 was the CYPHER Sirolimus-eluting Stent in international markets including its launch in Japan. U.S. CYPHER Sirolimus-eluting Stent sales remained relatively flat as compared to 2003, due to the entry of a competing product. Biosense Webster and the Endovascular business unit also contributed to the success of the Cordis franchise, with continued solid double-digit growth. In April and July of 2004, the Cordis Cardiology Division of Cordis Corporation received warning letters from the FDA regarding Good Manufacturing Practice regulations and Good Clinical Practice regulations. These observations followed post-approval site inspections completed in 2003 and early 2004, including sites involved in the production of the CYPHER Sirolimus-eluting Stent. In response to the warning letters, Cordis has met periodically with the FDA representatives at the Center and the Districts advising them of the progress being made in addressing observations raised in the warning letters. The Ethicon Endo-Surgery franchise reported $2.8 billion of sales in 2004, representing 10.1% growth over 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 the franchise. In 2004, Ethicon Endo-Surgery introduced the new ENDOPATH XCEL trocar platform and the CONTOUR Curved Cutter Stapler, the only curvilinear cutter stapler for colorectal surgery that conforms to a patient's natural anatomy. Strong double-digit sales in the Advanced Sterilization Products line was also a key contributor to the overall sales growth of the Ethicon Endo-Surgery franchise. The Ethicon worldwide franchise achieved $2.8 billion of sales in 2004, representing 7.5% growth over prior year. The Ethicon franchise continues to grow by introducing new products into the marketplace, such as coated VICRYL (polyglactin 910) Plus, the first product in a new anti-bacterial suture platform, and MULTIPASS needles, introduced in the second fiscal quarter of 2004. Major Medical Devices and Diagnostics Franchise Sales:
% Change '04 vs. '03 vs. (Millions of Dollars) 2004 2003 2002 '03 '02 DEPUY $ 3,420 3,008 2,536 13.7% 18.6 CORDIS 3,213 2,707 1,641 18.7 65.0 ETHICON ENDO-SURGERY 2,849 2,587 2,291 10.1 12.9 ETHICON 2,838 2,639 2,386 7.5 10.6 LIFESCAN 1,701 1,426 1,342 19.3 6.3 Vision Care 1,530 1,297 1,170 18.0 10.9 ORTHO-CLINICAL DIAGNOSTICS 1,273 1,176 1,094 8.2 7.5 Other 63 74 123 (14.9) (39.8) Total $16,887 14,914 12,583 13.2% 18.5
31 The LifeScan franchise reported $1.7 billion of sales in 2004, a growth rate of 19.3% over the prior year. The ONETOUCH ULTRA test strip provided strong growth to the franchise for 2004. The Vision Care franchise achieved $1.5 billion of sales in 2004, which was a growth rate of 18.0% over the prior year, led by the continued success of ACUVUE ADVANCE Brand Contact Lenses with HYDRACLEAR and 1-DAY ACUVUE. The Ortho-Clinical Diagnostics franchise reported $1.3 billion of sales in 2004, representing 8.2% growth over the prior year. This growth was mainly driven by its market penetration of the automated blood typing products, coupled with continued growth of the ECI product line. On December 15, 2004, Johnson & Johnson announced the signing of a definitive agreement to acquire Guidant Corporation (Guidant), a world leader in the treatment of cardiac and vascular disease, for $25.4 billion in fully diluted equity value. 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 increased 15.9% while international sales increased 21.7%, with 9.0% from operations and 12.7% from currency. In 2002, the Medical Devices and Diagnostics segment sales were $12.6 billion, representing a total increase of 12.9% over 2001. The 12.9% total increase also represents the operational sales increase over the prior year, as there was no currency impact. U.S. sales were up 13.0% and international sales increased 12.8% over the prior year. Analysis of Consolidated Earnings Before Provision for Taxes on Income Consolidated earnings before provision for taxes on income increased to $12.8 billion, or 24.5%, over the $10.3 billion in 2003. The increase in 2003 was 10.9% over the $9.3 billion in 2002. As a percent to sales, consolidated earnings before provision for taxes on income in 2004 was 27.1%, representing an increase of 2.5% over the 24.6% in 2003. For 2003, the decline was 1.0% over the 25.6% in 2002, and the improvement in 2002 was 1.2% over 2001. The sections that follow highlight the significant components of the changes in consolidated earnings before provision for taxes on income. Cost of Products Sold and Selling, Marketing and Administrative Expenses: Cost of products sold and selling, marketing and administrative expenses as a percent to sales were as follows:
% of Sales 2004 2003 2002 Cost of products sold 28.4% 29.1 28.8 Percent increase/(decrease) over prior year (0.7) 0.3 (0.8) Selling, marketing and administrative expenses 33.5% 33.7 33.7 Percent increase/(decrease) over prior year (0.2) - (1.1)
In 2004, there was a decrease in the percent to sales of cost of products sold. This was due to favorable mix, as well as cost improvement initiatives. There was also a decrease in the percent to sales of selling, marketing and administrative expenses. This was due to the Company's focus on managing expenses, partially offset by an increase in investment spending across a number of businesses focused on driving future growth. 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 cost of products 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 expensed in the fourth quarter of 2003. In 2002, the decreases were attributable to expense leveraging on sales increases and productivity improvements. Research and 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 and development charges, were as follows:
(Millions of Dollars) 2004 2003 2002 Research expense $5,203 4,684 3,957 Percent increase over prior year 11.1% 18.4 10.2 Percent of sales 11.0% 11.2 10.9
Research and development expense as a percent of sales for the Pharmaceutical segment was 16.4% for 2004, 16.4% for 2003 and 15.7% for 2002. Combined, the Consumer and Medical Devices and Diagnostics segments averaged 6.2%, 6.7% and 6.6% in 2004, 2003 and 2002, respectively. Significant research activities continued in the Pharmaceutical segment, increasing to $3.6 billion, or 13.6%, over 2003. The compound annual growth rate was approximately 15.5% for the five-year period since 1999. Johnson & Johnson Pharmaceutical Research & Development, L.L.C., Centocor, Inc., ALZA Corporation, Tibotec-Virco N.V. and Scios Inc. are primary research centers for the Company. In-Process Research and Development: In 2004, the Company recorded in-process research and development (IPR&D) charges of $18 million before tax as a result of the acquisition of U.S. commercial rights to certain patents and know-how in the field of sedation and analgesia from Scott Lab, Inc. This charge was included in the operating profit of the Medical Devices and Diagnostics segment. In 2003, the Company recorded IPR&D charges of $918 million before tax related to the acquisitions of 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 was included in the operating profit of the Pharmaceutical segment. Link Spine Group, Inc. was acquired 32 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 was 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 was 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 was 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 was included in the Pharmaceutical and Medical Devices and Diagnostics segments, respectively. 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 Johnson & Johnson Development Corporation, gains and 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 2003 to 2004 was an increase in expense of $400 million. For 2004, the other expense balance of $15 million included several expense items, none of which were individually significant, offset by royalty income. In 2003, other income of $385 million included a favorable ruling from a stent patent settlement of $230 million. This amount was received during the fourth quarter of 2003 and was included in the Medical Devices and Diagnostics segment operating profit. Also included in the Medical Devices and Diagnostics segment operating profit was 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 included the recovery of a $40 million loan, included in the Pharmaceutical segment operating profit. In 2002, other expense of $294 million included the impact of the Amgen arbitration settlement expense and the gain on the sale of the ORTHO PREFEST product line. 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 were included in the Pharmaceutical segment operating profit. Operating Profit by Segment Operating profits by segment of business were as follows:
Percent of Segment Sales (Millions of Dollars) 2004 2003 2004 2003 Consumer $ 1,514 1,393 18.2% 18.7 Pharmaceutical 7,608 5,896 34.4 30.2 Med Devices and Diag 4,091 3,370 24.2 22.6 Segments total 13,213 10,659 27.9 25.5 Expenses not allocated to segments(1) (375) (351) Earnings before provision for taxes on income $12,838 10,308 27.1% 24.6
(1) Amounts not allocated to segments include interest (income)/expense, minority interest, and general corporate income and expense. [graph] Consumer Segment: Consumer segment operating profit in 2004 increased 8.7% over the previous year. As a percent to sales, 2004 experienced a decrease of 0.5% from 2003, primarily due to additional investment in consumer promotions and advertising in the over-the-counter pharmaceuticals and nutritionals franchises. 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. Pharmaceutical Segment: In 2004, Pharmaceutical segment operating profit increased 29.0% and reflects operating profit as a percent to sales improvement of 4.2% over 2003 to 34.4%. This change is primarily due to the impact of $737 million of IPR&D expenses in 2003. Additionally, Pharmaceutical segment 33 leveraging is the result of selling and marketing related cost improvements. In 2003, operating profit for the Pharmaceutical segment as a percent to sales was 30.2%,reflecting a decline of 3.5% from 2002 due to the IPR&D charges related to acquisitions as previously noted. Additionally, operating profit was impacted by the sales decline of PROCRIT and EPREX, and increased consumer promotional spending for new products and line extensions. Medical Devices and Diagnostics Segment: In 2004, the Medical Devices and Diagnostics segment operating profit increased 21.4%. The increase over the prior year was achieved through improved gross margins, resulting from cost reduction programs and product mix, and the impact of $181 million of IPR&D expenses related to acquisitions in 2003. In 2003, operating profit for the Medical Devices and Diagnostics segment as a percent to sales was 22.6%, reflecting an improvement of 2.8% over 2002. Interest (Income) Expense: Interest income in 2004 increased by $18 million due primarily to a higher cash balance. The cash and marketable securities combined balance at the end of 2004 was $12.9 billion and averaged $11.3 billion, which is significantly higher than the $8.6 billion average cash balance in 2003. Interest expense in 2004 decreased by $20 million as compared to 2003 primarily due to a decrease in the average debt balance, from $5.0 billion in 2003 to $3.5 billion in 2004. Provision For Taxes On Income: The worldwide effective income tax rate was 33.7% in 2004, 30.2% in 2003 and 29.0% in 2002. The increase in the effective tax rate in 2004 was primarily due to the $789 million tax cost on the intended repatriation of undistributed international earnings associated with the American Jobs Creation Act of 2004, which added 6.1% to the effective income tax rate. The increase in 2003 and 2002 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. Liquidity and Capital Resources Cash Flows Cash generated from operations and selected borrowings provide the major sources of funds for the growth of the business, including working capital, capital expenditures and acquisitions. Other uses of cash include share repurchases, dividends and debt repayments. In 2004, cash flow from operations was $11.1 billion, an increase of $0.5 billion over 2003. The increase in cash generated from operations was a result of a net income increase of $0.4 billion, net of the non-cash impact of IPR&D charges. Net cash used by investing activities decreased by $2.2 billion in 2004 due to a decrease in acquisition activity. For a more detailed discussion on mergers and acquisitions, see Note 17. Net cash used by financing activities increased by $1.3 billion in 2004 primarily due to an increase in the net repayment of debt and increased dividends. Cash and current marketable securities were $12.9 billion at the end of 2004 as compared with $9.5 billion at the end of 2003. [graph] Cash generated from operations amounted to $10.6 billion in 2003, which was $2.4 billion more than the cash generated from operations in 2002 of $8.2 billion. Major factors contributing to the increase were an increase in net income of $1.3 billion, net of the non-cash impact of IPR&D charges, an increase in the change in accounts payable and accrued liabilities of $0.8 billion, a decrease in the pension funding from 2002 of $0.5 billion and changes to deferred taxes of $0.6 billion. 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 January 2, 2005 market rates would increase the unrealized value of the Company's forward contracts by $258 million. Conversely, a 10% depreciation of the U.S. dollar from the January 2, 2005 market rates would decrease the unrealized value of the Company's forward contracts by $315 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 certain 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 $64 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 assets and liabilities 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 related to non-performance by a counterparty is remote. 34 Total unused credit available to the Company approximates $3.9 billion, including $1.5 billion of credit commitments, of which $0.75 billion expire September 29, 2005 and $0.75 billion that expire September 30, 2009. Also, included are $0.9 billion of uncommitted lines with various banks worldwide that expire during 2005. Total borrowings at the end of 2004 and 2003 were $2.8 billion and $4.1 billion, respectively. Total debt represented 8.2% of total capital (shareholders' equity and total debt) in 2004 and 13.2% of total capital in 2003. Shareholders' equity per share at the end of 2004 was $10.71 compared with $9.05 at year-end 2003, an increase of 18.3%. On November 1, 2004 the Company exercised its right to redeem all of its $300 million aggregate principal amount of 8.72% Debentures due in 2024. The redemption price was 104.360% of the principal amount or $1,043.36 per $1,000 principal amount of Debentures, with accrued interest to the date of redemption. At January 2, 2005, there were no material cash commitments. Johnson & Johnson continues to be one of a few industrial companies with a Triple A credit rating. A summary of borrowings can be found in Note 6. Contractual Obligations and Commitments The Company has long-term contractual obligations, primarily lease, debt obligations and unfunded retirement plans, with no other significant obligations. 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 January 2, 2005 (see Notes 4, 6 and 13 for further details):
Unfunded Operating Debt(1) Retirement (Millions of Dollars) Leases Obligations Plans 2005 $144 18 35 2006 132 23 37 2007 110 11 39 2008 90 8 42 2009 76 384 45 After 2009 $173 2,139 272
(1) Amounts do not include interest expense. 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. In addition, the Company has an annual program to repurchase shares for use in employee stock and incentive plans. The Company increased its dividend in 2004 for the 42nd consecutive year. Cash dividends paid were $1.095 per share in 2004, compared with dividends of $0.925 per share in 2003 and $0.795 per share in 2002. The dividends were distributed as follows:
2004 2003 2002 First quarter $ 0.24 0.205 0.18 Second quarter 0.285 0.24 0.205 Third quarter 0.285 0.24 0.205 Fourth quarter 0.285 0.24 0.205 Total $ 1.095 0.925 0.795
On January 4, 2005, the Board of Directors declared a regular cash dividend of $0.285 per share, paid on March 8, 2005, to shareholders of record as of February 15, 2005. The Company expects to continue the practice of paying regular cash dividends. Other Information Critical Accounting Policies and Estimates Management's discussion and analysis on 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 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 of loss pass to the customer. Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded. Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates, the largest being the Medicaid rebate provision, are estimated based on sales terms, historical experience, trend analysis and projected market conditions in the various markets served. The Company evaluates market conditions for products or groups of products primarily through the analysis of wholesaler and other third party sell-through and market research data, as well as internally generated information. Sales returns are generally estimated and recorded based on historical sales and returns information, analysis of recent wholesale purchase information, consideration of stocking levels at wholesalers and forecasted demand amounts. Products that exhibit unusual sales or return patterns due to dating, competition or other marketing matters are specifically investigated and analyzed as part of the accounting for accruals. 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 sales to customers. 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 35 rates may affect recorded deferred tax assets and liabilities 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 has determined that it will repatriate $10.8 billion of undistributed international earnings in 2005 in accordance with the American Jobs Creation Act of 2004, and has recorded a tax charge of $789 million during the fourth quarter of 2004. (This tax charge may be reduced by approximately $225 million, due to technical corrections legislation, expected to be considered by Congress in 2005.) The legislation was passed during the fourth quarter of 2004 and permits U.S. corporations to repatriate earnings of foreign subsidiaries at a special one-time favorable effective tax rate. At January 2, 2005 and December 28, 2003, the cumulative amount of undistributed international earnings were approximately $18.6 billion and $14.8 billion, respectively. 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 undistributed portion not intended for repatriation. 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. 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 property, plant and equipment, goodwill and intangible assets. As these assumptions and estimates may change over time, it may or may not be necessary for the Company to record impairment charges. In 2004, certain tangible and intangible assets were written down to fair value with the resulting charge recorded in cost of products sold. 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 are based on 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 a rate change would have 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 charged against 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 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. In November 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 were effective on a prospective basis for guarantees that were 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. In addition, the FASB issued various FASB Staff Positions (FSP) on this topic in December 2003. FIN 46 expands 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 operations, cash flows or financial position. FIN 46 was applicable in 2004 to variable interest entities in which an enterprise holds a variable interest that was acquired before February 1, 2003. The adoption of this portion of FIN 46 did not have a material effect on the results of operations, cash flows or 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 36 and for hedging activities. The Company's adoption of SFAS No. 149 did not have a material effect on the Company's results of operations, cash flows or financial position. In December 2003, the FASB issued 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 elected to defer adoption of FSP FAS No. 106-1 until authoritative guidance was issued, as allowed by the Standard. This guidance was issued in by the FASB in May 2004 via FSP FAS No. 106-2. The Company adopted FSP FAS No. 106-1 and 106-2 in the fiscal third quarter of 2004. This adoption did not have a material effect on the Company's results of operations, cash flows or financial position. In July 2004, the FASB ratified the EITF consensus on Issue 02-14, Whether an Investor should apply the Equity Method of Accounting to Investments other than Common Stock, which is effective for the fourth quarter of 2004. This consensus clarifies that when an investor has the ability to exercise significant influence over the operating and financial policies of an investee, the equity method of accounting should be applied only when the investor has an investment in common stock and/or an investment that is in-substance common stock. The adoption of this consensus did not have a material effect on the Company's results of operations, cash flows or financial position. In October 2004, the FASB ratified the EITF consensus on Issue 04-1, Accounting for Preexisting Relationships between the Parties to a Business Combination. This consensus describes the accounting for the settlement of preexisting relationships and the re-acquisition of certain rights in a business combination. This consensus was effective for the fourth quarter of 2004 and was adopted by the Company in that quarter. This adoption did not have a material effect on the Company's results of operations, cash flows or financial position, but may impact future transactions. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43. This statement clarifies the accounting for idle capacity expense, freight, handling costs, and wasted material and is effective for the third quarter of 2005. The Company believes the adoption of this statement will not have a material effect on its results of operations, cash flows or financial position. In December 2004, the FASB issued SFAS No. 123(R), Share Based Payment. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services. It focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions (employee stock options). The statement requires the measurement of the cost of employee services received in exchange for an award of equity instruments (such as employee stock options) at fair value on the grant date. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award (the requisite service period). The effective date of this statement is the fiscal third quarter of 2005. The Company is still considering transition methods under this standard. The Company currently estimates the annualized cost associated with expensing stock options to be approximately $0.12 per share in 2005. Refer to Note 1 for more details. The Company is proposing a new long-term incentive plan including various forms of stock compensation, such as stock options and restricted stock. In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, an amendment of APB 29. This statement clarifies that all non-monetary transactions that have commercial substance should be recorded at fair value and is effective for the first quarter of 2005. The Company believes the adoption of this statement will not have a material effect on its results of operations, cash flows or financial position. In December 2004, the FASB issued FSP FAS No. 109-1 and FAS 109-2, which address accounting and disclosure requirements related to certain provisions of the American Jobs Creation Act of 2004. These requirements were effective immediately. The Company has adopted these provisions, the impact of which is more fully described in Note 1 and 8. 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 concerns 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 1994-2004, in the United States, the weighted average compound annual growth rate of Johnson & Johnson net 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 2004, 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. The Company also operates in an environment which has become 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 the potential for substantial market share and revenue loss for that product. For further information see the discussion on "Litigation Against Filers of Abbreviated New Drug Applications" in Note 18. 37 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 2004 and 2003 were:
2004 2003 High Low High Low First quarter $54.90 49.25 58.68 49.10 Second quarter 57.28 49.90 59.08 50.75 Third quarter 58.80 54.37 54.24 49.00 Fourth quarter 64.25 54.81 52.89 48.05 Year-end close $63.42 50.62
Legal Proceedings The Company is involved in numerous product liability cases in the United States, many of which concern adverse reactions to drugs and medical devices. The damages claimed are substantial, and while the Company is confident of the adequacy of the warnings and instructions for use which accompany such products, it is not feasible to predict the ultimate outcome of litigation. However, the Company believes that if any liability results from such cases, it will be substantially covered by existing amounts accrued in the Company's balance sheet under its self-insurance program and by third party product liability insurance. See Note 18 for further information regarding legal proceedings. 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 January 2, 2005 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. 38 Consolidated Balance Sheets Johnson & Johnson and Subsidiaries At January 2, 2005 and December 28, 2003 (Dollars in Millions Except Share and Per Share Data) (Note 1)
2004 2003 Assets Current assets Cash and cash equivalents (Notes 1, 14 and 15) $ 9,203 5,377 Marketable securities (Notes 1, 14 and 15) 3,681 4,146 Accounts receivable trade, less allowances for doubtful accounts $206 (2003, $192) 6,831 6,574 Inventories (Notes 1 and 2) 3,744 3,588 Deferred taxes on income (Note 8) 1,737 1,526 Prepaid expenses and other receivables 2,124 1,784 Total current assets 27,320 22,995 Marketable securities, non-current (Notes 1, 14 and 15) 46 84 Property, plant and equipment, net (Notes 1 and 3) 10,436 9,846 Intangible assets, net (Notes 1 and 7) 11,842 11,539 Deferred taxes on income (Note 8) 551 692 Other assets (Note 5) 3,122 3,107 Total assets $53,317 48,263 Liabilities and Shareholders' Equity Current liabilities Loans and notes payable (Note 6) $ 280 1,139 Accounts payable 5,227 4,966 Accrued liabilities 3,523 2,639 Accrued rebates, returns and promotions 2,297 2,308 Accrued salaries, wages and commissions 1,094 1,452 Accrued taxes on income 1,506 944 Total current liabilities 13,927 13,448 Long-term debt (Note 6) 2,565 2,955 Deferred tax liability (Note 8) 403 780 Employee related obligations (Notes 5 and 13) 2,631 2,262 Other liabilities 1,978 1,949 Total liabilities 21,504 21,394 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) (11) (18) Accumulated other comprehensive income (Note 12) (515) (590) Retained earnings 35,223 30,503 37,817 33,015 Less: common stock held in treasury, at cost (Note 20) (148,819,000 and 151,869,000) 6,004 6,146 Total shareholders' equity 31,813 26,869 Total liabilities and shareholders' equity $53,317 48,263
See Notes to Consolidated Financial Statements 39 Consolidated Statements of Earnings Johnson & Johnson and Subsidiaries (Dollars in Millions Except Per Share Figures) (Note 1)
2004 2003 2002 Sales to customers $47,348 41,862 36,298 Cost of products sold 13,422 12,176 10,447 Gross profit 33,926 29,686 25,851 Selling, marketing and administrative expenses 15,860 14,131 12,216 Research expense 5,203 4,684 3,957 Purchased in-process research and development (Note 17) 18 918 189 Interest income (195) (177) (256) Interest expense, net of portion capitalized (Note 3) 187 207 160 Other (income) expense, net 15 (385) 294 21,088 19,378 16,560 Earnings before provision for taxes on income 12,838 10,308 9,291 Provision for taxes on income (Note 8) 4,329 3,111 2,694 Net earnings $ 8,509 7,197 6,597 Basic net earnings per share (Notes 1 and 19) $ 2.87 2.42 2.20 Diluted net earnings per share (Notes 1 and 19) $ 2.84 2.40 2.16
See Notes to Consolidated Financial Statements 40 Consolidated Statements of Equity Johnson & Johnson and Subsidiaries (Dollars in Millions) (Note 1)
Note Receivable From Employee Compre- Stock Owner- hensive Retained ship Plan Total Income Earnings (ESOP) 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: Currency translation adj (10) (10) Unrealized losses on securities (86) (86) Pension liability adjustment (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: Currency translation adj 334 334 Unrealized gains on securities 29 29 Pension liability 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) Net earnings 8,509 8,509 8,509 Cash dividends paid (3,251) (3,251) Employee stock compensation and stock option plans 883 (520) Conver. of subordinated debentures 105 (18) Repurchase of common stock (1,384) Other comprehensive income, net of tax: Currency translation adj 268 268 Unrealized gains on securities 59 59 Pension liability adj (282) (282) Gains on derivatives & hedges 30 30 Reclassification adj (10) Total comprehensive income 8,574 Note receivable from ESOP 7 7 Bal, Jan. 2, 2005 $31,813 35,223 (11)
41
Accumul Other Common Compre- Stock Treasury hensive Issued Stock Income Amount Amount Bal, Dec. 30, 2001 (530) 3,120 (1,393) Net earnings Cash dividends paid Employee stock Compensation and stock option plans 1,295 Conver. 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 adjustment (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 Conver. of subordinated debentures 4 Repurchase of common stock (1,183) Business combinations Other comprehensive income, net of tax: Curncy 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) Net earnings Cash dividends paid Employee stock compensation and stock option plans 1,403 Conver. of subordinated debentures 123 Repurchase of common stock (1,384) Other comprehensive income, net of tax: Currency translation adj 268 Unrealized gains on securities 59 Pension liability adj (282) Gains on derivatives & hedges 30 Reclassification adj Total comprehensive income Note receivable from ESOP Bal, Jan. 2, 2005 $(515) 3,120 (6,004)
See Notes to Consolidated Financial Statements 41 Consolidated Statements of Cash Flows Johnson & Johnson and Subsidiaries (Dollars in Millions) (Note 1)
2004 2003 2002 Cash flows from operating activities Net earnings $ 8,509 7,197 6,597 Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles 2,124 1,869 1,662 Purchased in-process research and development 18 918 189 Deferred tax provision (498) (720) (74) Accounts receivable allowances 3 6 (6) Changes in assets and liabilities, net of effects from acquisition of businesses: Increase in accounts receivable (111) (691) (510) Decrease/(increase) in inventories 11 39 (109) Increase in accounts payable and accrued liabilities 607 2,192 1,420 Increase in other current and non-current assets (395) (746) (1,429) Increase in other current and non-current liabilities 863 531 436 Net cash flows from operating activities 11,131 10,595 8,176 Cash flows from investing activities Additions to property, plant and equipment (2,175) (2,262) (2,099) Proceeds from the disposal of assets 237 335 156 Acquisition of businesses, net of cash acquired (Note 17) (580) (2,812) (478) Purchases of investments (11,617) (7,590) (6,923) Sales of investments 12,061 8,062 7,353 Other (273) (259) (206) Net cash used by investing activities (2,347) (4,526) (2,197) Cash flows from financing activities Dividends to shareholders (3,251) (2,746) (2,381) Repurchase of common stock (1,384) (1,183) (6,538) Proceeds from short- term debt 514 3,062 2,359 Retirement of short- term debt (1,291) (4,134) (560) Proceeds from long- term debt 17 1,023 22 Retirement of long- term debt (395) (196) (245) Proceeds from the exercise of stock options 642 311 390 Net cash used by financing activities (5,148) (3,863) (6,953) Effect of exchange rate changes on cash and cash equivalents 190 277 110 Increase/(decrease) in cash and cash equivalents 3,826 2,483 (864) Cash and cash equivalents, beginning of year (Note 1) 5,377 2,894 3,758 Cash and cash equivalents, end of year (Note 1) $9,203 5,377 2,894 Supplemental cash flow data Cash paid during the year for: Interest $ 222 206 141 Income taxes 3,880 3,146 2,006 Supplemental schedule of noncash investing and financing activities Treasury stock issued for employee compensation and stock option plans, net of cash proceeds $ 802 905 946 Conversion of debt 105 2 131 Acquisition of businesses Fair value of assets acquired $ 595 3,135 550 Fair value of liabilities assumed (15) (323) (72) Net cash paid for acquisitions $ 580 2,812 478
See Notes to Consolidated Financial Statements 42 Notes to Consolidated Financial Statements 1 Summary of Significant Accounting Principles Principles of Consolidation The consolidated financial statements include the accounts of Johnson & Johnson and subsidiaries. Intercompany accounts and transactions are eliminated. Description of the Company and Business Segments The Company and its subsidiaries have approximately 109,900 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 focus has been in products related to human health and well-being. New Accounting Pronouncements 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. In November 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 were effective on a prospective basis for guarantees that were 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. In addition, the FASB issued various FASB Staff Positions (FSP) on this topic in December 2003. FIN 46 expands 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 operations, cash flows or financial position. FIN 46 was applicable in 2004 to variable interest entities in which an enterprise holds a variable interest that was acquired before February 1, 2003. The adoption of this portion of FIN 46 did not have a material effect on the results of operations, cash flows or 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 did not have a material effect on the Company's results of operations, cash flows or financial position. In December 2003, the FASB issued 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 elected to defer adoption of FSP FAS No. 106-1 until authoritative guidance was issued, as allowed by the Standard. This guidance was issued in by the FASB in May 2004 via FSP FAS No. 106-2. The Company adopted FSP FAS No. 106-1 and 106-2 in the fiscal third quarter of 2004. This adoption did not have a material effect on the Company's results of operations, cash flows or financial position. In July 2004, the FASB ratified the EITF consensus on Issue 02-14, Whether an Investor should apply the Equity Method of Accounting to Investments other than Common Stock, which is effective for the fourth quarter of 2004. This consensus clarifies that when an investor has the ability to exercise significant influence over the operating and financial policies of an investee, the equity method of accounting should be applied only when the investor has an investment in common stock and/or an investment that is in-substance common stock. The adoption of this consensus did not have a material effect on the Company's results of operations, cash flows or financial position. In October 2004, the FASB ratified the EITF consensus on Issue 04-1, Accounting for Preexisting Relationships between the Parties to a Business Combination. This consensus describes the accounting for the settlement of preexisting relationships and the re-acquisition of certain rights in a business combination. This consensus was effective for the fourth quarter of 2004 and was adopted by the Company in that quarter. This adoption did not have a material effect on the Company's results of operations, cash flows or financial position, but may impact future transactions. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43. This statement clarifies the accounting for idle capacity expense, freight, handling costs, and wasted material and is effective for the third quarter of 2005. The Company believes the adoption of this statement will not have a material effect on its results of operations, cash flows or financial position. In December 2004, the FASB issued SFAS No. 123(R), Share Based Payment. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services. It focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions (employee stock options). The statement requires the measurement of the cost of employee services received in exchange for an award of equity instruments (such as employee stock options) 43 at fair value on the grant date. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award (the requisite service period). The effective date of this statement is the fiscal third quarter of 2005. The Company is still considering transition methods under this standard. The Company currently estimates the annualized cost associated with expensing stock options to be approximately $0.12 per share in 2005. The Company is proposing a new long-term incentive plan including various forms of stock compensation, such as stock options and restricted stock. In December 2004, the FASB issued SFAS No. 153, Exchanges of Non- monetary Assets, an amendment of APB 29. This statement clarifies that all non-monetary transactions that have commercial substance should be recorded at fair value and is effective for the first quarter of 2005. The Company believes the adoption of this statement will not have a material effect on its results of operations, cash flows or financial position. In December 2004, the FASB issued FSP FAS No. 109-1 and FAS 109-2, which address accounting and disclosure requirements related to certain provisions of the American Jobs Creation Act of 2004. These requirements were effective immediately. The Company has adopted these provisions, the impact of which is described in Note 1 and Note 8. 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 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, when 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 and title and risk of loss pass to the customer. Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded. Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates, the largest being the Medicaid rebate provision, are estimated based on sales terms, historical experience, trend analysis and projected market conditions in the various markets served. The Company evaluates market conditions for products or groups of products primarily through the analysis of wholesaler and other third party sell-through and market research data, as well as internally generated information. Sales returns are generally estimated and recorded based on historical sales and returns information, analysis of recent wholesale purchase information, consideration of stocking levels at wholesalers and forecasted demand amounts. Products that exhibit unusual sales or return patterns due to dating, competition or other marketing matters are specifically investigated and analyzed as part of the accounting for accruals. The Company also recognizes service revenue that is received for co-promotion of certain products in sales to customers. Shipping and Handling Shipping and handling costs incurred were $679 million, $604 million and $518 million in 2004, 2003 and 2002, 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. Goodwill and Intangible Assets 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, which are non-amortizable. SFAS No. 142 requires that goodwill and non-amortizable intangible assets be assessed annually for impairment. The Company completed the annual impairment test for 2004 in the fiscal fourth quarter and no impairment was determined. Future impairment tests will be performed in the fiscal fourth quarter, annually. Intangible assets that have finite useful lives continue to be amortized over their useful lives, and are reviewed for impairment when warranted by economic conditions. See Note 7 for further details on Intangible Assets. 44 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, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, 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 so, what 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 entrance date 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, and was insignificant in 2004. 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 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 $1.9 billion in 2004, $1.7 billion in 2003 and $1.5 billion in 2002. Income Taxes The Company has determined that it will repatriate $10.8 billion of undistributed international earnings in 2005 in accordance with the American Jobs Creation Act of 2004, and has recorded a tax charge of $789 million during the fourth quarter of 2004. (This tax charge may be reduced by approximately $225 million, due to technical corrections legislation, expected to be considered by Congress in 2005.) The legislation was passed during the fourth quarter of 2004 and permits U.S. corporations to repatriate earnings of foreign subsidiaries at a special one-time favorable effective tax rate. At January 2, 2005 and December 28, 2003, the cumulative amount of undistributed international earnings were approximately $18.6 billion and $14.8 billion, respectively. 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 undistributed portion not intended for repatriation. 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 were exercised or converted into common stock using the treasury stock method. 45 Stock Options At January 2, 2005, the Company had 20 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) 2004 2003 2002 Net income, as reported $ 8,509 7,197 6,597 Less: Compensation expense(1) 329 349 320 Pro forma 8,180 6,848 6,277 Earnings per share: Basic - as reported $ 2.87 2.42 2.20 - pro forma 2.76 2.31 2.09 Diluted - as reported 2.84 2.40 2.16 - pro forma 2.74 2.29 2.06
(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. Estimates are used when accounting for sales discounts, rebates, allowances and incentives, product liabilities, depreciation, amortization, employee benefits, contingencies and asset and liability valuations. For instance, in determining annual pension and post-employment benefit costs, the Company estimates the rate of return on plan assets, and the cost of future health care benefits. 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, the fiscal year consists of 53 weeks, as was the case in 2004. Reclassification Certain prior year amounts have been reclassified to conform with current year presentation. 2 Inventories At the end of 2004 and 2003, inventories were comprised of:
(Dollars in Millions) 2004 2003 Raw materials and supplies $ 964 966 Goods in process 1,113 981 Finished goods 1,667 1,641 $ 3,744 3,588
3 Property, Plant and Equipment At the end of 2004 and 2003, property, plant and equipment at cost and accumulated depreciation were:
(Dollars in Millions) 2004 2003 Land and land improvements $ 515 491 Buildings and building equipment 5,907 5,242 Machinery and equipment 10,455 9,638 Construction in progress 1,787 1,681 18,664 17,052 Less accumulated depreciation 8,228 7,206 $10,436 9,846
The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2004, 2003 and 2002 was $136 million, $108 million and $98 million, respectively. Depreciation expense, including the amortization of capitalized interest in 2004, 2003 and 2002 was $1.5 billion, $1.4 billion and $1.3 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 recorded in earnings. 4 Rental Expense and Lease Commitments Rentals of space, vehicles, manufacturing equipment and office and data processing equipment under operating leases were approximately $254 million in 2004, $279 million in 2003 and $298 million in 2002. The approximate minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at January 2, 2005 are:
(Dollars After in Millions) 2005 2006 2007 2008 2009 2009 Total $144 132 110 90 76 173 725
Commitments under capital leases are not significant. 46 5 Employee Related Obligations At the end of 2004 and 2003, employee related obligations were:
(Dollars in Millions) 2004 2003 Pension benefits $1,109 862 Postretirement benefits 1,071 966 Postemployment benefits 244 213 Deferred compensation 397 362 2,821 2,403 Less current benefits payable 190 141 Employee related obligations $2,631 2,262
Prepaid employee related obligations of $1,001 million and $1,021 million for 2004 and 2003, respectively, are included in other assets on the consolidated balance sheet. 6 Borrowings The components of long-term debt are as follows:
Effective Effective (Dollars in Millions) 2004 Rate% 2003 Rate% 3% Zero Coupon Convertible Subordinated Debentures due 2020 $ 560 3.00 639 3.00 4.95% Debentures due 2033 500 4.95 500 4.95 3.80% Debentures due 2013 500 3.82 500 3.82 8.72% Debentures due 2024(2) - - 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 6.625% Notes due 2009 198 6.80 198 6.80 5.50% Convertible Subordinated Notes due 2009 177 2.00 182 2.00 Industrial Revenue Bonds 34 2.76 36 3.54 Other 71 - 81 - 2,583 4.63(1) 3,179 5.23(1) Less current portion 18 224 $ 2,565 2,955
(1) Weighted average effective rate. (2) 8.72% Debentures redeemed in November 2004. The Company has access to substantial sources of funds at numerous banks worldwide. Total unused credit available to the Company approximates $3.9 billion, including $1.5 billion of credit commitments, of which $0.75 billion expire September 29, 2005 and $0.75 billion expire September 30, 2009. Also included, are $0.9 billion of uncommitted lines with various banks worldwide that expire during 2005. Interest charged on borrowings under the credit line agreements is based on either bids provided by banks, the prime rate or London Interbank Offered Rates (LIBOR), plus applicable margins. Commitment fees under the agreement are not material. The Company filed a shelf registration with the Securities and Exchange Commission that became effective January 21, 2004, which enables the Company to issue up to $1.985 billion in debt securities and warrants for the purchase of debt securities. No debt was issued off the shelf during 2004 and the full amount remained available as of January 2, 2005. 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 January 2, 2005 the book value of these Notes approximates fair value. On July 28, 2000, ALZA Corporation completed a private offering of 3% Zero Coupon Convertible Subordinated Debentures, which were issued at a price of $551.26 per $1,000 principal amount at maturity. At January 2, 2005 the outstanding 3% Debentures had a total principal amount at maturity of $890.8 million 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 2.7 million shares have been issued as of January 2, 2005, 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 January 2, 2005, and December 28, 2003, the fair value based on quoted market value of the 3% Debentures was $780.5 million and $712.3 million, respectively. On November 1, 2004 the Company exercised its right to redeem all of its $300 million aggregate principal amount of 8.72% Debentures due in 2024. The redemption price was 104.360% of the principal amount or $1,043.36 per $1,000 principal amount of Debentures, with accrued interest to the date of redemption. Short-term borrowings and current portion of long-term debt amounted to $280 million at the end of 2004, principally local borrowing by international subsidiaries. 47 Aggregate maturities of long-term obligations commencing in 2005 are:
After (Dollars in Millions) 2005 2006 2007 2008 2009 2009 $ 18 23 11 8 384 2,139
7 Intangible Assets At the end of 2004 and 2003, the gross and net amounts of intangible assets were:
(Dollars in Millions) 2004 2003 Goodwill - gross $ 6,597 6,085 Less accumulated amortization 734 695 Goodwill - net $ 5,863 5,390 Trademarks (non-amortizable) - gross $ 1,232 1,098 Less accumulated amortization 142 136 Trademarks (non-amortizable) - net $ 1,090 962 Patents and trademarks - gross $ 3,974 3,798 Less accumulated amortization 1,125 818 Patents and trademarks - net $ 2,849 2,980 Other intangibles - gross $ 3,302 3,187 Less accumulated amortization 1,262 980 Other intangibles - net $ 2,040 2,207 Total intangible assets - gross $15,105 14,168 Less accumulated amortization 3,263 2,629 Total intangible assets - net $11,842 11,539
Goodwill as of January 2, 2005, 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 28, 2003 $ 882 781 3,727 5,390 Acquisitions 232 32 138 402 Translation & other 46 19 6 71 Goodwill at January 2, 2005 $ 1,160 832 3,871 5,863
The weighted average amortization periods for patents and trademarks and other intangible assets are 15 years and 17 years, respectively. The amortization expense of amortizable intangible assets for the fiscal year ended January 2, 2005, was $603 million before tax. Certain patents and intangibles were written down to fair value during 2004 with the resulting charge included in amortization expense. The estimated amortization expense for the five succeeding years approximates $550 million before tax, per year. Substantially all of the amortization expense is included in cost of products sold. 8 Income Taxes The provision for taxes on income consists of:
(Dollars in Millions) 2004 2003 2002 Currently payable: U.S. taxes $ 3,654 2,934 2,042 International taxes 1,173 897 726 4,827 3,831 2,768 Deferred: U.S. taxes (70) (409) 20 International taxes (428) (311) (94) (498) (720) (74) $ 4,329 3,111 2,694
A comparison of income tax expense at the federal statutory rate of 35% in 2004, 2003 and 2002, to the Company's effective tax rate is as follows:
(Dollars in Millions) 2004 2003 2002 U.S. $ 7,895 6,333 6,189 International 4,943 3,975 3,102 Earnings before taxes on income: $ 12,838 10,308 9,291 Tax rates: Statutory 35.0% 35.0% 35.0% Puerto Rico and Ireland operations (5.6) (6.1) (4.5) Research tax credits (0.8) (1.0) (0.7) U.S. state and local 1.6 2.0 1.2 International subsidiaries excluding Ireland (1.7) (2.0) (2.2) Repatriation of International earnings 6.1 - - IPR&D - 3.1 0.7 All other (0.9) (0.8) (0.5) Effective tax rate 33.7% 30.2% 29.0%
During 2004, 2003 and 2002, the Company had subsidiaries operating in Puerto Rico under various tax incentive grants. In addition, the Company had subsidiaries manufacturing in Ireland under an incentive tax rate. The American Jobs Creation Act of 2004 tax legislation, permits U.S. corporations to repatriate earnings of foreign subsidiaries at a special one-time favorable effective federal tax rate versus 35%, before consideration of foreign taxes paid. The Company has determined that it will repatriate approximately $10.8 billion. The Company accrued $789 million for federal and state taxes attributable to the repatriation of earnings. (This tax charge may be reduced by approximately $225 million, due to technical corrections legislation, expected to be considered by Congress in 2005.) The increase in the 2004 worldwide effective tax rate was primarily due to the repatriation of foreign earnings under this legislation, which added 6.1% to the 2004 effective tax rate. 48 Temporary differences and carry forwards for 2004 and 2003 are as follows:
2004 2003 Deferred Tax Deferred Tax (Dollars in Millions) Asset Liability Asset Liability Employee related obligations $ 483 356 Depreciation (378) (248) Non-deductible intangibles (1,366) (1,455) International R&D capitalized for tax 905 574 Reserves & liabilities 720 592 Income reported for tax purposes 463 416 Miscellaneous international 535 (236) 502 (258) Capitalized intangibles 147 131 Miscellaneous U.S. 515 724 Total deferred income taxes $ 3,768 (1,980) 3,295 (1,961)
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, or where a substantial portion of its cash flows are not in the local currency. 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 2004 and 2003 for foreign currency translation adjustments is included in Note 12. Net currency transaction and translation gains and losses included in other expense were losses of $38 million, $22 million and $29 million in 2004, 2003 and 2002, respectively. 10 Common Stock, Stock Option Plans and Stock Compensation Agreements At January 2, 2005, the Company had 20 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 Cordis, Biosense, Gynecare, Centocor, Innovasive Devices, ALZA, Inverness and Scios Stock Option Plans. During 2004, no options were granted under any of these plans except the 2000 Stock Option Plan. 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 83.3 million at the end of 2004. A summary of the status of the Company's stock option plans as of January 2, 2005, December 28, 2003 and December 29, 2002, and changes during the years ending on those dates are presented below:
Weighted Options Average (Shares in Thousands) Outstanding Exercise Price 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(1) 49.15 Options exercised (21,242) 17.22 Options canceled/forfeited (5,430) 52.68 Balance at December 28, 2003 213,949 45.37 Options granted 47,815 53.94 Options exercised (24,066) 28.50 Options canceled/forfeited (8,694) 53.77 Balance at January 2, 2005 229,004 $ 48.62
(1) Includes 7,002 options issued to replace Scios options outstanding at or granted prior to the acquisition. 49 The average fair value of options granted was $13.11 in 2004, $13.58 in 2003, and $15.49 in 2002. The fair value was estimated using the Black-Scholes option pricing model based on the weighted average assumptions of:
2004 2003 2002 Risk-free rate 3.15% 3.09% 4.39% Volatility 27.0% 28.0% 26.0% Expected life 5.0 yrs 5.0 yrs 5.0 yrs Dividend yield 1.76% 1.35% 1.33%
The following table summarizes stock options outstanding and exercisable at January 2, 2005:
(Shares in Thousands) Outstanding Exercisable Average Average Exercise Average Exercise Exercise Price Range Options Life(1) Price Options Price $ 3.85 - $ 22.95 11,336 1.4 $20.18 11,329 $ 20.18 $ 23.11 - $ 39.86 22,703 3.1 30.46 22,048 30.45 $ 40.08 - $ 50.08 34,952 4.7 46.00 34,615 45.98 $ 50.11 - $ 52.11 31,953 5.8 50.70 31,371 50.69 $ 52.20 - $ 53.89 39,403 8.1 52.22 173 52.48 $ 53.93 - $ 54.89 46,012 9.1 53.95 399 54.69 $ 55.01 - $ 65.10 42,645 7.1 57.34 553 59.20 229,004 6.4 $48.62 100,488 $ 41.26
(1) Average contractual life remaining in years. Stock options exercisable at December 28, 2003 and December 29, 2002 were 119,663 options at an average price of $38.51 and 100,702 options at an average price of $30.47, respectively. 11 Segments of Business and Geographic Areas See page 64 for information on segments of business and geographic areas. 12 Accumulated Other Comprehensive Income Components of other comprehensive income/(loss) consist of the following:
Total Unrealized Gains/ Accumulated Foreign Gains/ Pens (Losses) Other Cur. (Losses) Liab on Deriv Comprehensive (Dollars in Millions) Trans. On Sec Adj. & Hedg Inc/(Loss) 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) 2004 changes Net change due to hedging transactions - - - 15 Net amount reclassed to net earnings - - - 15 Net 2004 changes 268 59 (282) 30 75 Jan. 2, 2005 $(105) 86 (346) (150) (515)
Total other comprehensive income for 2004 includes reclassification adjustment gains of $16 million realized from the sale of equity securities and the associated tax expense of $6 million. Total other comprehensive income for 2003 includes reclassification adjustment gains of $3 million realized from the sale of equity securities and the associated tax expense 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. The tax effect on the unrealized gains/(losses) on equity securities is an expense of $47 million in 2004, an expense of $15 million in 2003 and a benefit of $1 million in 2002. The tax effect on the gains/(losses) on derivatives and hedges are benefits of $81 million, $99 million and $56 million in 2004, 2003 and 2002, respectively. 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. 50 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 for which 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. The Company uses the date of its consolidated financial statements (January 2, 2005 and December 28, 2003, respectively) as the measurement date for all U.S. and international retirement and other benefit plans. Net periodic benefit cost for the Company's defined benefit retirement plans and other benefit plans for 2004, 2003 and 2002 include the following components:
Retirement Plans Other Benefit Plans (Dollars in Millions) 2004 2003 2002 2004 2003 2002 Service cost $ 409 325 249 $ 56 28 23 Interest cost 444 391 354 91 70 59 Expected return on plan assets (529) (495) (447) (3) (3) (4) Amortization of prior service cost 15 18 15 (4) (3) (3) Amortization of net transition asset (3) (4) (7) - - - Recognized actuarial losses/(gains) 173 109 (41) 27 3 - Curtailments and settlements 3 1 (1) - - - Special termination benefits - 95 - - - - Net periodic benefit cost $ 512 440 122 $167 95 75
The net periodic benefit cost attributable to U.S. retirement plans was $329 million in 2004, $309 million in 2003 and $61 million in 2002. 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 have attained age 55 with at least 10 years of pension credited service by June 30, 2004. The program enhancements included 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 a one-time 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 2004 2003 2002 2001 Discount rate 5.75% 6.00 6.75 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 4.50 International Benefit plans Discount rate 5.00% 5.25 5.75 5.75 Expected long-term rate of return on plan assets 8.00 7.50 7.50 7.50 Rate of increase in compensation levels 3.75 3.50 3.50 3.50
Other Benefit Plans U.S. Benefit Plans 2004 2003 2002 2001 Discount rate 5.75% 6.00 6.75 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 4.50 International Benefit Plans Discount rate 5.50% 6.00 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. 51 The following table displays the assumed health care trend rates, for all individuals:
Health Care Plans 2004 2003 Health care trend rate assumed for next year 9.00% 10.00 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 2010
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 Health Care Plans Total interest and service cost $ 27 $ (22) Postretirement benefit obligation 256 (206)
The following table sets forth information related to the benefit obligation and the fair value of plan assets at year-end 2004 and 2003 for the Company's defined benefit retirement plans and other postretirement plans:
(Dollars in Millions) Retirement Plans Other Benefit Plans Change in Benefit Obligation 2004 2003 2004 2003 Projected benefit obligation - beginning of year $7,680 6,051 $1,329 1,015 Service cost 409 325 56 28 Interest cost 444 391 91 70 Plan participant contributions 21 20 - - Amendments (65) 110 (46) 1 Actuarial losses 609 714 229 261 Divestitures & acquisitions (1) (3) - - Curtailments & settlements (7) (1) - - Benefits paid from plan (401) (268) (73) (55) Effect of exchange rates 252 341 7 9 Projected benefit obligation - end of year $8,941 7,680 $1,593 1,329 Change in Plan Assets Plan assets at fair value - beginning of year $6,050 4,705 $ 39 34 Actual return on plan assets 713 963 4 9 Company contributions 531 393 65 49 Plan participant contributions 21 20 - - Divestitures (2) - - - Benefits paid from plan assets (359) (258) (71) (53) Effect of exchange rates 171 227 - - Plan assets at fair value - end of year $7,125 6,050 $ 37 39
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. The following table displays the projected future benefit payments from the Company's retirement and other benefit plans:
(Dollars in Millions) Projected future benefit payments 2005 2006 2007 2008 2009 2010-14 Retirement plans $335 349 364 361 377 2,235 Other benefit plans - gross $ 77 81 85 89 94 542 Medicare rebates - (5) (5) (6) (7) (41) Other benefit plans - net $ 77 76 80 83 87 501
The Company is not expected to have to fund its U.S. retirement plans in 2005 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. 52 The following table displays the projected future contributions to the Company's U.S. and international unfunded retirement plans:
(Dollars in Millions) Projected future contributions 2005 2006 2007 2008 2009 2010-14 Unfunded U.S. retirement plans $19 20 21 22 24 148 Unfunded International retirement plans $16 17 18 20 21 124
The Company's retirement plan asset allocation at the end of 2004 and 2003 and target allocations for 2005 are as follows:
Percent of Target (Dollars in Millions) Plan Assets Allocation U.S. Retirement Plans 2004 2003 2005 Equity securities 76% 78% 75% Debt securities 24 22 25 Total plan assets 100% 100% 100% International Retirement Plans Equity securities 69% 67% 75% Debt securities 30 32 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 $37 million and $39 million at January 2, 2005 and December 28, 2003, respectively. The fair value of Johnson & Johnson common stock directly held in plan assets was $440 million (6.2% of total plan assets) at January 2, 2005, and $363 million (6.0% of total plan assets) at December 28, 2003. Amounts recognized in the Company's balance sheet consist of the following:
Retirement Plans Other Benefit Plans (Dollars in Millions) 2004 2003 2004 2003 Plan assets at fair value $ 7,125 6,050 $ 37 39 Projected benefit obligation 8,941 7,680 1,593 1,329 Funded status (1,816) (1,630) (1,556) (1,290) Unrecognized actuarial losses 2,055 1,749 541 336 Unrecognized prior service cost 46 133 (56) (12) Unrecognized net transition asset 3 - - - Total recognized in the consolidated balance sheet $288 252 $(1,071) (966) Book accruals $(1,109) (862) $(1,071) (966) Prepaid benefits 1,001 1,021 - - Intangible assets 50 29 - - Accumulated comprehensive income 346 64 - - Total recognized in the consolidated balance sheet $288 252 $(1,071) (966)
The accumulated benefit obligation for all U.S. and international defined benefit retirement plans was $7,488 million and $6,475 million at January 2, 2005 and December 28, 2003, respectively. A minimum pension liability adjustment is required when the actuarial present value of the 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 2004 and 2003 of $396 million and $93 million, respectively, relate primarily to plans outside of the U.S. The increase in the minimum liability included in comprehensive income was $282 million and $31 million in 2004 and 2003,respectively. Plans with accumulated benefit obligations in excess of plan assets consist of the following:
Retirement Plans (Dollars in Millions) 2004 2003 Accumulated benefit obligation $(2,703) (1,328) Projected benefit obligation (3,327) (1,729) Plan assets at fair value 1,727 591
53 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's prescription plan is "actuarially equivalent" to the Medicare Part D Coverage due to the fact that at all levels of annual claim amounts, the Plan provides a greater reimbursement than the Medicare benefit. There is no change in estimated participation rates or per capita claims costs as a result of the Act. The Company has recognized the effect of the subsidy on a prospective basis from June 28, 2004. The recognition reduces before-tax and after-tax expense by $10 million and the APBO by $131 million. 14 Marketable Securities
January 2, 2005 Unreal- Amort- ized Est ized Gains/ Fair Cost (Losses) Value Current Investments Government securities and obligations $ 4,213 (1) 4,212 Corporate debt securities 2,798 (1) 2,797 Money market funds 2,153 - 2,153 Time deposits 1,325 - 1,325 Collateralized mortgage obligations and asset backed securities 397 - 397 Bank notes 20 - 20 Total current marketable securities $10,906 (2) 10,904 Non-Current Investments Marketable securities $ 46 - 46
December 28, 2003 Unreal- Amort- ized Est ized Gains/ Fair Cost (Losses) Value Current Investments Government securities and obligations $2,844 1 2,845 Corporate debt securities 2,565 - 2,565 Money market funds 1,559 - 1,559 Time deposits 663 - 663 Collateralized mortgage obligations and asset backed securities - - - Bank notes 22 - 22 Total current marketable securities $7,653 1 7,654 Non-Current Investments Marketable securities $ 84 - 84
Current marketable securities include $7.2 billion and $3.5 billion that are classified as cash equivalents on the balance sheet at January 2, 2005 and December 28, 2003, 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 January 2, 2005, the balance of deferred net losses on derivatives included in accumulated other comprehensive income was $150 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 January 2, 2005, the net impact of the hedges' ineffectiveness to the Company's financial statements was insignificant. The Company has recorded a net loss of $2 million in other (income) expense, 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. 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. 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 was paid in Company stock under an employee stock ownership plan (ESOP) unless the employee chose 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. The remaining shares held by the ESOP trust are expected to be allocated to participant accounts by the end of February, 2005. Total Company contributions to the plans were $143 million in 2004, $128 million in 2003 and $111 million in 2002. 54 17 Mergers, Acquisitions and Divestitures On December 15, 2004, Johnson & Johnson announced the signing of a definitive agreement to acquire Guidant Corporation (Guidant), a world leader in the treatment of cardiac and vascular disease, for $25.4 billion in fully diluted equity value. The Board of Directors of Johnson & Johnson and Guidant have given their respective approvals to the transaction, which is subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act, the European Union merger control regulation, and other customary closing conditions. The acquisition could result in the divestiture of certain assets and operations, if required by regulatory agencies. The agreement requires the approval of Guidant's shareholders. Subject to the aforementioned approvals, the acquisition is expected to close in the third quarter of 2005. Under the terms of the agreement, upon the close of the transaction each share of Guidant common stock would be exchanged for $30.40 in cash and $45.60 in Johnson & Johnson common stock, provided the average Johnson & Johnson common stock price is between $55.45 and $67.09 during the 15-day trading period ending three days prior to the transaction closing. Each Guidant common share exchanged would be converted into Johnson & Johnson common stock of not more than .8224 and not less than .6797 shares, plus $30.40 in cash. Based on Guidant's approximately 319 million common shares outstanding as of the close of business on December 15, 2004, this would result in the issuance of not more than approximately 262 million and not less than 217 million shares of Johnson & Johnson common stock. Guidant's approximately 35 million option shares outstanding as of the close of business on December 15, 2004 would be converted into options to acquire Johnson & Johnson common stock on the same terms and conditions as were applicable under Guidant's option plan. The option shares would convert to Johnson & Johnson common stock utilizing a floating exchange ratio, the Exchange Ratio and the Cash Portion Option Exchange Multiple as defined in the Agreement and Plan of Merger dated as of December 15, 2004. Certain businesses were acquired for $455 million in cash and $15 million of liabilities assumed during 2004. These acquisitions were accounted for by the purchase method and, accordingly, results of operations have been included in the financial statements from their respective dates of acquisition. In addition, per the terms of the 2003 acquisition agreement with the Link Spine Group, Inc., $125 million in cash was paid to the owners of the Link Spine Group, Inc. in 2004 based on the date the U.S. Food and Drug Administration (FDA) approved the CHARITE Artificial Disc. Thus, the 2004 total cash expenditures related to acquisition were $580 million. The 2004 acquisitions included: Merck's 50% interest in the Johnson & Johnson-Merck Consumer Pharmaceuticals Co. European non-prescription pharmaceutical joint venture including all of the infrastructure and brand assets managed by the European joint venture; Egea Biosciences, Inc. through the exercise of the option to acquire the remaining outstanding stock not owned by Johnson & Johnson, which has developed a proprietary technology platform called Gene Writer, that allows for the rapid and highly accurate synthesis of DNA sequences, gene assembly, and construction of large synthetic gene libraries; Artemis Medical, Inc., a privately held company with ultrasound and x-ray visible biopsy site breast markers as well as hybrid markers; U.S. commercial rights to certain patents and know-how in the field of sedation and analgesia from Scott Lab, Inc.; Biapharm SAS, a privately held French producer and marketer of skin care products centered around the leading brand BIAFINE; the assets of Micomed, a privately owned manufacturer of spinal implants primarily focused on supplying the German market; and the acquisition of the AMBI skin care brand for women of color. The excess of purchase price over the estimated fair value of tangible assets acquired amounted to $425 million and has been allocated to identifiable intangibles and goodwill. The $125 million related to the U.S. FDA approval of the CHARITE Artificial Disc was recorded as additional goodwill associated with the 2003 Link Spine Group, Inc. acquisition. Thus total additions to intangibles and goodwill in 2004 were $550 million. Approximately $18 million has been identified as the value of in-process research and development (IPR&D) associated with the Scott Lab acquisition. The value of the IPR&D was calculated using cash flow projections discounted for the risk inherent in such projects. The discount rate was 25%. 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 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 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 Group, Inc. 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 55 such projects. A probability of success factor of 95% was used to reflect inherent clinical and regulatory risk. The discount rate was 19%. The purchase price for the Link Spine Group, 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. The excess of the purchase price over the fair values of assets and liabilities acquired was approximately $84 million and was allocated to goodwill. Substantially all of the amount allocated to goodwill will not be deductible for tax purposes. The IPR&D charge related to Scios Inc. 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. 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. 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 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 2004, 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. Divestitures in 2004, 2003 and 2002 did not have a material effect on the Company's results of operations, cash flows or financial position. 18 Legal Proceedings Product Liability 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 existing amounts accrued in the Company's balance sheet under its self-insurance program and by third party product liability insurance. One group of cases against the Company concerns the Janssen Pharmaceutica Inc. product PROPULSID (cisapride), 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 423 such cases currently pending, including the claims of approximately 5,900 plaintiffs. In the active cases, 415 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 (tolling agreements) with various plaintiffs' counsel halting the running of the statutes of limitations with respect to the potential claims of a significant number of individuals while those attorneys evaluate whether or not to sue Janssen and the Company on their behalf. In September 2001, the first ten plaintiffs in the Rankin case, which comprises the claims of 155 PROPULSID plaintiffs, went to trial in state court in Claiborne County, Mississippi. The jury returned compensatory damage verdicts for each plaintiff in the amount of $10 million, for a total of $100 million. The trial judge thereafter dismissed the claims of punitive damages. On March 4, 2002, the trial judge reduced these verdicts to a total of $48 million, and denied the motions of Janssen and the Company for a new trial. On May 13, 2004, the Supreme Court of Mississippi reversed the verdicts against Janssen and the Company, and remanded the case to the trial court. The Supreme Court found the joint trial of multiple plaintiffs' cases against Janssen was prejudicial and directed the trial court to return the cases of the individual plaintiffs for separate trials to their home counties. A motion for rehearing was denied on August 5, 2004. 56 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. If the agreement becomes effective, 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 and the Company believe they have adequate self-insurance accruals and third party product liability 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. In March 2004, the Company 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 arbitration is currently scheduled to begin mid- May 2005 and last several weeks. 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. A previous trial date has been adjourned and not reset. Ethicon has been and intends to continue vigorously defending against the claims. 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. The trial judge has scheduled a trial in March 2005 against Boston Scientific and Medtronic AVE in connection with Cordis' efforts to obtain reinstatement of the original verdicts. 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 that decision was affirmed by the Court of Appeals for the Federal Circuit in May 2004. Trial of the case is scheduled for June 2005. Cordis also has pending in Delaware Federal Court another action against Medtronic AVE accusing Medtronic AVE of infringement by sale of stent products introduced by Medtronic AVE subsequent to its GFX and MicroStent products, the subject of 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 57 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, commencing in the first fiscal quarter of 2004. 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 chart summarizes various patent lawsuits concerning important products of Johnson & Johnson operating companies. 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.
J&J Plaintiff/ Oper Patent Trial Date Product Company Patents Holder Court Date Filed Stents Cordis Jang Boston D.Del. 6/13/05 3/03 Scientific Corporation Drug Cordis Ding Boston D.Del. 6/13/05 4/03 Eluting Scientific Stents Corporation Drug Cordis Kunz Boston D.Del. 10/17/05 12/03 Eluting Grainger Scientific Stents Corporation Stents Cordis Rockey Arlaine and S.D.Fla. TBD 7/02 Gena Rockey Inc. Stents Cordis Boneau Medtronic D.Del. TBD 4/02 Inc. Two- Cordis Kastenho- Boston N.D.Cal. TBD 2/02 layer fer Scientific Cathet- Forman Corporation ers Remi- Centocor Cerami Rockefeller E.D.Tex. 2/06 4/04 cade University and Chiron Corporation Two- Cordis Kastenho- Boston Belgium 4/05 12/03 layer fer Scientific Cathet- Corporation ers (Schneider) Stents Cordis Israel Medinol Multiple 1st 5/03 E.U. trial Juris- Nether- dictions lands 1/05 Contact Vision Nicolson CIBA M.D. Fla. 2/06 9/03 Lenses Care Vision
Litigation Against Filers of Abbreviated New Drug Applications (ANDAs) The following chart indicates lawsuits pending against generic firms that filed Abbreviated New Drug Applications 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. 58
Brand Name Patent/NDA Generic Court Trial Date Product Holder Challenger Date Filed Aciphex Eisai Teva SDNY TBD 11/03 20 mg delay (for Dr. SDNY TBD 11/03 release Janssen) Reddy's SDNY TBD 01/04 tablet Mylan Ditropan XL Ortho- Mylan DWV 2/14/05 05/03 5, 10, 15 mg McNeil, Impax NDCal TBD 09/03 controlled ALZA release tablet Duragesic Janssen, Mylan D Vt 8/25/03 01/02 25, 50, 75, ALZA 100 micrograms/hr patch Levaquin Daiichi, Mylan DWV 5/24/04 02/02 Tablets JJPRD 250, 500, 750 Ortho-McNeil Teva DNJ TBD 06/02 mg tablets Levaquin Injectable Daiichi, Bedford/ DNJ TBD 03/03 Single use JJPRD Ben vials and 5 Ortho- Venue ml/mg, McNeil Sicor DNJ TBD 12/03 premix (Teva) Levaquin Daiichi, American DNJ TBD 12/03 Injectable JJPRD, Pharmac- Single use Ortho- eutical vials McNeil Partners Quixin Daiichi, Hi-Tech DNJ TBD 12/03 Ophthalmic Ortho- Pharmacal Solution McNeil (Levo- floxacin) Ophthalmic solution Ortho Tri- Ortho- Barr DNJ TBD 10/03 cyclen LO McNeil 0.18 mg/0.025 mg, 0.215 mg/0.025 mg and 0.25 mg/0.025 mg Risperdal Janssen Mylan DNJ TBD 12/03 Tablets Dr. DNJ TBD 12/03 ..25, 0.5, 1, Reddy's 2, 3, 4 mg tablets Sporanox Janssen Eon Labs EDNY 5/17/04 04/01 100 mg capsule Topamax Ortho- Mylan DNJ TBD 04/04 25, 100, 200 McNeil mg tablet Ultracet Ortho- Kali(Par) DNJ TBD 11/02 37.5 tram/ McNeil Teva DNJ TBD 02/04 325 apap Caraco ED TBD 09/04 tablet Mich PEPCID McNeil- Perrigo SDNY TBD 02/05 Complete PPC, Inc.
In the DURAGESIC (fentanyl transdermal system) matter referenced above, the district court in March 2004 found ALZA's patent valid, enforceable and infringed by Mylan's generic. That decision was affirmed by the Court of Appeals for the Federal Court. In June 2004, FDA ruled that Mylan's ANDA would be subject to ALZA's period of pediatric exclusivity ending in January 2005. In late June, Mylan filed actions against FDA seeking to require the agency to grant it approval to market on July 24, 2004, the day after the DURAGESIC patent expired. On August 17, 2004, the district court ruled against Mylan and in favor of FDA's recognition of pediatric exclusivity for DURAGESIC, which decision was affirmed by the Court of Appeals for the District of Columbia Circuit. In the action against Mylan involving LEVAQUIN, the trial judge on December 23, 2004, found the patent at issue valid, enforceable and infringed by Mylan's contemplated ANDA product and issued an injunction precluding sale of the product until patent expiration in late 2010. Mylan has appealed to the Court of Appeals for the Federal Circuit. In the action against Eon Labs involving SPORANOX (itraconazole), the district court ruled on July 28, 2004 that Janssen's patent was valid but not infringed by Eon's generic. Janssen has appealed this ruling to the Court of Appeals for the Federal Circuit. Eon launched its generic version of SPORANOX on February 9, 2005. In the action against Kali involving ULTRACET (tramadol hydrochloride/ acetaminophen), Kali has moved for summary judgment on the issues of infringement and invalidity. The briefing on that motion was completed in October 2004 and a decision is expected anytime. With respect to claims other than that at issue in the litigation against Kali, Ortho-McNeil 59 has filed a reissue application in the U.S. Patent and Trademark Office seeking to narrow the scope of the claims. In the action against Mylan involving DITROPAN XL (oxybutynin chloride), Mylan moved for summary judgment on July 14, 2004 on the issues of non-infringement and invalidity. That motion was denied in December 2004. In the action against Mylan relating to TOPAMAX (topiramate), Mylan on October 8, 2004 filed a motion for summary judgment of non-infringement of Ortho-McNeil's patent. A decision is expected after February 1, 2005. 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 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. In the MDL proceeding in Boston, plaintiffs have moved for class certification of all or some portion of their claims. A decision is expected on that motion in the second or third quarter of 2005. 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. On April 24, 2003, the trial judge certified a national class of purchasers of the TAP product at issue. On July 6, 2004, that class was decertified by the North Carolina Court of Appeals and the matter remanded to the trial court for additional consideration. On January 5, 2005, the trial judge certified a North Carolina State class of purchases of the TAP product in question. No trial date has been set in this matter. 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 have responded 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 have responded 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 that 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 have responded 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 marketing, of the drug TOPAMAX (topiramate). Ortho-McNeil is cooperating in responding to the subpoena. In October 2004, the U.S. Attorney's Office in Boston asked attorneys for Ortho-McNeil Pharmaceutical to cooperate in facilitating the subpoenaed testimony of several present and former Ortho-McNeil witnesses before a grand jury in Boston, for which cooperation is being provided. 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 sales and marketing of, any and all payments to physicians in connection with sales and marketing of, and clinical trials for, RISPERDAL (risperidone) from 1997 to 2002. Documents subsequent to 2002 have also been requested. Janssen is cooperating in responding to the subpoena. In April 2004, the Company's pharmaceutical units were requested to submit information to the Senate Finance Committee on their use of the "nominal pricing exception" in calculating Best Price under the Medicaid Rebate Program. This request was sent to manufacturers for the top twenty drugs reimbursed under the Medicaid Program. The Company's pharmaceutical units have responded to the request. On July 27, 2004, the Company received a letter request from the New York State Attorney General's Office for documents pertaining to marketing, off-label sales and clinical trials for TOPAMAX (topiramate), RISPERDAL (risperidone), PROCRIT (Epoetin alfa), REMINYL (galantamine HBr), REMICADE (infliximab) and ACIPHEX (rabeprazole sodium). The Company is responding to the request. 60 On August 9, 2004, Johnson & Johnson Health Care Systems, Inc., a Johnson & Johnson operating company, received a subpoena from the Dallas, Texas U. S. Attorney's Office seeking documents relating to the relationships between the group purchasing organization Novation and HCS and other Johnson & Johnson operating companies. The Company's operating entities involved are responding to the subpoena. On September 30, 2004, Ortho Biotech Inc. received a subpoena from the U.S. Office of Inspector General's Denver, Colorado field office seeking documents directed to sales and marketing of PROCRIT (Epoetin alfa) from 1997 to the present. Ortho Biotech is responding to the subpoena. In September 2004, plaintiffs in an employment discrimination litigation initiated against the Company in 2001 moved to certify a class of all African American and Hispanic salaried employees of the Company and its affiliates in the United States, who were employed at any time from November 1997 to the present. Plaintiffs seek monetary damages for the period 1997 through the present (including punitive damages) and equitable relief. The Company is expected to file its response to plaintiffs' class certification motion in the first half of 2005. A decision by the district court is not expected before late 2005. The Company disputes the allegations in the lawsuit and is vigorously defending against them. 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. On October 15, 2004, the district court issued rulings that upheld its initial findings in 2001, that Amgen's patent claims were valid and infringed. 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. On October 21, 2004, in a companion action brought by TKT and Aventis against Amgen and Ortho Biotech's U.K. affiliate in the United Kingdom, the House of Lords, acting as the highest court in the U.K., invalidated the pertinent claims of Amgen's U.K. patent on EPO which expired in December 2004. 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 legal proceedings, net of liabilities already accrued in the Company's balance sheet, is not expected to have a material adverse effect on the Company's 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 January 2, 2005, December 28, 2003 and December 29, 2002:
(Shares in Millions) 2004 2003 2002 Basic earnings per share $ 2.87 2.42 2.20 Average shares outstanding - basic 2,968.4 2,968.1 2,998.3 Potential shares exercisable under stock option plans 186.5 166.6 188.3 Less: shares repurchased under treasury stock method (163.8) (141.4) (146.9) Convertible debt shares 12.4 14.8 14.4 Adjusted average shares outstanding - diluted 3,003.5 3,008.1 3,054.1 Diluted earnings per share $ 2.84 2.40 2.16
The diluted earnings per share calculation includes the dilution effect of convertible debt: a decrease in interest expense of $14 million, $15 million and $12 million after tax for years 2004, 2003 and 2002, respectively. Diluted earnings per share excludes 42 million, 47 million and 1 million shares underlying stock options for 2004, 2003 and 2002, respectively, as the exercise price of these options was greater than their average market value, resulting in an anti-dilutive effect on diluted earnings per share. 20 Capital and Treasury Stock Changes in treasury stock were:
(Amounts in Millions Except Treasury Stock Number of Shares in Thousands) Shares Amount 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 Employee compensation and stock option plans (25,340) (1,403) Conversion of subordinated debentures (2,432) (123) Repurchase of common stock 24,722 1,384 Balance at January 2, 2005 148,819 $ 6,004
Shares of common stock issued were 3,119,842,000 shares at the end of 2004, 2003 and 2002. Cash dividends paid were $1.095 per share in 2004, compared with dividends of $0.925 per share in 2003 and $0.795 per share in 2002. 61 21 Selected Quarterly Financial Data (Unaudited) Selected unaudited quarterly financial data for the years 2004 and 2003 are summarized below:
2004 (Dollars in Millions First Second Third Fourth Except Per Share Data) Qtr Qtr Qtr(1) Qtr(2) Segment sales to customers Consumer $ 2,047 2,000 2,024 2,262 Pharmaceutical 5,376 5,427 5,485 5,840 Med Devices & Diagnostics 4,136 4,057 4,044 4,650 Total sales $ 11,559 11,484 11,553 12,752 Gross profit 8,192 8,322 8,366 9,046 Earnings before provision for taxes on income 3,504 3,435 3,274 2,625 Net earnings 2,493 2,458 2,341 1,217 Basic net earnings per share $ .84 .83 .79 .41 Diluted net earnings per share $ .83 .82 .78 .41
2003 (Dollars in Millions First Second Third Fourth Except Per Share Data) Qtr(3) Qtr(4) Qtr Qtr(5) Segment sales to customers Consumer $ 1,791 1,819 1,841 1,979 Pharmaceutical 4,666 4,884 4,835 5,134 Med Devices & 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
(1) The third quarter of 2004 includes an after-tax charge of $12 million for In-Process Research and Development (IPR&D) costs. (2) The fourth quarter of 2004 includes $789 million for taxes on the repatriation of unremitted foreign earnings associated with the American Jobs Creation Act of 2004. (3) The first quarter of 2003 includes an after-tax charge of $15 million for IPR&D costs. (4) The second quarter of 2003 includes an after-tax charge of $900 million for IPR&D costs. (5) 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. Management's Report on Internal Control over Financial Reporting Under Section 404 of The Sarbanes-Oxley Act of 2002, our management is required to assess the effectiveness of the Company's internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company's internal control over financial reporting is effective. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company's financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company's management has assessed the effectiveness of the Company's internal control over financial reporting as of January 2, 2005. In making this assessment, the Company used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control-Integrated Framework." These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The Company's assessment included extensive documenting, evaluating and testing the design and operating effectiveness of its internal control over financial reporting. Based on the Company's processes and assessment, as described above, management has concluded that, as of January 2, 2005, the Company's internal control over financial reporting was effective. Our management's assessment of the effectiveness of the Company's internal control over financial reporting as of January 2, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. 62 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Johnson & Johnson: We have completed an integrated audit of Johnson & Johnson's fiscal 2004 consolidated financial statements and of its internal control over financial reporting as of January 2, 2005 and audits of its fiscal 2003 and fiscal 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated financial statements In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, statements of equity and statements of cash flows present fairly, in all material respects, the financial position of Johnson & Johnson and Subsidiaries (the "Company") at January 2, 2005 and December 28, 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 2005 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 the standards of the Public Company Accounting Oversight Board (United States). 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 of financial statements 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. Internal control over financial reporting Also, in our opinion, management's assessment, "Management's Report on Internal Control over Financial Reporting," appearing on page 62 of the 2004 Annual Report to Shareholders, that the Company maintained effective internal control over financial reporting as of January 2, 2005 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission "COSO", is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 2, 2005, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. By: /s/ PricewaterhouseCoopers LLP -------------------------------- New York, New York February 28, 2005 63 Segments of Business(1) and Geographic Areas Johnson & Johnson and Subsidiaries
Sales to Customers(2) (Dollars in Millions) 2004 2003 2002 Consumer - United States $ 4,224 3,968 3,605 International 4,109 3,463 2,959 Total 8,333 7,431 6,564 Pharmaceutical - United States 14,960 13,271 11,919 International 7,168 6,246 5,232 Total 22,128 19,517 17,151 Med Devices and Diag - United States 8,586 8,035 6,931 International 8,301 6,879 5,652 Total 16,887 14,914 12,583 Worldwide total $47,348 41,862 36,298
Operating Profit (Dollars in Millions) 2004(5) 2003(6) 2002(7) Consumer $ 1,514 1,393 1,229 Pharmaceutical 7,608 5,896 5,787 Medical Devices and Diagnostics 4,091 3,370 2,489 Segments total 13,213 10,659 9,505 Expenses not allocated to segments(3) (375) (351) (214) General corporate(4) Worldwide total $12,838 10,308 9,291
Identifiable Assets (Dollars in Millions) 2004 2003 2002 Consumer $ 6,142 5,371 5,056 Pharmaceutical 16,058 15,001 11,112 Medical Devices and Diagnostics 15,805 16,082 15,052 Segments total 38,005 36,454 31,220 Expenses not allocated to segments(3) General corporate(4) 15,312 11,809 9,336 Worldwide total $53,317 48,263 40,556
Additions to Property, Plant & Equipment (Dollars in Millions) 2004 2003 2002 Consumer $ 227 229 222 Pharmaceutical 1,197 1,236 1,012 Medical Devices and Diagnostics 630 639 713 Segments total 2,054 2,104 1,947 General corporate 121 158 152 Worldwide total $2,175 2,262 2,099
Depreciation and Amortization (Dollars in Millions) 2004 2003 2002 Consumer $ 222 246 244 Pharmaceutical 1,008 765 557 Medical Devices and Diagnostics 769 761 776 Segments total 1,999 1,772 1,577 General corporate 125 97 85 Worldwide total $2,124 1,869 1,662
Sales to Customers(2) (Dollars in Millions) 2004 2003 2002 United States $27,770 25,274 22,455 Europe 11,151 9,483 7,636 Western Hemisphere excluding U.S. 2,589 2,236 2,018 Asia-Pacific, Africa 5,838 4,869 4,189 Segments total 47,348 41,862 36,298 Worldwide total $47,348 41,862 36,298
Long-Lived Assets(8) (Dollars in Millions) 2004 2003 2002 United States $14,324 14,367 11,822 Europe 6,142 5,193 4,613 Western Hemisphere excluding U.S. 748 772 583 Asia-Pacific, Africa 620 605 555 Segments total 21,834 20,937 17,573 General corporate 444 448 383 Other non long-lived assets 31,039 26,878 22,600 Worldwide total $53,317 48,263 40,556
(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 our top three distributors accounted for 10.2%, 10.0% and 7.5% in 2004, 10.5%, 9.1% and 9.0% in 2003 and 10.3%, 9.8% and 9.2% in 2002. (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 $18 million of In-Process Research & Development (IPR&D) in the Medical Devices and Diagnostics segment. (6) Includes $737 million of 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. (7) 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. (8) Long-lived assets include property, plant and equipment, net for 2004, 2003 and 2002 of $10,436, $9,846 and $8,710, respectively, and intangible assets, net for 2004, 2003 and 2002 of $11,842, $11,539 and $9,246, respectively. 64 Summary of Operations and Statistical Data 1994-2004 Johnson & Johnson and Subsidiaries (Dollars in Millions Except Per Share Figures)
2004 2003 2002 2001 2000 1999 Sales to customers - U.S. $ 27,770 25,274 22,455 19,825 17,316 15,532 Sales to customers - International 19,578 16,588 13,843 12,492 11,856 11,825 Total sales 47,348 41,862 36,298 32,317 29,172 27,357 Cost of products sold 13,422 12,176 10,447 9,581 8,957 8,539 Selling, marketing and admin expenses 15,860 14,131 12,216 11,260 10,495 10,065 Research expense 5,203 4,684 3,957 3,591 3,105 2,768 Purchased in-process research and development 18 918 189 105 66 - Interest income (195) (177) (256) (456) (429) (266) Interest expense, net of portion capitalized 187 207 160 153 204 255 Other (income) expense, net 15 (385) 294 185 (94) 119 34,510 31,554 27,007 24,419 22,304 21,480 Earnings before provision for taxes on income 12,838 10,308 9,291 7,898 6,868 5,877 Provision for taxes on income 4,329 3,111 2,694 2,230 1,915 1,604 Net earnings 8,509 7,197 6,597 5,668 4,953 4,273 Percent of sales to customers 18.0 17.2 18.2 17.5 17.0 15.6 Diluted net earnings per share of common stock 2.84 2.40 2.16 1.84 1.61 1.39 Percent return on average shareholders' equity 29.0 29.0 28.1 25.4 26.5 27.0 Percent increase over previous year: Sales to customers 13.1 15.3 12.3 10.8 6.6 14.9 Diluted net earnings per share 18.3 11.1 17.4 14.3 15.8 36.3 Supplementary expense data: Cost of materials and services(1) 21,053 18,568 16,540 15,333 14,113 13,922 Total employment costs 11,074 10,005 8,450 7,749 7,085 6,537 Depreciation and amortization 2,124 1,869 1,662 1,605 1,592 1,510 Maint and repairs(2) 462 395 360 372 327 322 Total tax expense(3) 5,393 4,078 3,497 2,995 2,619 2,271 Supplementary balance sheet data: Property, plant and equipment, net 10,436 9,846 8,710 7,719 7,409 7,155 Additions to property, plant and equipment 2,175 2,262 2,099 1,731 1,689 1,822 Total assets 53,317 48,263 40,556 38,488 34,245 31,064 Long-term debt 2,565 2,955 2,022 2,217 3,163 3,429 Operating cash flow 11,131 10,595 8,176 8,864 6,903 5,920 Common stock information Dividends paid per share $1.095 .925 .795 .70 .62 .55 Shareholders' equity per share $10.71 9.05 7.65 7.95 6.77 5.70 Market price per share (year-end close) $63.42 50.62 53.11 59.86 52.53 46.63 Average shares outstanding (millions) - basic 2,968.4 2,968.1 2,998.3 3,033.8 2,993.5 2,978.2 - diluted 3,003.5 3,008.1 3,054.1 3,099.3 3,099.2 3,100.4 Employees (thousands) 109.9 110.6 108.3 101.8 100.9 99.8
1998 1997 1996 1995 1994 Sales to customers - U.S. $ 12,901 11,814 10,851 9,065 7,731 Sales to customers - International 10,910 10,708 10,536 9,472 7,723 Total sales 23,811 22,522 21,387 18,537 15,454 Cost of products sold 7,700 7,350 7,185 6,352 5,393 Selling, marketing and admin expenses 8,525 8,185 7,848 6,950 5,901 Research expense 2,506 2,373 2,109 1,788 1,416 Purchased in-process research and development 298 108 - - 37 Interest income (302) (263) (196) (151) (85) Interest expense, net of portion capitalized 186 179 176 184 182 Other (income) expense, net 565 248 122 70 (5) 19,478 18,180 17,244 15,193 12,839 Earnings before provision for taxes on income 4,333 4,342 4,143 3,344 2,615 Provision for taxes on income 1,232 1,237 1,185 926 654 Net earnings 3,101 3,105 2,958 2,418 1,961 Percent of sales to customers 13.0 13.8 13.8 13.0 12.7 Diluted net earnings per share of common stock 1.02 1.02 .98 .84 .69 Percent return on average shareholders' equity 22.2 24.6 27.2 27.6 28.4 Percent increase over previous year: Sales to customers 5.7 5.3 15.4 19.9 11.4 Diluted net earnings per share - 4.1 16.7 21.7 9.5 Supplementary expense data: Cost of materials and services(1) 11,779 11,702 11,341 9,984 8,104 Total employment costs 5,908 5,586 5,447 4,849 4,401 Depreciation and amortization 1,335 1,117 1,047 886 754 Maint and repairs(2) 286 270 285 257 222 Total tax expense(3) 1,881 1,824 1,753 1,458 1,132 Supplementary balance sheet data: Property, plant and equipment, net 6,767 6,204 6,025 5,544 5,230 Additions to property, plant and equipment 1,610 1,454 1,427 1,307 979 Total assets 28,966 23,615 22,248 19,355 17,027 Long-term debt 2,652 2,084 2,347 2,702 2,776 Operating cash flow 5,106 4,210 4,001 3,436 2,984 Common stock information Dividends paid per share $ .49 .425 .368 .32 .283 Shareholders' equity per share $ 4.93 4.51 4.07 3.46 2.76 Market price per share (year-end close) $ 41.94 32.44 25.25 21.38 13.69 Average shares outstanding (millions) - basic 2,973.6 2,951.9 2,938.0 2,820.1 2,796.9 - diluted 3,082.7 3,073.0 3,046.2 2,890.0 2,843.2 Employees (thousands) 96.1 92.6 91.5 84.2 83.4
(1) Net of interest and other income. (2) Also included in cost of materials and services category. (3) Includes taxes on income, payroll, property and other business taxes. 65 EX-21 6 y06203exv21.txt SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES Johnson & Johnson, a New Jersey corporation, has the domestic and international subsidiaries shown below. Certain U.S. subsidiaries and international subsidiaries are not named because they are not significant in the aggregate. Johnson & Johnson has no parent.
JURISDICTION OF NAME OF SUBSIDIARY ORGANIZATION ------------------ --------------- U.S. Subsidiaries: ALZA Corporation.......................................... Delaware ALZA Land Management, Inc. ............................... Delaware Biosense Webster, Inc. ................................... California Centocor Biologics, LLC................................... Pennsylvania Centocor, Inc. ........................................... Pennsylvania Centocor Research & Development, Inc. .................... Pennsylvania Codman & Shurtleff, Inc. ................................. New Jersey Cordis Corporation........................................ Florida Cordis Development Corporation............................ Florida Cordis International Corporation.......................... Delaware Cordis LLC................................................ Delaware Cordis Neurovascular, Inc. ............................... Florida Crescendo Pharmaceuticals Corporation..................... Delaware DePuy Disc, Inc. ......................................... Delaware DePuy, Inc. .............................................. Delaware DePuy Mitek, Inc. ........................................ Massachusetts DePuy Orthopaedics, Inc. ................................. Indiana DePuy Products, Inc. ..................................... Indiana DePuy Spine, Inc. ........................................ Ohio DePuy Spine Sales Limited Partnership..................... Massachusetts Diabetes Diagnostics, Inc. ............................... Delaware Egea Biosciences, LLC..................................... Delaware Ethicon Endo-Surgery, Inc. ............................... Ohio Ethicon Endo-Surgery, L.L.C. ............................. New Mexico Ethicon Endo-Surgery Services, L.P. ...................... Texas Ethicon, Inc. ............................................ New Jersey Ethicon LLC............................................... Delaware Global Biologics Supply Chain, LLC........................ Pennsylvania GynoPharma Inc. .......................................... Delaware Iso Merger Corp........................................... Delaware Janssen Finance Company................................... Florida Janssen Inc. ............................................. Delaware Janssen Ortho LLC......................................... Delaware Janssen Pharmaceutica Inc. ............................... Pennsylvania Janssen Pharmaceutica Products, L.P. ..................... New Jersey JJHC, LLC................................................. Delaware Johnson & Johnson Baby Products, Inc. .................... Delaware Johnson & Johnson Consumer Companies, Inc. ............... New Jersey Johnson & Johnson Development Corporation................. New Jersey
JURISDICTION OF NAME OF SUBSIDIARY ORGANIZATION ------------------ --------------- Johnson & Johnson Finance Corporation..................... New Jersey Johnson & Johnson Health Care Systems Inc. ............... New Jersey Johnson & Johnson International........................... New Jersey Johnson & Johnson Japan Inc. ............................. New Jersey Johnson & Johnson - Merck Consumer Pharmaceuticals Co. ... New Jersey Johnson & Johnson (Middle East) Inc. ..................... New Jersey Johnson & Johnson Pharmaceutical Research & Development, L.L.C. ................................................ New Jersey Johnson & Johnson Professional Co. (P.R.) Inc. ........... Delaware Johnson & Johnson Services, Inc. ......................... New Jersey Johnson & Johnson Urban Renewal Associates................ New Jersey Johnson & Johnson Vision Care, Inc. ...................... Florida Joint Medical Products Corporation........................ Delaware LifeScan, Inc. ........................................... California LifeScan LLC.............................................. Delaware McNeil Nutritionals, LLC.................................. Delaware McNEIL-PPC, Inc. ......................................... New Jersey Middlesex Assurance Company Limited....................... Vermont Neutrogena Corporation.................................... Delaware Nitinol Development Corporation........................... California Noramco, Inc. ............................................ Georgia OMJ Pharmaceuticals, Inc. ................................ Delaware OraPharma, Inc. .......................................... Delaware Ortho Biologics LLC....................................... Delaware Ortho Biotech Holding Corp. .............................. Delaware Ortho Biotech Inc. ....................................... New Jersey Ortho Biotech Products, L.P. ............................. New Jersey Ortho-Clinical Diagnostics, Inc. ......................... New York Ortho-McNeil Finance Co. ................................. Florida Ortho-McNeil Pharmaceutical, Inc. ........................ Delaware Rutan Realty LLC.......................................... New Jersey Scios Inc. ............................................... Delaware SweetFranchise, Inc. ..................................... Delaware TERAMed Corporation....................................... Delaware Therakos, Inc. ........................................... Florida Therapeutic Discovery Corporation......................... Delaware The Tylenol Company....................................... New Jersey Winthorpe & Valentine, Inc. .............................. Delaware International Subsidiaries: ALZA Ireland Limited...................................... Ireland Apsis S.A.S. ............................................. France Biapharm, SAS............................................. France Centocor Biologics (Ireland) Limited...................... Ireland Centocor B.V. ............................................ Netherlands Cilag Advanced Technologies GmbH.......................... Switzerland Cilag AG.................................................. Switzerland Cilag AG International.................................... Switzerland Cilag Holding AG.......................................... Switzerland
JURISDICTION OF NAME OF SUBSIDIARY ORGANIZATION ------------------ --------------- Codman Sarl............................................... Switzerland Cordis Europa N.V. ....................................... Netherlands Cordis Medizinische Apparate GmbH ........................ Germany Cordis S.A.S. ............................................ France DePuy Ace Sarl ........................................... Switzerland DePuy Australia Pty. Ltd. ................................ Australia DePuy France S.A.S. ...................................... France DePuy International Limited............................... United Kingdom DePuy Intl. (Holdings) Limited............................ United Kingdom DePuy (Ireland) Limited................................... Ireland DePuy Mitek Sarl.......................................... Switzerland DePuy Orthopadie GmbH..................................... Germany DePuy Orthopedie S.A.S.................................... France DePuy Spine Sarl ......................................... Switzerland DePuy UK Holdings Limited................................. United Kingdom Ethicon GmbH.............................................. Germany Ethicon Ireland Limited................................... Ireland Ethicon Sarl.............................................. Scotland Ethicon SAS............................................... France Ethnor (Proprietary) Limited.............................. South Africa Greiter AG................................................ Switzerland Greiter (International) AG................................ Switzerland Janssen Animal Health BVBA................................ Belgium Janssen-Cilag A/S......................................... Norway Janssen-Cilag AB.......................................... Sweden Janssen-Cilag AG.......................................... Switzerland Janssen-Cilag B.V. ....................................... Netherlands Janssen-Cilag Farmaceutica, Lda. ......................... Portugal Janssen-Cilag Farmaceutica Ltda. ......................... Brazil Janssen-Cilag GmbH........................................ Germany Janssen-Cilag Ltd. ....................................... United Kingdom Janssen-Cilag N.V. ....................................... Belgium Janssen-Cilag Pharmaceutical S.A.C.I. .................... Greece Janssen-Cilag Pharma GmbH................................. Austria Janssen-Cilag Polska, Sp. z o.o........................... Poland Janssen-Cilag Pty. Ltd. .................................. Australia Janssen-Cilag S.A. ....................................... Spain Janssen-Cilag, S.A. de C.V. .............................. Mexico Janssen-Cilag S.A.S. ..................................... France Janssen-Cilag S.p.A. ..................................... Italy Janssen Korea, Ltd. ...................................... Korea Janssen Pharmaceutica N.V. ............................... Belgium Janssen Pharmaceutica (Pty) Limited....................... South Africa Janssen Pharmaceutical K.K. .............................. Japan Janssen Pharmaceutical Limited............................ Ireland J.C. General Services CVBA................................ Belgium J-C Healthcare Ltd. ...................................... Israel
JURISDICTION OF NAME OF SUBSIDIARY ORGANIZATION ------------------ --------------- JHC Nederland B.V. ....................................... Netherlands Johnson & Johnson AB...................................... Sweden Johnson & Johnson AG...................................... Switzerland Johnson & Johnson (China) Investment Co., Ltd. ........... China Johnson & Johnson (China) Ltd. ........................... China Johnson & Johnson Comercio E Distribuicao Ltda. .......... Brazil Johnson & Johnson Consumer France SAS .................... France Johnson & Johnson de Argentina, S.A.C.e I. ............... Argentina Johnson & Johnson de Colombia S.A. ....................... Colombia Johnson & Johnson de Venezuela, S.A. ..................... Venezuela Johnson & Johnson European Treasury Company............... Ireland Johnson & Johnson (Egypt) S.A.E. ......................... Egypt Johnson & Johnson Finance Limited......................... England Johnson & Johnson Gesellschaft m.b.H...................... Austria Johnson & Johnson GmbH.................................... Germany Johnson & Johnson Group Holdings G.m.b.H ................. Germany Johnson & Johnson Hellas S.A. ............................ Greece Johnson & Johnson Holding AB.............................. Sweden Johnson & Johnson Holding GmbH............................ Germany Johnson & Johnson (Hong Kong) Limited..................... Hong Kong Johnson & Johnson Inc. ................................... Canada Johnson & Johnson International Financial Services Company................................................ Ireland Johnson & Johnson International S.A. ..................... France Johnson & Johnson (Ireland) Limited....................... Ireland Johnson & Johnson Kft. ................................... Hungary Johnson & Johnson K.K. ................................... Japan Johnson & Johnson Korea, Ltd. ............................ Korea Johnson & Johnson Limitada................................ Portugal Johnson & Johnson Limited................................. India Johnson & Johnson Management Limited...................... England Johnson & Johnson Medical B.V. ........................... Netherlands Johnson & Johnson Medical (China) Ltd. ................... China Johnson & Johnson Medical Holding S.p.A. ................. Italy Johnson & Johnson Medical Korea Limited................... Korea Johnson & Johnson Medical Limited......................... Scotland Johnson & Johnson Medical Mexico, S.A. de C.V. ........... Mexico Johnson & Johnson Medical Products GmbH................... Austria Johnson & Johnson Medical (Pty) Limited .................. South Africa Johnson & Johnson Medical Pty. Limited ................... Australia Johnson & Johnson Medical S.A. ........................... Argentina Johnson & Johnson Medical S.p.A. ......................... Italy Johnson & Johnson Morocco S.A. ........................... Morocco Johnson & Johnson Pacific Pty. Limited ................... Australia Johnson & Johnson Pakistan (Private) Limited.............. Pakistan Johnson & Johnson (Philippines), Inc. .................... Philippines Johnson & Johnson Poland Sp. z o.o ....................... Poland Johnson & Johnson Produtos Profissionais Ltda. ........... Brazil
JURISDICTION OF NAME OF SUBSIDIARY ORGANIZATION ------------------ --------------- Johnson & Johnson (Proprietary) Limited................... South Africa Johnson & Johnson Pte. Ltd. .............................. Singapore Johnson & Johnson Pty. Limited............................ Australia Johnson & Johnson Research Pty. Ltd. ..................... Australia Johnson & Johnson S.A. ................................... Spain Johnson & Johnson, S.A. de C.V. .......................... Mexico Johnson & Johnson SDN. BHD. .............................. Malaysia Johnson & Johnson S.p.A .................................. Italy Johnson & Johnson, s.r.o. ................................ Czech Republic Johnson & Johnson Swiss Finance Company Limited .......... United Kingdom Johnson & Johnson Taiwan Ltd. ............................ Taiwan Johnson & Johnson (Thailand) Ltd.......................... Thailand Johnson & Johnson Vision Care (Ireland) Limited .......... Ireland K.K. DePuy Japan.......................................... Japan Laboratoires Polive S.N.C. ............................... France Lifescan Canada Ltd. ..................................... Canada Lifescan Scotland Ltd. ................................... Scotland McNeil GmbH & Co. Arzneimittelvertrieb oHG................ Germany McNeil GmbH & Co. oHG..................................... Germany McNeil Iberica S.L.U. .................................... Spain McNEIL PDI Inc. .......................................... Canada McNeil SAS................................................ France Medos International Sarl.................................. Switzerland Medos Sarl................................................ Switzerland OMJ Ireland Limited....................................... Ireland OMJ Manufacturing Limited................................. Ireland Ortho-Clinical Diagnostics................................ United Kingdom Ortho-Clinical Diagnostics GmbH........................... Germany Ortho-Clinical Diagnostics K.K. .......................... Japan Ortho-Clinical Diagnostics S.A. .......................... France P.T. Johnson & Johnson Indonesia.......................... Indonesia Shanghai Johnson & Johnson Pharmaceuticals, Ltd........... China Tasmanian Alkaloids Pty. Ltd. ............................ Australia Tibotec BVBA.............................................. Belgium Tibotec Pharmaceuticals Ltd. ............................. Ireland Tibotec-Virco Comm. VA.................................... Belgium Vania Expansion, S.N.C.................................... France Virco BVBA................................................ Belgium Xian-Janssen Pharmaceutical Ltd. ......................... China
EX-23 7 y06203exv23.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File No. 333-106007, 333-104828, 333-96541, 333-87736, 333-67370, 333-59380, 33-52252, 33-40294, 33-40295, 33-32875, 033-59009, 333-38055, 333-40681, 333-26979, 333-39238, 333-94367, 033-57583 and 333-86611) and Form S-3 (File No. 333-111082, 333-104821, 333-67020, 33-55977, 333-91349 and 33-47424) of Johnson & Johnson of our report dated February 28, 2005, relating to the financial statements, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated March 11, 2005 relating to the financial statement schedule, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP - --------------------------------------------- PricewaterhouseCoopers LLP New York, New York March 14, 2005 EX-31.A 8 y06203exv31wa.txt CERTIFICATION EXHIBIT 31(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, William C. Weldon, certify that: 1. I have reviewed this annual report on Form 10-K of Johnson & Johnson (the "Company"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) for the Company and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. /s/ WILLIAM C. WELDON -------------------------------------- William C. Weldon Chief Executive Officer Date: March 14, 2005 EX-31.B 9 y06203exv31wb.txt CERTIFICATION EXHIBIT 31(B) CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Robert J. Darretta, certify that: 1. I have reviewed this annual report on Form 10-K of Johnson & Johnson (the "Company"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) for the Company and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. /s/ ROBERT J. DARRETTA -------------------------------------- Robert J. Darretta Chief Financial Officer Date: March 14, 2005 EX-32.A 10 y06203exv32wa.txt CERTIFICATION EXHIBIT 32(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT The undersigned, William C. Weldon, the Chief Executive Officer of Johnson & Johnson, a New Jersey corporation (the "Company"), pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, hereby certifies that: (1) the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2005 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ WILLIAM C. WELDON -------------------------------------- William C. Weldon Chief Executive Officer Dated: March 14, 2005 This certification is being furnished to the SEC with this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934. EX-32.B 11 y06203exv32wb.txt CERTIFICATION EXHIBIT 32(B) CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT The undersigned, Robert J. Darretta, the Chief Financial Officer of Johnson & Johnson, a New Jersey corporation (the "Company"), pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, hereby certifies that: (1) the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2005 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ ROBERT J. DARRETTA -------------------------------------- Robert J. Darretta Chief Financial Officer Dated: March 14, 2005 This certification is being furnished to the SEC with this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934. EX-99.B 12 y06203exv99wb.txt CAUTIONARY STATEMENT PURSUANT TO PRIVATE SECURITIES EXHIBIT 99(b) CAUTIONARY STATEMENT PURSUANT TO PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 -- "SAFE HARBOR" FOR FORWARD-LOOKING STATEMENTS The Company may from time to time make certain forward-looking statements in publicly-released materials, both written and oral. Forward-looking statements do not relate strictly to historical or current facts and anticipate results based on management's plans that are subject to uncertainty. Forward-looking statements may be identified by the use of words like "plans," "expects," "will," "anticipates," "estimates" and other words of similar meaning in conjunction with, among other things, discussions of future operations, financial performance, the Company's strategy for growth, product development, regulatory approvals, market position and expenditures. Forward-looking statements are based on current expectations of future events. The Company cannot guarantee that any forward-looking statement will be accurate, although the Company believes that it has been reasonable in its expectations and assumptions. Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could vary materially from the Company's expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. Furthermore, the Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments. Some important factors that could cause the Company's actual results to differ from the Company's expectations in any forward-looking statements are as follows: Economic factors, including inflation and fluctuations in interest rates and currency exchange rates and the potential effect of such fluctuations on revenues, expenses and resulting margins; Competitive factors, including technological advances achieved and patents attained by competitors as well as new products introduced by competitors, including the fact that there is continued competition in the U.S. for PROCRIT, the top-selling product in the Company's portfolio and, within the last year, competition for the CYPHER drug-eluting stent; Challenges to the Company's patents by competitors or allegations that the Company's products infringe the patents of third parties, which could potentially affect the Company's competitive position and ability to sell the products in question and require the payment of past damages and future royalties. In particular, 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 that the Company is not successful in defending the resulting lawsuits, generic versions of the product at issue will be introduced, resulting in very substantial market share and revenue losses; Financial distress and bankruptcies experienced by significant customers and suppliers that could impair their ability, as the case may be, to purchase the Company's products, pay for products previously purchased or meet their obligations to the Company under supply arrangements; The impact on political and economic conditions due to terrorist attacks in the U.S. and other parts of the world or U.S. military action overseas, as well as instability in the financial markets which could result from such terrorism or military actions; Interruptions of computer and communication systems, including computer viruses, that could impair the Company's ability to conduct business and communicate internally and with its customers; Health care changes in the U.S. and other countries resulting in pricing pressures, including the continued consolidation among health care providers, trends toward managed care and health care cost containment and government laws and regulations relating to sales and promotion, reimbursement and pricing generally; Government laws and regulations, affecting U.S. and foreign operations, including those relating to securities laws compliance, trade, monetary and fiscal policies, taxes, price controls, regulatory approval of new products, licensing and patent rights, and including, in particular, proposed amendments to the Hatch-Waxman Act, implementation of the recently enacted Medicare Prescription Drug, Improvement and Modernization Act of 2003 and possible drug reimportation legislation; Competition in research, involving the development and the improvement of new and 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; Difficulties inherent in product development, including the potential inability to successfully continue technological innovation, complete clinical trials, obtain regulatory approvals in the United States and abroad, gain and maintain market approval of products and the possibility of encountering infringement claims by competitors with respect to patent or other intellectual property rights which can preclude or delay commercialization of a product; Significant litigation adverse to the Company including product liability claims, patent infringement claims, and antitrust claims; The health care industry has come under increased scrutiny by government agencies and state attorney generals and resulting investigations and prosecutions carry the risk of significant civil and criminal penalties, including debarment from government business; Product efficacy or safety concerns resulting in product recalls, regulatory action on the part of the FDA (or foreign counterparts) or declining sales. While the Company's affiliates do not sell any COX-2 inhibitor medicines, the recent developments involving those medicines demonstrate these risks and are likely to have implications throughout the health care industry; The impact of business combinations, including acquisitions and divestitures, both internally for the Company and externally in the pharmaceutical and health care industries; and Issuance of new or revised accounting standards by the American Institute of Certified Public Accountants, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board. The foregoing list sets forth many, but not all, of the factors that could impact upon the Company's ability to achieve results described in any forward-looking statements. Investors should understand that it is not possible to predict or identify all such factors and should not consider this list to be a complete statement of all potential risks and uncertainties. The Company has identified the factors on this list as permitted by the Private Securities Litigation Reform Act of 1995. -----END PRIVACY-ENHANCED MESSAGE-----