Why did reported earnings decline in 1998 despite record sales?

Net earnings fell 7.4% to $3.06 billion because of $610 million in pre-tax special charges recorded in the fourth quarter. These included a $553 million restructuring charge and $60 million in inventory write-offs tied to a plan to close inefficient plants (roughly 10% of manufacturing capacity), plus $164 million of purchased in-process R&D, mainly from the DePuy acquisition. Excluding these items, earnings grew 11.1%.

How did the DePuy acquisition change Johnson & Johnson's financial profile?

DePuy, a leading orthopaedics company, was acquired in November 1998 for about $3.7 billion, which raised intangible assets to $7.2 billion from $3.3 billion and lifted total borrowings to $4.02 billion. The acquisition is part of the Professional segment. Management said the overall impact on results was not material on a pro forma basis, and the fair value of the IPR&D was based on projects focused on spinal and hip implants.

Which business segments drive growth, and which lag?

The Pharmaceutical segment is the growth and profit engine, with sales up 11.3% and operating profit of $3.02 billion on a 35.2% margin, accounting for over half of segment operating profit. Consumer sales were essentially flat (+0.4%), with the skin care franchise and MOTRIN offsetting currency drag. Professional sales rose only 1.6%, as domestic sales fell 2.4% and Cordis coronary stent sales declined, though the segment's international business grew 10.7% in local currency.

What are the main risks investors should monitor?

Key risks include the Amgen arbitration, which could terminate Ortho Biotech's U.S. EPO license and is described as material, and the December 1998 ruling that allows Amgen's NESP product to compete in U.S. non-dialysis and most overseas markets once approved. Other exposures are product liability suits with substantial damages claimed, antitrust litigation on pharmacy discounts and contact lens distribution, and the U.S. Surgical trocar patent suit. The company also flagged Year 2000 risks from suppliers and customers, with total remediation costs estimated at about $200 million and a material adverse effect possible if widespread failures occur.

How is the company returning cash to shareholders, and is the dividend secure?

In 1998 the company paid $1.3 billion in dividends, $0.97 per share (up 14.1%), marking the 36th consecutive annual increase, and repurchased $930 million of stock. A regular quarterly dividend of $0.25 was declared for payment in March 1999, and management said it expects to continue paying regular cash dividends. Operating cash flow of $4.89 billion funded these payouts along with $1.46 billion in capital spending, and the company retains about $3.2 billion in unused credit capacity.

JNJ 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 1, 1999. Cited figures are marked; the original filing is the authoritative source.

Johnson & Johnson's 10-K for the fiscal year ended January 3, 1999 shows record sales of $23.66 billion^a, up 4.5% (7.0% excluding currency), marking the 66th consecutive year of sales growth.

Reported net earnings fell 7.4% to $3.06 billion^b, or $2.23 diluted EPS, due to $610 million of special charges tied to the fourth-quarter DePuy acquisition ($164 million in-process R&D) and a worldwide manufacturing reconfiguration ($613 million restructuring plan, with $60 million in cost of sales). Excluding these charges, net earnings rose 11.1% to $3.67 billion, diluted EPS was $2.67 (up 10.8%), and the net margin hit a record 15.5%. Growth was led by the Pharmaceutical segment, whose sales rose 11.3% to $8.56 billion on strong performances from RISPERDAL, PROCRIT, DURAGESIC and LEVAQUIN, with segment operating margin reaching 35.2% (36.0% excluding charges).

Consumer sales were nearly flat at $6.53 billion^c, and Professional sales grew only 1.6% to $8.57 billion, with domestic Professional sales declining 2.4% and the Cordis coronary stent business weakening. Research spending reached a record $2.27 billion, or 9.6% of sales. The balance sheet and capital allocation shifted meaningfully.

Total assets rose to $26.2 billion^d from $21.5 billion, largely from intangibles (up to $7.2 billion), and total borrowings climbed to $4.02 billion from $1.84 billion, moving the company from net cash of $1.06 billion to net debt representing 9.6% of net capital. Operating cash flow was $4.89 billion, funding $1.5 billion in capital expenditures, $1.3 billion in dividends (up 14.1%, the 36th consecutive annual increase) and $0.9 billion in share repurchases. Key risks flagged include product liability litigation, the Amgen EPO arbitration (which could materially affect Ortho Biotech's U.S. license), antitrust suits involving pharmacies and contact lenses, and Year 2000 readiness, with remediation costs estimated at about $200 million.

02—Key points

Key Highlights

Record 1998 sales of $23.66 billion (+4.5%; +7.0% ex-currency), the 66th consecutive year of sales growth.
Reported net earnings fell 7.4% to $3.06 billion ($2.23 diluted EPS) due to $610 million in special charges, including $164 million of IPR&D largely tied to DePuy and a $613 million restructuring plan.
Excluding special charges, net earnings rose 11.1% to $3.67 billion, diluted EPS grew 10.8% to $2.67, and the net margin reached a record 15.5%.
Pharmaceutical segment sales rose 11.3% to $8.56 billion with a 35.2% operating margin, driven by RISPERDAL, PROCRIT, DURAGESIC and LEVAQUIN; Consumer was flat at $6.53 billion and Professional grew 1.6% to $8.57 billion.
Record R&D spending of $2.27 billion (9.6% of sales) and the November 1998 acquisition of DePuy for about $3.7 billion expand the Professional orthopaedics franchise.
Borrowings rose to $4.02 billion from $1.84 billion, shifting the company from net cash of $1.06 billion to net debt, while operating cash flow of $4.89 billion still covered capex, dividends ($0.97 per share, up 14.1%) and buybacks.
Material legal exposures include the Amgen arbitration over Ortho Biotech's U.S. EPO license, pharmacy antitrust suits, contact lens antitrust actions, and the U.S. Surgical trocar patent case.

03—Questions

Frequently Asked Questions

Why did reported earnings decline in 1998 despite record sales?
Net earnings fell 7.4% to $3.06 billion because of $610 million in pre-tax special charges recorded in the fourth quarter. These included a $553 million restructuring charge and $60 million in inventory write-offs tied to a plan to close inefficient plants (roughly 10% of manufacturing capacity), plus $164 million of purchased in-process R&D, mainly from the DePuy acquisition. Excluding these items, earnings grew 11.1%.
How did the DePuy acquisition change Johnson & Johnson's financial profile?
DePuy, a leading orthopaedics company, was acquired in November 1998 for about $3.7 billion, which raised intangible assets to $7.2 billion from $3.3 billion and lifted total borrowings to $4.02 billion. The acquisition is part of the Professional segment. Management said the overall impact on results was not material on a pro forma basis, and the fair value of the IPR&D was based on projects focused on spinal and hip implants.
Which business segments drive growth, and which lag?
The Pharmaceutical segment is the growth and profit engine, with sales up 11.3% and operating profit of $3.02 billion on a 35.2% margin, accounting for over half of segment operating profit. Consumer sales were essentially flat (+0.4%), with the skin care franchise and MOTRIN offsetting currency drag. Professional sales rose only 1.6%, as domestic sales fell 2.4% and Cordis coronary stent sales declined, though the segment's international business grew 10.7% in local currency.
What are the main risks investors should monitor?
Key risks include the Amgen arbitration, which could terminate Ortho Biotech's U.S. EPO license and is described as material, and the December 1998 ruling that allows Amgen's NESP product to compete in U.S. non-dialysis and most overseas markets once approved. Other exposures are product liability suits with substantial damages claimed, antitrust litigation on pharmacy discounts and contact lens distribution, and the U.S. Surgical trocar patent suit. The company also flagged Year 2000 risks from suppliers and customers, with total remediation costs estimated at about $200 million and a material adverse effect possible if widespread failures occur.
How is the company returning cash to shareholders, and is the dividend secure?
In 1998 the company paid $1.3 billion in dividends, $0.97 per share (up 14.1%), marking the 36th consecutive annual increase, and repurchased $930 million of stock. A regular quarterly dividend of $0.25 was declared for payment in March 1999, and management said it expects to continue paying regular cash dividends. Operating cash flow of $4.89 billion funded these payouts along with $1.46 billion in capital spending, and the company retains about $3.2 billion in unused credit capacity.

04—Continue

← View all 10-K filings