01—Abstract
Summary
Summary of the 10-K filed March 15, 2005. Cited figures are marked; the original filing is the authoritative source.
Johnson & Johnson's fiscal 2004 10-K (fiscal year ended January 2, 2005) shows a company in strong operating form.
Worldwide sales rose 13.1% to $47.3 billiona, driven by 8.7% volume growth and 3.4% favorable currency, with U.S. sales up 9.9% and international sales up 18.0%. Pre-tax earnings grew 24.5% to $12.8 billion, and net earnings reached $8.5 billion, or $2.84 diluted EPS, up 18.3% from $2.40. Pre-tax margin expanded to 27.1%, aided by lower IPR&D charges (only $18 million versus $918 million in 2003) and gross margin improvement, though the effective tax rate rose to 33.7% due to an $789 million one-time charge for repatriating $10.8 billion of foreign earnings under the American Jobs Creation Act.
Growth was broad across segments. Pharmaceuticals ($22.1 billionb, up 13.4%) led on operating profit, which rose 29% to $7.6 billion, with RISPERDAL, REMICADE, DURAGESIC, and TOPAMAX all growing strongly. Medical Devices and Diagnostics ($16.9 billion, up 13.2%) was driven by Cordis (CYPHER stent) and DePuy, and Consumer ($8.3 billion, up 12.1%) benefited from SPLENDA and skin care.
Investors should note the concentration risk: PROCRIT/EPREX sales fell 9.9%, and DURAGESIC faces U.S. generic entry in 2005, with the company expecting its sales to decline. The pending $25.4 billionc acquisition of Guidant, announced December 15, 2004, is a major forward-looking item, with closing expected in Q3 2005 subject to regulatory and shareholder approvals. Balance sheet strength is a standout feature.
Shareholders' equity rose to $31.8 billion, total debt fell to $2.8 billiond (8.2% of total capital), cash and marketable securities reached $12.9 billion, and operating cash flow was $11.1 billion. The company retains a Triple-A credit rating and raised its dividend for the 42nd consecutive year to $1.095 per share. Material litigation exposure remains, including PROPULSID product liability cases, VICRYL suit claims, Average Wholesale Price (AWP) litigation, and patent disputes around stents and generic drugs, though management does not expect these to have a material adverse effect on financial position.
02—Key points
Key Highlights
- Worldwide sales grew 13.1% to $47.3 billion; U.S. sales rose 9.9% and international sales 18.0%, with currency contributing 3.4 points.
- Net earnings increased to $8.5 billion, and diluted EPS rose 18.3% to $2.84, aided by minimal IPR&D charges ($18 million vs. $918 million in 2003).
- Pre-tax margin improved to 27.1% from 24.6%, but the effective tax rate rose to 33.7% due to an $789 million charge on repatriating $10.8 billion of foreign earnings.
- Pharmaceutical segment operating profit rose 29% to $7.6 billion; RISPERDAL ($3.05B), REMICADE ($2.15B, +24.1%), and DURAGESIC ($2.08B, +27.7%) were key drivers.
- Pending $25.4 billion acquisition of Guidant Corporation, announced December 15, 2004, with closing expected in Q3 2005.
- Balance sheet is strong: $12.9 billion in cash and marketable securities, $2.8 billion total debt, $31.8 billion shareholders' equity, Triple-A credit rating, and $11.1 billion operating cash flow.
- Patent expirations and generic competition pose risk: DURAGESIC sales are expected to decline in 2005, and PROCRIT/EPREX sales fell 9.9%.
03—Questions
Frequently Asked Questions
How did Johnson & Johnson perform financially in fiscal 2004?
Sales rose 13.1% to $47.3 billion, pre-tax earnings rose 24.5% to $12.8 billion, and net earnings reached $8.5 billion, or $2.84 per diluted share, up 18.3%. Results were boosted by strong volume growth and currency gains, and by lower in-process R&D charges compared with 2003.
What is the impact of the Guidant acquisition on investors?
J&J agreed on December 15, 2004 to acquire Guidant for $25.4 billion in fully diluted equity value. Each Guidant share would receive $30.40 in cash and $45.60 in J&J stock, subject to a price collar, which implies issuing roughly 217 to 262 million J&J shares. The deal requires antitrust clearance and Guidant shareholder approval, with closing expected in Q3 2005. It could dilute existing shareholders and may require divestitures.
What are the main risks to future earnings?
Key risks include generic competition to DURAGESIC in the U.S. (pediatric exclusivity expired January 2005) and to EPREX internationally, declining PROCRIT sales (down 9.9%), and pricing pressure from managed care and government policy. The company also faces product liability and patent litigation, including PROPULSID claims, VICRYL suits, AWP pricing cases, and stent patent disputes.
Why did the effective tax rate increase in 2004?
The effective tax rate rose to 33.7% from 30.2%, mainly because of an $789 million tax charge for repatriating $10.8 billion of undistributed foreign earnings under the American Jobs Creation Act of 2004. This charge added 6.1 percentage points to the rate. A possible reduction of about $225 million could come from technical corrections legislation expected in 2005.
Is the dividend secure and how strong is the balance sheet?
The dividend was raised for the 42nd consecutive year, with 2004 cash dividends of $1.095 per share, up from $0.925. The company holds $12.9 billion in cash and marketable securities, has total debt of $2.8 billion (8.2% of total capital), and retains a Triple-A credit rating. Management says it expects to continue paying regular cash dividends.
04—Continue