01—Abstract
Summary
Summary of the 10-K filed March 1, 2010. Cited figures are marked; the original filing is the authoritative source.
Johnson & Johnson's fiscal 2009 10-K (filed March 1, 2010) shows a company whose top line contracted while its balance sheet and cash generation stayed strong.
Worldwide sales fell 2.9% to $61.9 billiona, driven largely by a 2.6-point currency headwind and a 0.2% volume decline. The Pharmaceutical segment was the weak spot, with sales down 8.3% as generic competition hit TOPAMAX (down 57.9%) and oral RISPERDAL (down 57.7%). Medical Devices and Diagnostics grew 1.9% to $23.6 billion, and Consumer slipped 1.6% to $15.8 billion.
Net earnings fell to $12.3 billionb from $12.9 billion, and diluted EPS declined to $4.40 from $4.57, a 3.7% drop. Profitability was pressured by a $1.2 billion pre-tax restructuring charge recorded in Q4 2009, which the company tied to a program expected to deliver $1.4–$1.7 billion in annual pre-tax savings by 2011 and to eliminate roughly 7,500 positions. Segment operating profit fell in Consumer and Pharmaceutical but rose in Medical Devices and Diagnostics, helped by a $478 million net litigation gain there.
Management also flagged that the LEVAQUIN patent expires in December 2010, that CONCERTA generic filings are pending, and that REMICADE, at about 7% of revenue, is now the largest product and faces growing competition. Balance sheet and cash flow remain a clear strength. Operating cash flow was $16.6 billionc, cash and marketable securities totaled $19.4 billion, and the company retained a triple-A credit rating.
Shareholders' equity rose to $50.6 billiond. The dividend was raised for the 47th consecutive year to $1.93 per share, and the company repurchased $2.1 billion of stock in 2009 under a program with $8.9 billion executed to date against a $10 billion authorization. The filing itself is brief on risk factors, which it incorporates by reference to Exhibit 99, and it discloses a large volume of ongoing litigation, including a $1.9 billion judgment against Abbott that J&J has not recognized.
02—Key points
Key Highlights
- Worldwide sales declined 2.9% to $61.9 billion, with currency (-2.6 pts) and volume (-0.2%) as the main drags; U.S. sales fell 4.4% while international sales fell 1.4%.
- Diluted EPS fell 3.7% to $4.40 (net earnings $12.3 billion) as a $1.2 billion Q4 restructuring charge and generic erosion weighed on results.
- Pharmaceutical sales dropped 8.3% to $22.5 billion, driven by TOPAMAX (-57.9%) and RISPERDAL oral (-57.7%) losing exclusivity; REMICADE grew 14.8% to $4.3 billion and is the largest product (~7% of revenue).
- Medical Devices and Diagnostics was the growth engine at $23.6 billion (+1.9%), supported by DePuy, Ethicon Endo-Surgery, and a $478 million net litigation gain.
- Operating cash flow of $16.6 billion and $19.4 billion in cash and marketable securities give J&J substantial capacity for dividends ($5.3 billion paid), buybacks, and acquisitions ($2.5 billion in 2009).
- Restructuring program targets $1.4–$1.7 billion in annual pre-tax savings by 2011 and about 7,500 position eliminations, with $0.8–$0.9 billion expected in 2010.
- Upcoming patent cliffs include LEVAQUIN (U.S. patent expiry December 2010, exclusivity to June 2011 via pediatric extension) and CONCERTA, where generic ANDA filings are pending.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Johnson & Johnson kept $0.20.
- Revenue$61.90B100.0%
- Cost of revenue−$18.45B29.8%
- Gross profit$43.45B70.2%
- Operating costs−$26.87B43.4%
- Operating income$16.58B26.8%
- Interest, other & tax−$4.32B7.0%
- Net income$12.27B19.8%
Where FY2010 revenue went
$61.90B- SG&A: $19.80B, 32% of revenue
- Cost of revenue: $18.45B, 30% of revenue
- Net income: $12.27B, 20% of revenue
- Other operating costs: $7.07B, 11% of revenue
- Interest, other & tax: $4.32B, 7.0% of revenue
Kept 20% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed March 1, 2010Financial Statements
| Revenue | $61.90B |
| Cost of Revenue | $18.45B |
| Gross Profit | $43.45B |
| SG&A Expenses | $19.80B |
| Operating Income | $16.58B |
| Interest Expense | $451.00M |
| Net Income | $12.27B |
| EPS (Basic) | $4.45 |
| EPS (Diluted) | $4.40 |
| Shares Outstanding (Basic) | 2.76B |
| Shares Outstanding (Diluted) | 2.79B |
05—Questions
Frequently Asked Questions
Why did J&J's earnings decline in 2009 despite a strong balance sheet?
Net earnings fell to $12.3 billion from $12.9 billion, and diluted EPS dropped 3.7% to $4.40. The main drivers were lower sales (down 2.9%, with currency a 2.6-point headwind), generic competition in the Pharmaceutical segment, and a $1.2 billion pre-tax restructuring charge in Q4 2009. Lower interest income also contributed. Cost containment in selling, marketing and administrative expenses partly offset these pressures.
How exposed is J&J to patent expirations?
Significantly. TOPAMAX and oral RISPERDAL already lost exclusivity and their sales fell by more than half in 2009. LEVAQUIN, which generated $1.6 billion in 2009, faces U.S. patent expiry in December 2010, with exclusivity extended to June 2011 by a pediatric extension, and management expects a significant sales reduction afterward. CONCERTA has pending ANDA challenges that could lead to a similar loss of exclusivity. REMICADE, the largest product at $4.3 billion, is facing rising competition from new entrants and expanded competitor indications.
Is J&J's dividend and share buyback program at risk?
Based on this filing, the risk appears low. The company raised its dividend for the 47th consecutive year to $1.93 per share, and it expects to continue regular cash dividends, with a $0.49 quarterly dividend declared for March 2010. Operating cash flow of $16.6 billion covered the $5.3 billion dividend payout. The company repurchased $2.1 billion of stock in 2009, with $8.9 billion executed under the $10 billion program. Management said the buybacks would not affect its triple-A credit rating.
What litigation risks should investors weigh?
The filing describes extensive litigation, including product liability cases involving RISPERDAL, LEVAQUIN, DURAGESIC and CYPHER stents, multistate Attorney General actions, and multiple government investigations (FCPA, TOPAMAX and RISPERDAL marketing). It also discloses patent disputes such as Centocor's $1.9 billion judgment against Abbott, which J&J has not reflected in its financials. Management believes the ultimate outcome, net of accrued liabilities, will not be materially adverse, but individual case resolutions could significantly affect quarterly results. The filing also notes that Item 1A risk factors are incorporated from Exhibit 99 rather than set out in the 10-K body.
Where is J&J's growth coming from going forward?
Management pointed to new product launches and the medical devices business. In 2009 the company received approvals for STELARA, SIMPONI, INVEGA SUSTENNA and PRILIGY, and it filed an NDA for tapentadol ER. Medical Devices and Diagnostics grew 1.9%, with DePuy up 4.6%, Ethicon Endo-Surgery up 4.8%, and Ethicon up 7.3%. The company also made acquisitions in 2009, including Mentor Corporation, Cougar Biotechnology and an Elan Alzheimer's immunotherapy program. It invested $7.0 billion in R&D, or 11.3% of sales. New products launched within the past five years accounted for about 25% of 2009 sales.
06—Continue