01—Abstract
Summary
Summary of the 10-K filed February 25, 2011. Cited figures are marked; the original filing is the authoritative source.
Johnson & Johnson's fiscal 2010 10-K (fiscal year ended January 2, 2011) shows a company that held sales essentially flat but expanded profitability and cash generation.
Worldwide sales fell 0.5% to $61.6 billiona, as a steep decline in Consumer (-7.7%, driven by OTC recalls and the suspended McNeil Fort Washington plant) and Pharmaceutical (-0.6%, hurt by TOPAMAX generic erosion and ESA declines) offset growth in Medical Devices and Diagnostics (+4.4% to $24.6 billion). Net earnings rose 8.7% to $13.3 billion and diluted EPS reached $4.78 (up 8.6%), helped by cost containment from the 2009 restructuring, roughly $966 million of net litigation gains, and the Breast Care divestiture gain, partly offset by product liability charges and the DePuy ASR hip recall costs ($280 million). Balance sheet and cash flow remained strong: operating cash flow was $16.4 billion, cash and marketable securities totaled $27.7 billion, and net cash was $10.9 billion.
Shareholder returns continued through $5.8 billionb in dividends (a $2.11 per share payout, the 48th consecutive annual increase) and $2.8 billion in buybacks; the $10 billion 2007 repurchase program was completed. Management expects 2011 to bring meaningful pressure from loss of exclusivity on LEVAQUIN (June 2011) and an authorized generic of CONCERTA (May 2011), along with health care reform costs of roughly $550 to $700 million. Investors should weigh the company's diversified portfolio and cash strength against a heavy litigation and recall overhang.
The filing discloses numerous material matters, including a $482 millionc CYPHER stent patent verdict, a $257.7 million Louisiana false claims verdict, the McNeil recalls, DePuy ASR hip claims, and multiple government investigations. The 2011 patent expirations on key franchises and the outcome of these legal matters are the main near-term risks to the earnings trajectory.
02—Key points
Key Highlights
- Worldwide sales declined 0.5% to $61.6 billion; U.S. sales fell 4.7% while international sales rose 3.6%, with Medical Devices and Diagnostics the only segment to grow (+4.4%).
- Net earnings increased 8.7% to $13.3 billion and diluted EPS rose 8.6% to $4.78, supported by $966 million of net litigation gains, the Breast Care divestiture gain, and lower SG&A from the 2009 restructuring.
- Operating cash flow of $16.4 billion funded $2.4 billion of capex, $5.8 billion of dividends, and $2.8 billion of share repurchases, while cash and marketable securities reached $27.7 billion against $16.8 billion of total debt.
- Consumer sales fell 7.7% to $14.6 billion because of OTC product recalls and the suspended McNeil Fort Washington facility, which impacted sales by about $900 million.
- Patent expirations are a key 2011 risk: LEVAQUIN (about 2% of sales) loses U.S. exclusivity in June 2011, and an authorized generic of CONCERTA launches in May 2011; TOPAMAX sales already fell 53.3% in 2010.
- The dividend was raised for the 48th consecutive year to $2.11 per share, and the $10 billion 2007 buyback program was completed with 158.3 million shares repurchased.
- Significant contingent liabilities remain, including a $482 million CYPHER stent verdict (not reserved), a $257.7 million Louisiana false claims verdict (not reserved), DePuy ASR hip recall claims, and multiple DOJ and SEC investigations.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, Johnson & Johnson kept $0.22.
- Revenue$61.59B100.0%
- Cost of revenue−$18.79B30.5%
- Gross profit$42.80B69.5%
- Operating costs−$25.09B40.7%
- Operating income$17.70B28.7%
- Interest, other & tax−$4.37B7.1%
- Net income$13.33B21.7%
Where FY2011 revenue went
$61.59B- SG&A: $19.42B, 32% of revenue
- Cost of revenue: $18.79B, 31% of revenue
- Net income: $13.33B, 22% of revenue
- Other operating costs: $5.67B, 9.2% of revenue
- Interest, other & tax: $4.37B, 7.1% of revenue
Kept 22% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 25, 2011Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $61.59B$61.90B | −0.5% |
| Cost of Revenue | $18.79B$18.45B | +1.9% |
| Gross Profit | $42.80B$43.45B | −1.5% |
| SG&A Expenses | $19.42B$19.80B | −1.9% |
| Operating Income | $17.70B$16.58B | +6.7% |
| Interest Expense | $455.00M$451.00M | +0.9% |
| Net Income | $13.33B$12.27B | +8.7% |
| EPS (Basic) | $4.85$4.45 | +9.0% |
| EPS (Diluted) | $4.78$4.40 | +8.6% |
| Shares Outstanding (Basic) | 2.75B2.76B | −0.3% |
| Shares Outstanding (Diluted) | 2.79B2.79B | 0.0% |
05—Questions
Frequently Asked Questions
Did Johnson & Johnson's revenue grow in fiscal 2010?
No. Worldwide sales decreased 0.5% to $61.6 billion. Currency added 0.8 points, offset by a 0.5% volume decline and a 0.8% price decline. The Consumer segment (-7.7%) and Pharmaceutical segment (-0.6%) fell, while Medical Devices and Diagnostics grew 4.4%.
Why did earnings rise even though sales fell?
Earnings before taxes rose 7.6% to $16.9 billion. Key drivers were lower selling, marketing and administrative expenses (down to 31.5% of sales from 32.0%) following the 2009 restructuring, net litigation gains of about $966 million, and the gain on the Breast Care divestiture. These were partly offset by product liability expense, the $280 million DePuy ASR recall cost, and the OTC recall costs.
What are the biggest risks to future earnings?
The main risks are generic competition as key patents expire (LEVAQUIN in June 2011 and CONCERTA authorized generic in May 2011), pricing pressure from U.S. health care reform (estimated at $400 to $500 million of 2011 sales impact plus a $150 to $200 million fee), and large legal exposures. Several verdicts, including the $482 million CYPHER stent judgment and the $257.7 million Louisiana verdict, have no reserve established, and the company cannot estimate the range of losses from the DePuy ASR hip recall.
Is the dividend safe, and how is capital being returned?
The dividend appears secure. The company increased it for the 48th consecutive year to $2.11 per share in 2010 and declared a $0.54 quarterly dividend payable in March 2011. Operating cash flow of $16.4 billion comfortably covered $5.8 billion of dividends. The company also repurchased $2.8 billion of stock in 2010 and completed its $10 billion 2007 authorization, with a new annual program for employee plans.
How strong is the balance sheet?
The balance sheet is strong. Cash, cash equivalents and marketable securities totaled $27.7 billion, and net cash (cash and current securities minus debt) was $10.9 billion. Total debt was $16.8 billion, representing 22.9% of total capital. Shareholders' equity rose to $56.6 billion, or $20.66 per share, and the company has a $10 billion 364-day credit facility.
06—Continue