01—Abstract
Summary
Summary of the 10-K filed February 23, 2012. Cited figures are marked; the original filing is the authoritative source.
Johnson & Johnson's fiscal 2011 10-K shows worldwide sales up 5.6% to $65.0 billiona, driven by 3.1% volume growth and a 2.8% currency tailwind, with international sales rising 12.4% to $36.1 billion while U.S. sales fell 1.8% to $28.9 billion.
The growth was led by the Pharmaceutical segment (sales up 8.8% to $24.4 billionb, with REMICADE up 19.1% to $5.5 billion) and Medical Devices and Diagnostics (up 4.8% to $25.8 billion), while Consumer grew 2.0% to $14.9 billion. Reported earnings were heavily hit by non-operating charges: net earnings fell 27% to $9.7 billion (diluted EPS $3.49 vs. $4.78), with pre-tax earnings down 27.1%, driven by roughly $1.7 billion in net litigation expense, $1.6 billion in product liability charges, DePuy ASR hip recall costs, a $676 million Cardiovascular restructuring, and a $0.5 billion adjustment tied to the pending Synthes acquisition. The balance sheet and cash generation remain strong.
Operating cash flow was $14.3 billionc, cash and marketable securities totaled $32.3 billion, and total debt rose to $19.6 billion, leaving net cash of $12.6 billion. The dividend was raised for the 49th consecutive year to $2.25 per share, and the company repurchased $2.5 billion of stock in 2011. Management expects operating cash flow, credit facilities and commercial paper access to fund 2012 needs.
Key forward risks include LEVAQUIN's loss of exclusivity (sales down 54.1%), the Fort Washington McNeil facility shutdown, the planned Synthes acquisition (~$21.3 billiond, expected to close in the first half of 2012), and a large open litigation docket, including a $593 million Saffran judgment against Cordis that the company has not accrued for. For investors, the story is a top-line growth company whose 2011 earnings were depressed by legal and quality-related costs rather than by operating weakness.
Whether those charges prove to be recurring is the central question for the 2012 outlook. The CEO transition to Alex Gorsky, effective April 26, 2012, adds a further leadership variable.
02—Key points
Key Highlights
- Worldwide sales rose 5.6% to $65.0 billion, with volume up 3.1% and currency adding 2.8%; international sales grew 12.4% while U.S. sales declined 1.8%.
- Net earnings fell 27% to $9.7 billion and diluted EPS to $3.49 (from $4.78), primarily due to litigation (~$1.7B net), product liability (~$1.6B), DePuy ASR hip recall costs and a $676M Cardiovascular restructuring.
- Pharmaceutical sales grew 8.8% to $24.4 billion, led by REMICADE (+19.1% to $5.5B, 8.4% of total revenue), PREZISTA (+41.3%) and VELCADE (+18.0%), offset by LEVAQUIN's 54.1% decline after generic entry.
- Medical Devices & Diagnostics sales rose 4.8% to $25.8 billion, but segment operating margin fell to 20.4% from 33.6% amid litigation, recall and restructuring costs.
- Operating cash flow was $14.3 billion; cash and marketable securities totaled $32.3 billion against $19.6 billion of total debt (net cash $12.6 billion).
- Shareholder returns continued: dividend raised for the 49th consecutive year to $2.25/share ($6.2B paid), and $2.5B of stock repurchased in 2011.
- Pending ~$21.3 billion Synthes acquisition (35% cash / 65% stock, expected close 1H 2012) and a $593 million Saffran patent judgment against Cordis (no accrual recorded) are key items to watch.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Johnson & Johnson kept $0.16.
- Revenue$67.22B100.0%
- Cost of revenue−$21.66B32.2%
- Gross profit$45.57B67.8%
- Operating costs−$30.61B45.5%
- Operating income$14.96B22.2%
- Interest, other & tax−$4.10B6.1%
- Net income$10.85B16.1%
Where FY2012 revenue went
$67.22B- Cost of revenue: $21.66B, 32% of revenue
- SG&A: $20.87B, 31% of revenue
- Net income: $10.85B, 16% of revenue
- Other operating costs: $9.74B, 14% of revenue
- Interest, other & tax: $4.10B, 6.1% of revenue
Kept 16% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 23, 2012Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $67.22B$61.59B | +9.2% |
| Cost of Revenue | $21.66B$18.79B | +15.3% |
| Gross Profit | $45.57B$42.80B | +6.5% |
| SG&A Expenses | $20.87B$19.42B | +7.4% |
| Operating Income | $14.96B$17.70B | −15.5% |
| Interest Expense | $532.00M$455.00M | +16.9% |
| Net Income | $10.85B$13.33B | −18.6% |
| EPS (Basic) | $3.94$4.85 | −18.8% |
| EPS (Diluted) | $3.86$4.78 | −19.2% |
| Shares Outstanding (Basic) | 2.75B2.75B | +0.1% |
| Shares Outstanding (Diluted) | 2.81B2.79B | +0.9% |
05—Questions
Frequently Asked Questions
Why did Johnson & Johnson's 2011 earnings decline so sharply despite sales growth?
Pre-tax earnings fell 27.1% to $12.4 billion because of large non-operating charges: about $1.7 billion of net litigation expense, $1.6 billion of product liability expense, DePuy ASR hip recall costs, a $676 million Cardiovascular Care restructuring tied to exiting drug-eluting stents, and a $0.5 billion currency-option adjustment for the Synthes deal. Gains on divestitures partly offset these charges.
How exposed is J&J to patent expirations and generic competition?
Exposure is significant. LEVAQUIN lost U.S. exclusivity in June 2011 and its sales fell 54.1%. The 10-K also notes TOPAMAX and DURAGESIC declines from generic competition, and that generic filers have challenged most key pharmaceutical patents. REMICADE, the largest product at 8.4% of revenue, is a material patent-dependent asset.
What are the main litigation and quality risks disclosed?
The filing lists product liability suits tied to the DePuy ASR hip system, PINNACLE cups, RISPERDAL, pelvic mesh and CYPHER stents, plus a consent decree and the McNeil OTC facility shutdown at Fort Washington, PA, along with DOJ/AG investigations into RISPERDAL and Omnicare. A $593 million Saffran judgment against Cordis is on appeal without an accrual, and management says resolution of these matters could have a material impact on results in any given period.
What does the Synthes acquisition mean for the balance sheet and outlook?
The planned ~$21.3 billion Synthes acquisition (about $19.3 billion net of cash acquired) is roughly 35% cash and 65% J&J stock, with closing expected in the first half of 2012. It would materially expand the orthopaedics business within DePuy. Investors should watch the cash funding, share issuance and integration costs, since 2011 already included deal-related charges.
Is the dividend and capital return policy at risk?
The company raised its dividend for the 49th consecutive year to $2.25 per share in 2011 and declared a $0.57 quarterly payment for 2012, stating it expects to continue regular dividends. Operating cash flow of $14.3 billion, $32.3 billion of cash and marketable securities, and a $10 billion credit facility support that policy, although the $6.2 billion dividend outlay is large relative to 2011 net earnings of $9.7 billion.
06—Continue