How did the Synthes acquisition affect J&J's 2012 results and balance sheet?

Synthes contributed about 3.1 points of sales growth and drove the Medical Devices and Diagnostics segment's 6.4% increase, with Orthopaedics up 34.3%. The deal was financed largely with 203.7 million shares repurchased via accelerated share repurchase agreements plus about $6.9 billion of cash. It added roughly $12.9 billion of intangibles and $6.0 billion of goodwill, sharply increasing total assets to $121.3 billion. Synthes also incurred integration and transaction costs, and its results are excluded from management's internal control assessment for 2012.

What drove the decline in Consumer segment sales, and is it likely to continue?

Consumer sales fell 2.9% to $14.4 billion, reflecting negative currency (-3.4%), divestitures in Women's Health, and competitive pressures in U.S. skin care, baby care and OTC analgesics. Manufacturing under the McNeil consent decree remains constrained, with the company expecting these impacts to continue throughout most of 2013. Consumer pre-tax margin fell to 11.7% from 14.1%.

What are the largest legal and regulatory risks disclosed in the filing?

Key exposures include product liability for the DePuy ASR hip, PINNACLE cups and pelvic mesh; RISPERDAL off-label marketing matters, including a roughly $1.2 billion Arkansas judgment (under appeal) and a $257.7 million Louisiana verdict; a $593 million Saffran patent judgment against Cordis (under appeal, with no accrual recorded); and a $327 million South Carolina civil penalty against JPI, also under appeal. Management believes the net impact on financial position is not expected to be material, but resolution in any given period could materially affect results and cash flows.

Why did reported 2012 earnings growth look modest relative to operating performance?

Pre-tax earnings rose 11.4% to $13.8 billion, but the result included $1.16 billion of IPR&D charges (mainly bapineuzumab and Crucell), about $2.1 billion of asset write-downs, and roughly $1.0 billion of acquisition-related costs including Synthes integration and inventory step-up amortization. The effective tax rate also rose to 23.7% from 21.8%. Management's narrative points to lower litigation expense ($2.1 billion lower than the prior year) and cost containment as offsetting factors.

How much cash does J&J have, and what are its capital return and debt obligations?

Cash and equivalents fell to $14.9 billion, and cash plus current marketable securities totaled $21.1 billion. Total debt was $16.2 billion, with the 2013 maturity of $1.5 billion and about $13.0 billion in long-term obligations. Net cash, defined as cash and current marketable securities less debt, was $4.9 billion, down from $12.6 billion. The company returned $19.5 billion to shareholders in 2012, comprising $12.9 billion of repurchases (largely tied to Synthes) and $6.6 billion of dividends, and also has a $10 billion 364-day credit facility.

JNJ 10-K Filed Feb 22, 2013

01—Abstract

Summary

Summary of the 10-K filed February 22, 2013. Cited figures are marked; the original filing is the authoritative source.

Johnson & Johnson's FY2012 10-K (fiscal year ended December 30, 2012) shows a company that grew sales 3.4% to $67.2 billion^a, with volume up 5.7% offset by a 2.7% currency headwind.

Growth was driven by the Synthes acquisition, which closed June 14, 2012 for roughly $20.2 billion^b in cash and stock, and by strong Pharmaceutical momentum in immunology (REMICADE, STELARA, SIMPONI), oncology (ZYTIGA, VELCADE) and HIV (PREZISTA). Medical Devices and Diagnostics grew 6.4% to $27.4 billion, with Orthopaedics up 34.3% largely on Synthes. Consumer sales fell 2.9% to $14.4 billion, weighed down by generic-driven declines and the McNeil consent decree, which continues to constrain production at key plants.

Reported earnings were distorted by one-time charges. Net earnings attributable to J&J were $10.9 billion^c, or $3.86 diluted EPS, up from $3.49, but the figures include a $1.16 billion IPR&D charge (largely the bapineuzumab Phase III discontinuation and the Crucell vaccine write-down), roughly $1.2 billion of net litigation expense, and about $1.0 billion of acquisition-related costs. Pre-tax margin rose to 20.5% from 19.0%, and the effective tax rate increased to 23.7%.

Cash flow from operations was $15.4 billion^d, and the balance sheet moved materially: total assets rose to $121.3 billion, intangibles and goodwill increased by roughly $19 billion, and cash fell to $14.9 billion. Total debt declined to $16.2 billion, and shareholder equity reached $64.8 billion. The company also returned $12.9 billion through share repurchases (largely the Synthes-linked ASR) and $6.6 billion in dividends, with the quarterly dividend raised to $0.61 (2.40 per year, 50th consecutive annual increase).

Key risks flagged in the filing include the LEVAQUIN loss of exclusivity (U.S. sales down about 94%), CONCERTA generic erosion, ongoing product liability exposure (DePuy ASR hip, pelvic mesh, PINNACLE), a $1.2 billion Arkansas RISPERDAL judgment under appeal, the Louisiana and South Carolina RISPERDAL matters, and a pending $593 million Saffran patent judgment against Cordis. The company also reported that new products launched in the past five years accounted for about 25% of 2012 sales, and that R&D spending was $7.7 billion, or 11.4% of sales.

02—Key points

Key Highlights

Worldwide sales rose 3.4% to $67.2 billion; volume grew 5.7%, while currency subtracted 2.7 points.
Synthes acquisition (closed June 14, 2012; ~$20.2 billion consideration) added about 3.1 points to total sales growth and drove Orthopaedics sales up 34.3% to $7.8 billion.
Pharmaceutical sales grew 4.0% to $25.4 billion, led by immunology (+15.8%) and oncology (+28.4%); LEVAQUIN U.S. sales fell about 94% after generic entry.
Diluted EPS of $3.86 (vs. $3.49) was burdened by a $1.16 billion IPR&D charge, roughly $1.2 billion of net litigation expense, and about $1.0 billion of acquisition costs.
Operating cash flow of $15.4 billion funded $12.9 billion of share repurchases and $6.6 billion of dividends; dividend raised to $2.40/share, the 50th consecutive annual increase.
Total debt fell to $16.2 billion (20.0% of total capital) from $19.6 billion, while goodwill and intangibles rose sharply to about $51 billion following Synthes.
Consumer sales declined 2.9% to $14.4 billion, and the McNeil consent decree continues to constrain production at Las Piedras and Lancaster; full-year 2013 constraints are expected.

03—Questions

Frequently Asked Questions

How did the Synthes acquisition affect J&J's 2012 results and balance sheet?
Synthes contributed about 3.1 points of sales growth and drove the Medical Devices and Diagnostics segment's 6.4% increase, with Orthopaedics up 34.3%. The deal was financed largely with 203.7 million shares repurchased via accelerated share repurchase agreements plus about $6.9 billion of cash. It added roughly $12.9 billion of intangibles and $6.0 billion of goodwill, sharply increasing total assets to $121.3 billion. Synthes also incurred integration and transaction costs, and its results are excluded from management's internal control assessment for 2012.
What drove the decline in Consumer segment sales, and is it likely to continue?
Consumer sales fell 2.9% to $14.4 billion, reflecting negative currency (-3.4%), divestitures in Women's Health, and competitive pressures in U.S. skin care, baby care and OTC analgesics. Manufacturing under the McNeil consent decree remains constrained, with the company expecting these impacts to continue throughout most of 2013. Consumer pre-tax margin fell to 11.7% from 14.1%.
What are the largest legal and regulatory risks disclosed in the filing?
Key exposures include product liability for the DePuy ASR hip, PINNACLE cups and pelvic mesh; RISPERDAL off-label marketing matters, including a roughly $1.2 billion Arkansas judgment (under appeal) and a $257.7 million Louisiana verdict; a $593 million Saffran patent judgment against Cordis (under appeal, with no accrual recorded); and a $327 million South Carolina civil penalty against JPI, also under appeal. Management believes the net impact on financial position is not expected to be material, but resolution in any given period could materially affect results and cash flows.
Why did reported 2012 earnings growth look modest relative to operating performance?
Pre-tax earnings rose 11.4% to $13.8 billion, but the result included $1.16 billion of IPR&D charges (mainly bapineuzumab and Crucell), about $2.1 billion of asset write-downs, and roughly $1.0 billion of acquisition-related costs including Synthes integration and inventory step-up amortization. The effective tax rate also rose to 23.7% from 21.8%. Management's narrative points to lower litigation expense ($2.1 billion lower than the prior year) and cost containment as offsetting factors.
How much cash does J&J have, and what are its capital return and debt obligations?
Cash and equivalents fell to $14.9 billion, and cash plus current marketable securities totaled $21.1 billion. Total debt was $16.2 billion, with the 2013 maturity of $1.5 billion and about $13.0 billion in long-term obligations. Net cash, defined as cash and current marketable securities less debt, was $4.9 billion, down from $12.6 billion. The company returned $19.5 billion to shareholders in 2012, comprising $12.9 billion of repurchases (largely tied to Synthes) and $6.6 billion of dividends, and also has a $10 billion 364-day credit facility.

04—Continue

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