01—Abstract
Summary
Summary of the 10-K filed February 21, 2014. Cited figures are marked; the original filing is the authoritative source.
Johnson & Johnson's FY2013 10-K (filed February 21, 2014) shows a strong year of top-line growth and profitability, led by the Pharmaceutical segment.
Worldwide sales rose 6.1% to $71.3 billiona, driven by volume growth of 7.6% partially offset by a 1.6% currency headwind. Pharmaceutical sales grew 10.9% to $28.1 billion, with immunology (REMICADE, STELARA, SIMPONI), oncology (ZYTIGA, VELCADE) and infectious disease (PREZISTA) as the main contributors. Medical Devices and Diagnostics grew 3.9% to $28.5 billion, helped by the full-year contribution of the Synthes acquisition, while Consumer grew 1.7% to $14.7 billion.
Net earnings attributable to J&J rose to $13.8 billionb, or $4.81 diluted EPS, versus $3.86 in 2012, though the 2012 comparison was depressed by large in-process R&D and asset write-downs. Profitability and cash generation were robust. Gross margin expanded to roughly 68.7%, and the effective tax rate fell to 10.6% from 23.7%, largely due to a Scios-related tax benefit, so the EPS increase is flattered by tax items.
Operating cash flow was $17.4 billionc, which funded $7.3 billion of dividends, $3.6 billion of capex and $3.5 billion of share repurchases. Cash and marketable securities reached $29.2 billion against total debt of $18.2 billion, leaving net cash of $11.0 billion. The Board raised the dividend for the 51st consecutive year to $0.66 per quarter.
Key risks remain material. REMICADE represented about 9.4%d of revenue and faces patent expiries in Europe (2015) and the U.S. (2018), with biosimilar threats.
The DePuy ASR hip recall led to a roughly $2.5 billion U.S. settlement program, and the company faces large product liability and government investigation exposure, including a $1.6 billion civil settlement and $400 million criminal penalty tied to RISPERDAL. Management also announced a binding offer to sell the Ortho-Clinical Diagnostics business to The Carlyle Group for $4.15 billion.
02—Key points
Key Highlights
- Worldwide sales up 6.1% to $71.3 billion; volume contributed 7.6 points, offset by a 1.6-point currency drag.
- Pharmaceutical segment sales rose 10.9% to $28.1 billion, with immunology up 16.7% to $9.2 billion and oncology up 43.5% to $3.8 billion (ZYTIGA, VELCADE).
- Diluted EPS of $4.81 versus $3.86 in 2012; effective tax rate dropped to 10.6% from 23.7%, which flatters the earnings comparison.
- Operating cash flow of $17.4 billion; $7.3 billion paid in dividends and $3.5 billion used for share repurchases.
- Balance sheet strength: $29.2 billion in cash and marketable securities against $18.2 billion of total debt, for net cash of $11.0 billion.
- R&D spending reached $8.2 billion (11.5% of sales), up 6.8%, supporting a pipeline that includes new products launched over the past five years, approximately 25% of 2013 sales.
- Significant litigation and regulatory exposure, including the DePuy ASR hip settlement (~$2.5 billion), the RISPERDAL settlements (~$1.6 billion civil plus $400 million criminal), and REMICADE patent and biosimilar risk.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Johnson & Johnson kept $0.19.
- Revenue$71.31B100.0%
- Cost of revenue−$22.34B31.3%
- Gross profit$48.97B68.7%
- Operating costs−$32.56B45.7%
- Operating income$16.41B23.0%
- Interest, other & tax−$2.58B3.6%
- Net income$13.83B19.4%
Where FY2013 revenue went
$71.31B- Cost of revenue: $22.34B, 31% of revenue
- SG&A: $21.83B, 31% of revenue
- Net income: $13.83B, 19% of revenue
- Other operating costs: $10.73B, 15% of revenue
- Interest, other & tax: $2.58B, 3.6% of revenue
Kept 19% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 21, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $71.31B$67.22B | +6.1% |
| Cost of Revenue | $22.34B$21.66B | +3.2% |
| Gross Profit | $48.97B$45.57B | +7.5% |
| SG&A Expenses | $21.83B$20.87B | +4.6% |
| Operating Income | $16.41B$14.96B | +9.7% |
| Interest Expense | $482.00M$532.00M | −9.4% |
| Net Income | $13.83B$10.85B | +27.4% |
| EPS (Basic) | $4.92$3.94 | +24.9% |
| EPS (Diluted) | $4.81$3.86 | +24.6% |
| Shares Outstanding (Basic) | 2.81B2.75B | +2.0% |
| Shares Outstanding (Diluted) | 2.88B2.81B | +2.3% |
05—Questions
Frequently Asked Questions
What drove J&J's revenue growth in 2013?
Growth came mainly from volume (+7.6%), led by the Pharmaceutical segment (+10.9%) and a full year of Synthes orthopaedics sales, which added about 2.5 points to total growth. Currency reduced sales by about 1.6 points.
Is the 2013 EPS increase sustainable?
Only partly. Diluted EPS rose to $4.81 from $3.86, but the effective tax rate fell to 10.6% from 23.7%, helped by a Scios-related tax benefit and a $180 million net gain from an IRS settlement. The 2012 base was also depressed by about $2.1 billion of asset write-downs and IPR&D charges, so the year-over-year comparison overstates the underlying improvement.
What are the biggest threats to J&J's revenue?
The main threats are loss of exclusivity for REMICADE (about 9.4% of revenue), with European protection running to 2015 and U.S. patents to 2018, plus biosimilar competition. Generic erosion is also affecting CONCERTA, RISPERDAL and ACIPHEX. A pending challenge to a REMICADE patent in U.S. reexamination adds uncertainty.
How significant is the litigation exposure?
It is material but has been partly quantified. The DePuy ASR hip program has a U.S. settlement valued at about $2.5 billion, and 2013 included $2.3 billion of net litigation expense overall. Management believes the ultimate outcome, net of accruals, will not have a material adverse effect on financial position, but results could be significantly affected in any given period.
What is the Ortho-Clinical Diagnostics divestiture?
In January 2014 J&J received a binding offer from The Carlyle Group to acquire the Ortho-Clinical Diagnostics business for $4.15 billion, reduced by about $0.2 billion at closing. The deal is expected to close in mid-2014, subject to antitrust clearance and other conditions, and would remove a segment of the Diagnostics franchise, which declined 8.9% in 2013.
06—Continue