01—Abstract
Summary
Summary of the 10-K filed February 24, 2015. Cited figures are marked; the original filing is the authoritative source.
Johnson & Johnson's fiscal 2014 10-K (filed February 24, 2015) shows a company in a strong growth and profitability phase, driven by the Pharmaceutical segment.
Worldwide sales rose 4.2% to $74.3 billiona, with volume growth of 6.3% partly offset by a 1.9% currency headwind. Pharmaceutical sales grew 14.9% to $32.3 billion, led by Hepatitis C launches (OLYSIO/SOVRIAD and INCIVO), ZYTIGA, STELARA, XARELTO and INVEGA SUSTENNA. Earnings before taxes rose 32.9% to $20.6 billion, and diluted EPS increased 18.5% to $5.70, helped by a $1.9 billion pre-tax gain on the Ortho-Clinical Diagnostics divestiture and lower litigation expense.
Reported net earnings were also lifted by a low 20.6%b effective tax rate, which was driven partly by one-time items, so investors should separate those effects from the underlying operating trend. The main risk for investors is patent exposure in the Pharmaceutical franchise. REMICADE, the largest product at roughly 9.2% of revenue, faces European loss of exclusivity in February 2015 and biosimilar competition, with U.S. patents under reexamination and litigation.
Management also cites ongoing product liability exposure (DePuy ASR hip, pelvic mesh, RISPERDAL), an open McNeil consent decree, and a loss of about $1.1 billionc in Medical Devices sales from divestitures and pricing pressure. Medical Devices sales fell 3.4% to $27.5 billion, and Diagnostics fell 49%. Capital returns remained substantial.
The company paid $7.8 billiond in dividends (a 52nd consecutive annual increase to $2.76 per share), repurchased $7.1 billion of stock, and operated with $33.1 billion of cash and marketable securities against $18.8 billion of total debt, leaving net cash of about $14.3 billion. Operating cash flow was $18.5 billion, and R&D spending reached $8.5 billion, or 11.4% of sales.
02—Key points
Key Highlights
- Worldwide sales grew 4.2% to $74.3 billion; Pharmaceutical sales rose 14.9% to $32.3 billion, while Medical Devices fell 3.4% to $27.5 billion and Consumer fell 1.4% to $14.5 billion.
- Diluted EPS rose 18.5% to $5.70, and earnings before taxes increased 32.9% to $20.6 billion, aided by a $1.9 billion pre-tax divestiture gain and $1.0 billion lower litigation expense.
- Effective tax rate increased to 20.6% from 10.6% in 2013, with one-time items such as the Conor Medsystems benefit and the IRS settlement affecting comparability.
- REMICADE (about 9.2% of revenue) faces European patent expiry in February 2015, U.S. patent challenges, and expected biosimilar competition from Celltrion and Hospira.
- R&D spending rose 3.8% to $8.5 billion (11.4% of sales), and the Company launched or gained approvals for several products including IMBRUVICA, OLYSIO and INVEGA SUSTENNA.
- Shareholder returns totaled about $14.9 billion in 2014: $7.8 billion in dividends ($2.76 per share) and $7.1 billion in buybacks, with $3.5 billion of the $5.0 billion authorization used.
- Ongoing risks include product liability litigation (DePuy ASR hip, pelvic mesh, RISPERDAL), the McNeil consent decree, and a pending $600 million Guidant settlement to be recorded in 2015.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Johnson & Johnson kept $0.22.
- Revenue$74.33B100.0%
- Cost of revenue−$22.75B30.6%
- Gross profit$51.59B69.4%
- Operating costs−$30.00B40.4%
- Operating income$21.59B29.0%
- Interest, other & tax−$5.27B7.1%
- Net income$16.32B22.0%
Where FY2014 revenue went
$74.33B- Cost of revenue: $22.75B, 31% of revenue
- SG&A: $21.95B, 30% of revenue
- Net income: $16.32B, 22% of revenue
- Other operating costs: $8.04B, 11% of revenue
- Interest, other & tax: $5.27B, 7.1% of revenue
Kept 22% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 24, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $74.33B$71.31B | +4.2% |
| Cost of Revenue | $22.75B$22.34B | +1.8% |
| Gross Profit | $51.59B$48.97B | +5.3% |
| SG&A Expenses | $21.95B$21.83B | +0.6% |
| Operating Income | $21.59B$16.41B | +31.6% |
| Interest Expense | $533.00M$482.00M | +10.6% |
| Net Income | $16.32B$13.83B | +18.0% |
| EPS (Basic) | $5.80$4.92 | +17.9% |
| EPS (Diluted) | $5.70$4.81 | +18.5% |
| Shares Outstanding (Basic) | 2.82B2.81B | +0.2% |
| Shares Outstanding (Diluted) | 2.86B2.88B | −0.5% |
05—Questions
Frequently Asked Questions
How much of Johnson & Johnson's revenue depends on REMICADE, and what happens when its patents expire?
REMICADE accounted for about 9.2% of 2014 total revenue, or roughly $6.9 billion in sales. Patents in several European countries expired in February 2015, and the U.S. patent runs to September 2018 but is under reexamination. Loss of exclusivity is expected to reduce sales as biosimilars enter the market. The Company does not expect further patent extensions, and it is defending its patents in the U.S. and Canada, where the Feldman and Le patents are being challenged.
Why did earnings grow so much faster than sales in 2014?
Pre-tax earnings rose 32.9% against a 4.2% sales increase. The main drivers were the $1.9 billion gain on the Ortho-Clinical Diagnostics sale, $1.0 billion lower litigation expense, higher-margin Pharmaceutical mix, and cost containment. Pharmaceutical pre-tax margin rose to 36.2% from 32.6%, and Medical Devices margin rose to 28.9% from 18.5%, largely because of the divestiture gain. Investors should note that the divestiture gain and lower litigation charges are not recurring operating income.
What are the biggest legal and regulatory risks disclosed in the filing?
The most significant items are product liability claims: about 11,200 plaintiffs in the DePuy ASR hip cases, 7,300 in PINNACLE, 36,600 in pelvic mesh, and 1,200 in RISPERDAL. Government matters include state Attorney General actions over RISPERDAL marketing (for example, a roughly $327 million South Carolina penalty under appeal) and the McNeil grand jury and False Claims investigations. The Company says it does not expect a material adverse effect on financial position, but it also warns that a single period's resolution could materially affect results of operations and cash flows.
How strong is Johnson & Johnson's balance sheet and capacity for shareholder returns?
At year-end 2014 the Company held $33.1 billion in cash, cash equivalents and marketable securities against $18.8 billion of total debt, giving net cash of $14.3 billion. Operating cash flow was $18.5 billion, against $3.7 billion of capital expenditures. Total debt was 21.2% of total capital. The Company paid $7.8 billion in dividends and repurchased $7.1 billion of stock, and it expects operating cash flow, credit facilities and commercial paper access to fund 2015 needs. Shareholders' equity fell to $69.8 billion from $74.1 billion, mainly from a $7.9 billion currency translation and pension-related reduction in other comprehensive income.
06—Continue