Johnson & Johnson — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. Johnson & Johnson is a global health-care company operating in Consumer, Pharmaceutical and Medical Devices; approximately 134,000 employees worked across more than 260 operating companies.
Financial results
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Sales | $76.45 billion | $71.89 billion |
| Gross profit / gross margin | $51.10 billion / 66.8% | $50.21 billion / 69.8% |
| Earnings before tax | $17.67 billion | $19.80 billion |
| Net earnings | $1.30 billion | $16.54 billion |
| Diluted earnings per share | $0.47 | $5.93 |
| Operating cash flow | $21.06 billion | $18.77 billion |
| Cash and cash equivalents | $17.82 billion | $18.97 billion |
| Cash, cash equivalents and marketable securities | $18.30 billion | $41.91 billion |
| Total debt | $34.58 billion | $27.13 billion |
| Shareholders’ equity | $60.16 billion | $70.42 billion |
Sales rose 6.3%, driven by 8.0% volume growth and a 3.6% net positive acquisition/divestiture contribution; price reduced growth by 2.0%, while currency added 0.3%. Earnings before tax margin declined to 23.1% from 27.5%. The effective tax rate surged to 92.6% from 16.5%, principally due to the provisional U.S. Tax Cuts and Jobs Act charge; excluding that exceptional tax impact, reported earnings would have been substantially higher, but the filing does not provide an adjusted net-income figure here.
Net cash used in investing was $14.87 billion, including $35.15 billion of acquisitions, partly offset by investment sales and divestiture proceeds. Net cash used in financing was $7.67 billion, including $8.94 billion of dividends and $6.36 billion of share repurchases. Net debt was $16.3 billion, versus net cash of $14.8 billion in 2016; debt was 36.5% of total capital, versus 27.8%. Management said operating cash flow, external funding, committed facilities and commercial paper access should provide sufficient resources for operating needs over the next 12 months. A $10 billion credit facility was available through September 2018.
Segments and changes versus prior year
| Segment | FY 2017 sales | Change | Notable drivers |
|---|---|---|---|
| Consumer | $13.60 billion | +2.2% | Beauty and OTC growth; declines in Baby Care, Oral Care, Women’s Health and Wound Care/Other. |
| Pharmaceutical | $36.26 billion | +8.3% | Oncology grew 25.0%; Pulmonary Hypertension added Actelion products. Remicade sales declined 9.3%; Invokana declined 21.0%. |
| Medical Devices | $26.59 billion | +5.9% | Vision Care growth reflected the AMO acquisition; Diabetes Care declined 9.7%, and the company decided to exit Animas insulin pumps. |
Actelion, acquired in June for approximately $29.6 billion net of cash acquired, established a pulmonary-hypertension franchise; AMO was acquired for approximately $4.3 billion. Total acquisition cash outlay was $35.15 billion. Acquisition-related amortization and inventory step-up costs contributed to the deterioration in gross margin and segment profitability. R&D expense increased 16.0% to $10.55 billion, or 13.8% of sales, from $9.10 billion, or 12.7%.
Fourth-quarter results and unusual items
Fourth-quarter sales were $20.20 billion, compared with $18.11 billion in the prior-year quarter. The company reported a fourth-quarter net loss of $10.71 billion, or $3.99 per diluted share, compared with net earnings of $3.81 billion, or $1.38 per diluted share, in Q4 2016. The loss primarily reflects the provisional tax charge associated with the TCJA, alongside litigation, acquisition, restructuring and in-process R&D charges.
The filing gives differing fourth-quarter tax-charge figures: the quarterly-data note refers to a $13.6 billion provisional charge, while the tax discussion describes an approximately $13.0 billion provisional tax cost. Management noted the estimate was provisional and subject to adjustment as tax guidance and analysis were finalized.
A Medical Devices restructuring announced in 2016 is expected to yield $800 million to $1.0 billion in annualized pre-tax savings, with most expected by the end of 2018; approximately $500 million was realized in 2017. Cumulative restructuring charges were approximately $2.0 billion, within an estimated total of $2.0 billion to $2.4 billion. The company increased its dividend for the 55th consecutive year; FY 2017 dividends were $3.32 per share.
Outlook, risks and contingencies
- No specific full-year 2018 sales or earnings guidance is included in the supplied filing text. Management expects regular cash dividends to continue and stated it expects adequate liquidity for the next 12 months.
- Management expects continued Remicade sales pressure from biosimilar competition. Remicade represented approximately 8.3% of 2017 net trade sales. Generic challenges to Zytiga patents also create potential for rapid U.S. sales declines if rulings are unfavorable.
- Other significant risks include health-care pricing and reimbursement pressure; product safety, manufacturing and regulatory issues; foreign exchange and international-market exposure; cybersecurity and supply-chain disruptions; and the uncertainty of product development and acquisition integration.
- The company faces numerous product-liability and other legal matters, including litigation concerning talc products, pelvic mesh, Xarelto, Risperdal, Invokana and orthopedic devices, as well as opioid-related government and municipal lawsuits and investigations. Management said ultimate outcomes cannot be predicted and that resolution or increased accruals could materially affect results or cash flows in a reporting period.
- The company recorded a $408 million in-process R&D charge, primarily after discontinuing Novira development due to safety concerns, and a $215 million asset impairment primarily related to the insulin-pump business. The company exited Animas and continued evaluating strategic options for LifeScan.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The assessment excluded the recently acquired Actelion and AMO businesses.
Most important facts for investors to verify
- Reconcile the fourth-quarter tax-charge disclosures ($13.6 billion versus approximately $13.0 billion) and track final adjustments to the provisional TCJA accounting.
- Assess underlying operating performance separately from acquisition effects, purchase-accounting amortization, divestiture gains, restructuring, litigation and tax items.
- Monitor Remicade biosimilar erosion and the outcome and timing of Zytiga patent proceedings.
- Review litigation accruals, developments in talc and opioid matters, and whether eventual losses could exceed recorded amounts.
- Track post-acquisition results and integration of Actelion and AMO, including the preliminary Actelion purchase-price allocation and the impact on margins, debt and cash generation.
- Evaluate the progress and costs of the Medical Devices restructuring, the Animas exit and strategic decisions concerning LifeScan.