Johnson & Johnson — FY2020 Form 10-K Summary
Business context and period. Johnson & Johnson is a global health care company operating through Consumer Health, Pharmaceutical and Medical Devices. This annual report covers the fiscal year ended January 3, 2021; fiscal 2020 included a 53rd week. The filing estimates that the extra week increased sales growth by about 1 percentage point, with negligible net earnings impact.
Key financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Sales | $82.584 billion | $82.059 billion |
| Gross profit / gross margin | $54.157 billion / 65.6% | $54.503 billion / 66.4% |
| Earnings before tax / margin | $16.497 billion / 20.0% | $17.328 billion / 21.1% |
| Net earnings | $14.714 billion | $15.119 billion |
| Diluted EPS | $5.51 | $5.63 |
| Operating cash flow | $23.536 billion | $23.416 billion |
| Cash and cash equivalents | $13.985 billion | $17.305 billion |
| Current marketable securities | $11.200 billion | $1.982 billion |
| Total debt | $35.3 billion | $27.7 billion |
| Net debt | $10.1 billion | $8.4 billion |
Net margin was approximately 17.8%, compared with 18.4% in 2019. Cash, cash equivalents and marketable securities totaled $25.2 billion. Operating cash flow exceeded net earnings; investing activities used $20.825 billion, including acquisitions and net investment purchases, while financing activities used $6.120 billion. Capital expenditures were $3.347 billion. The company paid $10.481 billion in dividends and reported a 10.8% effective tax rate, versus 12.7% in 2019.
Material changes and segment performance
- Pharmaceutical: Sales grew 8.0% to $45.572 billion. Oncology rose 15.7%, led by DARZALEX and IMBRUVICA; Pulmonary Hypertension grew 20.0%. REMICADE sales fell 14.4% amid biosimilar competition, while Cardiovascular/Metabolism/Other declined 6.0%.
- Consumer Health: Sales grew 1.1% to $14.053 billion. OTC rose 8.5%, while Baby Care fell 9.4%, Women’s Health fell 8.6%, and Skin Health/Beauty fell 3.1%. The segment reported a $1.064 billion pretax loss, compared with $2.061 billion pretax income in 2019, principally reflecting higher talc-related litigation expense.
- Medical Devices: Sales fell 11.6% to $22.959 billion, with declines across Surgery, Orthopaedics and Vision. Management attributed the decline mainly to COVID-19-related deferral of procedures; Interventional Solutions grew 1.6%.
- Worldwide sales growth was 0.6%; volume added 3.5 percentage points, while price and currency reduced growth by 2.3 and 0.6 percentage points, respectively. International sales declined 1.3%, compared with U.S. growth of 2.5%.
Outlook, commentary and material risks
- The filing provides no specific FY2021 sales or earnings guidance. Management said it expected operating cash flow, external financing access, committed credit facilities and commercial paper markets to provide sufficient funding for operating needs, including litigation payments.
- Global supply-chain restructuring is expected to generate $0.6–$0.8 billion in annual pretax savings, substantially by 2022, against expected total pretax charges of $1.9–$2.3 billion. Approximately $1.3 billion of project costs had been recorded through 2020.
- The company recorded $5.1 billion of litigation expense in 2020, primarily including $4.0 billion for talc-related reserves and settlements and an additional $1.0 billion associated with the revised opioid settlement agreement in principle. The proposed opioid resolution totals $5 billion, is subject to conditions and final agreement, and is not an admission of liability. Management states that outcomes and potential losses beyond accrued amounts are difficult to estimate.
- COVID-19 reduced demand and procedure volumes in parts of the portfolio and created uncertainty for operations, supply chains and clinical trials. The company was developing a COVID-19 vaccine and disclosed approximately $0.9 billion of contractual vaccine manufacturing commitments.
- Other key risks include product liability and regulatory actions, pricing and reimbursement pressure, patent challenges and generic or biosimilar competition, manufacturing interruptions, foreign exchange exposure, cybersecurity incidents, and tax disputes. STELARA represented 9.3% of 2020 revenue; its latest-expiring U.S. patent expires in 2023 and its latest-expiring European patent in 2024.
Most important facts for investors to verify
- Track the resolution, timing and cash-payment implications of talc and opioid litigation; the filing does not quantify a reliable range of additional potential losses beyond accrued amounts.
- Assess whether Pharmaceutical growth can offset Medical Devices’ pandemic-related declines and Consumer Health softness, and distinguish underlying growth from the estimated 53rd-week benefit.
- Monitor debt growth, net debt, upcoming maturities and liquidity after the 2020 borrowings and acquisitions.
- Check progress toward restructuring savings and charges, and the commercial, regulatory and manufacturing progress of the COVID-19 vaccine program.
- Review pharmaceutical rebate estimates: U.S. Managed Care, Medicare and Medicaid rebate liabilities were $7.2 billion, identified by the auditor as a critical audit matter.