Johnson & Johnson — 2019 Form 10-K
Reporting period: Fiscal year ended December 29, 2019. This is an annual filing, not a standalone fourth-quarter filing. Johnson & Johnson operates in Consumer, Pharmaceutical and Medical Devices, with approximately 132,200 employees worldwide.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Sales | $82.1 billion | $81.6 billion |
| Net earnings | $15.1 billion | $15.3 billion |
| Diluted earnings per share | $5.63 | $5.61 |
| Operating cash flow | $23.4 billion | $22.2 billion |
| Cash and cash equivalents | $17.3 billion | $18.1 billion |
| Current marketable securities | $2.0 billion | $1.6 billion |
| Total debt | $27.7 billion | $30.5 billion |
| Total assets | $157.7 billion | $153.0 billion |
| Shareholders’ equity | $59.5 billion | $59.8 billion |
Sales increased 0.6%, comprising 3.7% volume growth, offset by price declines of 0.9%, adverse currency effects of 2.2%, and a 1.7% negative net impact from acquisitions and divestitures. Net earnings declined about 1.2%, while diluted EPS increased 0.4%. Gross profit was $54.5 billion; cost of products sold was 33.6% of sales versus 33.2% in 2018. Pretax earnings were $17.3 billion, or 21.1% of sales, compared with $18.0 billion, or 22.1%. The effective tax rate was 12.7%, down from 15.0%.
Operating cash flow exceeded net earnings. Investing activities used $6.2 billion, including $5.8 billion for acquisitions and $3.5 billion for capital expenditures; financing activities used $18.0 billion, including $9.9 billion of dividends, $6.7 billion of share repurchases and net debt repayments. Net debt was $8.4 billion, down from $10.8 billion. The company reported access to commercial paper markets and approximately $10 billion of committed credit facilities, expiring September 2020, and said it expected available funding sources to cover operating needs and potential opioid-settlement payments.
Business and material changes
- Pharmaceutical: Sales rose 3.6% to $42.2 billion. Growth in STELARA, TREMFYA, DARZALEX and IMBRUVICA was partly offset by declines in REMICADE, ZYTIGA and other products facing biosimilar or generic competition. Segment sales growth included a favorable 1.3% impact from adjustments to prior reserve estimates.
- Consumer: Sales increased 0.3% to $13.9 billion. Beauty and OTC grew, while Baby Care declined 9.9%, Women’s Health declined 6.0% and Oral Care declined 1.7%.
- Medical Devices: Sales fell 3.8% to $26.0 billion, including a 5.6% negative operational impact from acquisitions and divestitures, principally the LifeScan and Advanced Sterilization Products divestitures. Interventional Solutions grew 13.3%; Surgery declined 4.0%.
- The company acquired Auris Health and DR. CI:LABO among other businesses, and divested its Advanced Sterilization Products business, recording a $2.0 billion pretax gain. Acquisition spending was $5.8 billion.
- Research and development expense rose 5.4% to $11.4 billion, or 13.8% of sales. New products launched in the prior five years represented approximately 25% of 2019 sales.
Outlook, risks and unusual items
- The filing provides no specific forward-year revenue, earnings or EPS guidance. Management described continued investment in innovation and a global supply-chain restructuring intended to produce $0.6–$0.8 billion in annual pretax savings, substantially by 2022. Expected total restructuring charges are $1.9–$2.3 billion; approximately $0.8 billion had been recorded through 2019.
- A $4.0 billion pretax charge was recorded for an agreement in principle to settle opioid litigation. The proposed agreement remained subject to conditions and finalization; related cases continued, and the company could not predict whether or when it would be finalized. The filing also describes a $465 million Oklahoma opioid judgment under appeal.
- Major litigation exposures include talc-related claims, product-liability matters and opioid litigation. The company stated it could not estimate possible losses or ranges beyond amounts accrued for certain matters. Management said outcomes net of accruals were not expected to materially affect financial position, but resolutions or higher accruals could materially affect results or cash flows in a period.
- Other notable items included a $0.9 billion impairment and abandonment of the AL-8176 development program; a $2.0 billion gain on the ASP divestiture; and acquisitions, including Auris Health, with potential contingent payments. The company reported $4.5 billion of intangible-asset amortization in cost of products sold.
- Key business risks include pricing and reimbursement pressure, patent challenges and product exclusivity losses, regulatory and product-safety issues, litigation, foreign-exchange exposure, supply-chain disruption and cybersecurity threats. The company reported that it no longer purchased third-party product-liability insurance as of 2005.
- Management and the independent auditor concluded that internal control over financial reporting was effective at year-end; the auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Progress and final terms, payment schedule and cash-flow impact of the proposed $4.0 billion opioid settlement, as well as outcomes of other major opioid cases.
- Developments in talc litigation, including verdicts, appeals, accruals and the potential exposure that the company says cannot currently be estimated.
- Whether Pharmaceutical growth can offset generic and biosimilar erosion, particularly for REMICADE, ZYTIGA and other products, and how key growth products perform.
- Underlying segment profitability excluding large litigation charges, divestiture gains and other unusual items; reported segment pretax results were materially affected by these items.
- Execution and realized savings from the supply-chain restructuring, and the financial performance and contingent-payment exposure associated with acquisitions such as Auris Health.
- Tax-audit settlement and related payments, including the company’s expected 2020 IRS settlement and the reported subsequent $0.6 billion payment.