Johnson & Johnson — 2018 Form 10-K Summary
Business context and reporting period
Johnson & Johnson is a global healthcare company operating in Consumer, Pharmaceutical and Medical Devices. The filing covers the fiscal year ended December 30, 2018; it is an annual report, not a standalone fourth-quarter filing. The company reported approximately 135,100 employees and operations in more than 60 countries.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Worldwide sales | $81.6 billion | $76.5 billion |
| Net earnings | $15.3 billion | $1.3 billion |
| Diluted EPS | $5.61 | $0.47 |
| Operating cash flow | $22.2 billion | $21.1 billion |
| Capital expenditures | $3.7 billion | $3.3 billion |
| Cash and cash equivalents | $18.1 billion | $17.8 billion |
| Total debt | $30.5 billion | $34.6 billion |
| Net debt | $10.8 billion | $16.3 billion |
- Sales rose 6.7%: volume contributed 8.5%, pricing reduced growth by 2.2%, and currency added 0.4%. International sales were 49% of total revenue.
- Gross profit was $54.5 billion, approximately 66.8% of sales. Pretax earnings were $18.0 billion, or 22.1% of sales, versus 23.1% in 2017. The 2018 effective tax rate was 15.0%, compared with 92.6% in 2017.
- 2017 net earnings and EPS were heavily depressed by an approximately $13 billion provisional charge related to U.S. tax reform. The sharp year-over-year earnings increase therefore is not solely indicative of operating improvement.
- Segment sales: Pharmaceutical $40.7 billion (+12.4%); Medical Devices $27.0 billion (+1.5%); Consumer $13.9 billion (+1.8%). Pharmaceutical pretax margin was 30.9%; Consumer was 16.7%; Medical Devices was 16.3%.
- Operating cash flow covered $9.5 billion of dividends and $5.9 billion of share repurchases. The company paid $3.54 per share in dividends, up from $3.32. A new authorization permits up to $5.0 billion of share repurchases; $0.9 billion had been repurchased under it by year-end.
- Current assets were $46.0 billion and current liabilities $31.2 billion (current ratio approximately 1.47). The company cited operating cash flow, committed credit facilities of approximately $10 billion and commercial-paper-market access as sources expected to fund needs for the next 12 months.
Material changes versus the prior comparable period
- Pharmaceutical growth was led by Oncology (+35.6%), including DARZALEX, IMBRUVICA and ZYTIGA, and by the full-year contribution from Actelion-acquired pulmonary hypertension products. REMICADE sales fell 15.7% amid biosimilar competition and higher discounts.
- Medical Devices growth was restrained by declining Orthopaedics sales (-1.9%) and the LifeScan divestiture; Vision sales rose 12.1% and Interventional Solutions rose 15.2%.
- Consumer sales growth remained modest. Baby Care declined 3.0%, and Wound Care/Other declined 13.4%, primarily reflecting divestiture effects.
- Reported 2018 results included $2.0 billion of litigation expense, versus $1.3 billion in 2017; $1.1 billion of in-process R&D charges; and approximately $1.2 billion of divestiture gains. The company also recorded $4.4 billion of intangible amortization, up from $3.0 billion.
- Debt declined by approximately $4.1 billion during 2018. Cash and marketable securities together were $19.7 billion at year-end, compared with $18.3 billion in 2017.
Outlook, management commentary, risks and unusual items
- The filing does not provide a clear numerical company-wide revenue or earnings forecast. Management said the 2018 Medical Devices restructuring was completed, with approximately $0.7 billion of annualized pretax savings achieved and a target of $0.8–$1.0 billion.
- New global supply-chain actions are expected to generate $0.6–$0.8 billion in annual pretax savings, substantially by 2022, with $1.9–$2.3 billion in expected pretax restructuring charges; approximately 70% of cumulative costs are expected to be cash outlays.
- Product and patent risks include biosimilar competition for REMICADE and generic ZYTIGA launches after a court invalidated asserted patent claims; Janssen appealed. Pricing and reimbursement pressure, development and regulatory uncertainty, and currency exposure also remain material concerns.
- Significant legal matters include product-liability claims involving talc-containing powders, pelvic mesh, hip devices, RISPERDAL, XARELTO and other products, as well as more than 1,600 opioid-related lawsuits. A July 2018 talc-related verdict was $4.7 billion; the company said it believed it had strong grounds to appeal and had accrued defense costs only for talc claims. The company stated it could not estimate possible losses beyond amounts accrued for several matters.
- Other unusual items include the impairment of $0.8 billion for an investigational respiratory-virus program and $0.3 billion for a discontinued anti-thrombin program. Argentina was treated as highly inflationary beginning in the third quarter; management said this had no material period impact.
- Auditor PwC gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded internal controls were effective.
Most important facts for investors to verify
- Track the outcome and financial exposure of major product-liability, talc, opioid and government-investigation matters; reported litigation accruals do not establish the ultimate loss.
- Assess the effect of REMICADE biosimilars and ZYTIGA generics, including the ZYTIGA patent appeal, on Pharmaceutical sales and margins.
- Separate underlying operating performance from tax-law effects, litigation expense, acquisition-related amortization, impairments and divestiture gains when comparing earnings.
- Monitor whether supply-chain savings and restructuring targets are achieved on schedule and whether costs or disruption exceed expectations.
- Review the maturity and cash-flow implications of debt, tax obligations and shareholder distributions; the filing lists $8.2 billion of remaining TCJA-related tax payments.