Johnson & Johnson — FY2016 Form 10-K
Reporting period: Fiscal year ended January 1, 2017. The filing includes unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. J&J operates Consumer, Pharmaceutical and Medical Devices businesses worldwide.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Sales | $71.89 billion | $70.07 billion |
| Gross profit / gross margin | $50.21 billion / 69.8% | $48.54 billion / 69.3% |
| Earnings before tax | $19.80 billion | $19.20 billion |
| Net earnings | $16.54 billion | $15.41 billion |
| Diluted EPS | $5.93 | $5.48 |
| Operating cash flow | $18.77 billion | $19.57 billion |
| Cash and cash equivalents | $18.97 billion | $13.73 billion |
| Current marketable securities | $22.94 billion | $24.64 billion |
| Total debt | $27.1 billion | $19.9 billion |
- Sales rose 2.6%: volume contributed 3.2%, price 0.7%, and currency reduced growth by 1.3%. U.S. sales increased 6.0%; international sales declined 0.9%.
- Net margin was 23.0%, compared with 22.0% in 2015. Pretax margin was 27.5%, versus 27.4%. The effective tax rate fell to 16.5% from 19.7%, including a 1.8 percentage-point benefit from adopted share-based compensation accounting changes.
- Operating cash flow declined about 4%. Investing activities used $4.76 billion and financing activities used $8.55 billion. Financing included $8.62 billion of dividends and $8.98 billion of share repurchases; debt proceeds helped fund these uses.
- Cash and current marketable securities totaled $41.9 billion; management reported net cash of $14.8 billion after debt. Debt was 27.8% of total capital, up from 21.8%.
- Dividend paid per share increased to $3.15 from $2.95. J&J reported its 54th consecutive annual dividend increase.
Fourth-quarter results
Fiscal Q4 sales were $18.11 billion, compared with $17.81 billion in Q4 2015. Net earnings were $3.81 billion versus $3.22 billion, and diluted EPS was $1.38 versus $1.15. Q4 2016 included $298 million of pretax restructuring charges and $96 million of pretax net litigation expense.
Material changes and segment performance
- Pharmaceutical: Sales increased 6.5% to $33.46 billion; pretax income rose to $12.83 billion. Oncology grew 23.7%, led by IMBRUVICA and DARZALEX; immunology grew 15.1%. Infectious disease sales fell 12.3%, primarily from hepatitis C competition. Neuroscience declined 2.8%.
- Consumer: Sales declined 1.5% to $13.31 billion, with international currency headwinds and declines in Baby Care, Women’s Health and Wound Care/Other. Beauty sales grew 7.3%, partly reflecting acquisitions.
- Medical Devices: Sales were essentially flat at $25.12 billion. Vision Care grew 6.8%, while Cardiovascular declined 9.2%, partly due to the Cordis divestiture, and Diabetes Care declined 7.2%. Segment pretax income fell to $5.58 billion from $6.83 billion, including lower divestiture gains and higher litigation and restructuring expenses.
- Reported earnings benefited from higher sales volume, favorable mix and lower selling, marketing and administrative costs. These were partly offset by $0.7 billion higher net litigation expense and lower divestiture gains: $0.6 billion in 2016 versus $2.6 billion in 2015.
Outlook, commentary and risks
- No specific consolidated sales or earnings guidance is provided in the supplied filing text. Management said operating cash flows, credit facilities and capital-market access should be sufficient to fund 2017 operating needs.
- Medical Devices restructuring is expected to generate $800 million to $1.0 billion in annual pretax savings, with most expected by the end of 2018. Estimated total pretax charges are $2.0 billion to $2.4 billion; $1.275 billion had been recorded through FY2016.
- J&J announced a proposed approximately $30 billion Actelion acquisition after year-end, subject to conditions; it also completed the approximately $4.3 billion Abbott Medical Optics acquisition in February 2017. The company was evaluating strategic options for Diabetes Care. These transactions and plans may affect future capital allocation and results.
- REMICADE represented approximately 9.7% of FY2016 revenue. A Pfizer-marketed infliximab biosimilar began U.S. shipments in late 2016; J&J expects biosimilar competition to reduce REMICADE sales. Patent litigation and challenges remain ongoing.
- Material risks include product liability and other litigation, regulatory and manufacturing compliance, patent challenges and generic competition, healthcare pricing pressure, foreign exchange, tax uncertainty, and supply-chain and cybersecurity disruptions. The company said it had stopped purchasing third-party product-liability insurance in 2005. For disclosed litigation matters, it could not estimate potential losses beyond amounts accrued; outcomes may materially affect earnings or cash flow in a period.
Important facts for investors to verify
- How quickly U.S. and international biosimilar competition affects REMICADE revenue and margins, and the outcome of related patent proceedings.
- Whether the announced restructuring delivers the expected savings, and how much additional expense and cash outlay remains.
- Funding, closing conditions, integration costs and expected returns for Actelion and Abbott Medical Optics, alongside the outcome of the Diabetes Care strategic review.
- Future litigation developments, accrual adequacy and cash payments, especially for product-liability and government matters; the filing does not quantify potential losses beyond recorded accruals.
- Debt and capital returns: debt rose to $27.1 billion while FY2016 dividends and buybacks totaled about $17.6 billion.
- Drivers of operating cash flow, including working-capital movements, and the extent to which lower tax expense and nonrecurring divestiture gains affect earnings comparisons.