Johnson & Johnson — FY2022 Form 10-K
Reporting period: Fiscal year ended January 1, 2023 (the filing reports annual results, not standalone 2022 Q4 results). J&J operates Consumer Health, Pharmaceutical and MedTech businesses worldwide.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Sales | $94.943 billion | $93.775 billion |
| Gross profit | $63.854 billion | $63.920 billion |
| Earnings before tax | $21.725 billion; 22.9% of sales | $22.776 billion; 24.3% of sales |
| Net earnings | $17.941 billion | $20.878 billion |
| Diluted EPS | $6.73 | $7.81 |
| Cash from operations | $21.194 billion | $23.410 billion |
| Capital expenditures | $4.009 billion | $3.652 billion |
| Cash and cash equivalents | $14.127 billion | $14.487 billion |
| Marketable securities | $9.392 billion | $17.121 billion |
| Total debt | $39.7 billion | $33.8 billion |
Sales increased 1.3%; volume contributed 6.9%, while currency reduced growth by 4.8% and price by 0.8%. International sales declined 0.6%, against U.S. growth of 3.0%. Reported gross margin was approximately 67.3% versus 68.2% in FY2021; net margin was approximately 18.9% versus 22.3%.
Segment sales: Pharmaceutical $52.563 billion (+1.7%); MedTech $27.427 billion (+1.4%); Consumer Health $14.953 billion (-0.5%). Pharmaceutical operating growth was 6.7% before a 5.0% adverse currency impact; MedTech operating growth was 6.2% before a 4.8% currency impact. Oncology grew 9.9%, led by DARZALEX (+32.4%) and ERLEADA (+45.7%); REMICADE sales fell 26.6% amid biosimilar competition. Consumer Health OTC grew 7.2%, while Oral Care fell 8.5%.
Research and development expense was $14.603 billion, or 15.4% of sales. The company generated approximately $17.2 billion of cash after capital expenditures (operating cash flow less reported capital expenditures). Dividends paid were $11.682 billion, or $4.45 per share; the annual dividend increased for the 60th consecutive year. Management reported net debt of $16.1 billion, up from $2.1 billion, primarily following the Abiomed acquisition. Total debt was 34.1% of total capital, versus 31.3% in FY2021.
Material changes and unusual items
- Net earnings declined about 14% and diluted EPS about 14%, despite modest sales growth. Earnings before tax fell $1.051 billion.
- FY2022 included $1.5 billion of COVID-19 vaccine manufacturing exit costs, an approximately $0.8 billion impairment of bermekimab after development was terminated, and $0.7 billion of losses from changes in investment fair values. Consumer Health separation costs were approximately $1.0 billion in other expense and $1.089 billion in total segment reporting.
- The effective tax rate rose to 17.4% from 8.3%, including approximately $0.5 billion of incremental tax costs related to the planned Consumer Health separation. FY2021 benefited from non-recurring tax items.
- J&J acquired Abiomed on December 22, 2022, paying approximately $17.1 billion net of cash acquired, plus contingent value rights potentially worth up to approximately $1.6 billion. Purchase-price allocation was preliminary at year-end.
- The company repurchased $6.035 billion of stock in FY2022; approximately $2.5 billion was spent under the new $5 billion authorization through year-end.
Outlook, risks and contingencies
The filing provides no specific FY2023 revenue or EPS guidance. Management said operating cash flows, external funding capacity, committed credit facilities and commercial paper access should provide sufficient resources for operating needs, including expected payments related to opioid litigation and a planned $2.0 billion trust for talc liabilities. J&J targeted completion of the Consumer Health separation in 2023, subject to approvals and other conditions, and warned that timing, tax treatment, costs and expected benefits were uncertain.
Key business risks include pricing and reimbursement pressure, implementation of the Inflation Reduction Act, foreign exchange and inflation, supply-chain or manufacturing disruption, regulatory and product-safety matters, cybersecurity, and patent challenges. STELARA, which generated 10.2% of FY2022 revenue, faced a U.S. composition-of-matter patent expiration in 2023; management warned that loss of exclusivity could reduce sales. Litigation exposures include talc, opioids, pelvic mesh, product liability and government proceedings. The company stated that it could not estimate possible losses beyond accrued amounts in certain matters; adverse developments could materially affect results or cash flows in a period.
Subsequent event disclosed in the filing: On January 30, 2023, the Third Circuit reversed the bankruptcy court’s ruling in the LTL talc bankruptcy and remanded for dismissal. LTL sought rehearing. The outcome and effect on talc claims remain uncertain. The auditor issued unqualified opinions on the financial statements and internal controls, while identifying U.S. pharmaceutical rebate reserves and talc litigation contingencies as critical audit matters.
Investor verification priorities
- Track STELARA patent and exclusivity developments, biosimilar competition, and the resulting revenue outlook.
- Review the LTL bankruptcy appeal/rehearing and talc trust funding, alongside opioid settlement payments and other major litigation developments.
- Assess whether the Consumer Health separation closes on schedule, its final tax treatment and costs, and the allocation of separation-related expenses.
- Verify the final Abiomed purchase accounting and the performance or potential payouts of its contingent value rights.
- Monitor the sources of earnings decline, including vaccine exit costs, investment valuation changes, impairments, taxes, currency and segment margins.
- Evaluate debt maturities, commercial paper reliance, liquidity after the acquisition, and cash available after dividends and repurchases.