Johnson and Johnson 2013 Annual Report Download - page 18

The Medical Devices and Diagnostics segment achieved sales of $27.4 billion in 2012, representing an increase of 6.4%
over the prior year, with operational growth of 8.7% and a negative currency impact of 2.3%. U.S. sales were $12.4 billion,
an increase of 8.7% as compared to the prior year. International sales were $15.1 billion, an increase of 4.5% over the
prior year, with operational growth of 8.6% and a negative currency impact of 4.1%. The acquisition of Synthes, Inc., net of
the related divestiture, increased both total sales growth and operational growth for the Medical Devices and Diagnostics
segment by 7.9%.
Analysis of Consolidated Earnings Before Provision for Taxes on
Income
Consolidated earnings before provision for taxes on income increased by $1.7 billion to $15.5 billion in 2013 as
compared to $13.8 billion in 2012, an increase of 12.3%. Earnings before provision for taxes on income were favorable
due to increased gross profit of $3.4 billion resulting from higher sales of higher margin products and cost containment
initiatives and a $0.4 billion net gain on equity investment transactions, primarily from the sale of Elan American Depositary
Shares. This was partially offset by higher litigation expenses of $1.1 billion and higher expenses of $0.1 billion related to
the DePuy ASR™ Hip program. The fiscal year 2012 included $1.5 billion of higher write-downs of intangible assets and
in-process research and development and higher costs of $0.3 billion related to the Synthes acquisition partially offset by
higher gains of $0.8 billion related to divestitures.
The 2012 consolidated earnings before provision for taxes on income increased by $1.4 billion to $13.8 billion as
compared to $12.4 billion in 2011, an increase of 11.4%. Earnings before provision for taxes on income were favorable
due to increased gross profit of $0.9 billion, a $0.1 billion decrease in selling, marketing and administrative expenses due
to cost containment initiatives across many of the businesses, lower litigation expense of $2.1 billion and lower charges of
$0.4 billion related to the DePuy ASR™ Hip program versus the prior year. This was partially offset by $2.1 billion of
charges attributable to asset write-downs and impairment of in-process research and development, primarily related to the
Crucell vaccine business and the discontinuation of the Phase III clinical development of bapineuzumab IV and $0.2 billion
of integration and currency costs related to the acquisition of Synthes, Inc. versus the prior year. Included in 2011 was a
$0.6 billion restructuring charge, net of inventory write-offs which are included in cost of products sold, related to the
Cardiovascular Care business. Additionally, 2011 included higher gains from divestitures and other items of $0.3 billion,
recorded in other (income) expense, net.
As a percent to sales, consolidated earnings before provision for taxes on income in 2013 was 21.7% versus 20.5% in 2012.
Cost of Products Sold and Selling, Marketing and Administrative Expenses: Cost of products sold and selling,
marketing and administrative expenses as a percent to sales were as follows:
% of Sales 2013 2012 2011
Cost of products sold 31.3% 32.2 31.3
Percent point (decrease)/increase over the prior year (0.9) 0.9 0.8
Selling, marketing and administrative expenses 30.6% 31.0 32.3
Percent point (decrease)/increase over the prior year (0.4) (1.3) 0.8
In 2013, cost of products sold as a percent to sales decreased compared to the prior year. This was primarily the result of
positive mix resulting from higher sales of higher margin products, lower costs associated with strong volume growth in the
Pharmaceutical business and cost reduction efforts across many of the businesses. The decrease was partially offset by
incremental intangible asset amortization expense primarily related to Synthes, the Medical Device Excise tax and
increased amortization expense as a result of the royalty buyout agreement with Vertex for INCIVO®. Intangible asset
amortization expense for 2013 and 2012 was $1.4 billion and $1.1 billion, respectively. Additionally, 2012 included $0.2
billion higher amortization of the inventory step-up charge related to the Synthes, Inc. acquisition. There was a decrease in
the percent to sales of selling, marketing and administrative expenses in 2013 compared to the prior year primarily due to
cost containment initiatives across many of the businesses.
In 2012, cost of products sold as a percent to sales increased compared to the prior year. This was primarily the result of
the amortization of the inventory step-up charge of $0.4 billion and amortization of intangible assets related to the Synthes,
Inc. acquisition of $0.3 billion and ongoing remediation costs in the McNeil OTC business. There was a decrease in the
percent to sales of selling, marketing and administrative expenses in 2012 compared to the prior year primarily due to cost
containment initiatives across many of the businesses. The prior year period included higher investment spending in the
Pharmaceutical business for new products.
8•Johnson & Johnson 2013 Annual Report