Johnson and Johnson 2015 Annual Report Download - page 29

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Analysis of Consolidated Earnings Before Provision for Taxes on Income
Consolidated earnings before provision for taxes on income decreased to $19.2 billion as compared to $20.6 billion in
2014, a decrease of 6.6%. The decrease was primarily attributable to significantly lower sales of OLYSIO®/SOVRIAD®
(simeprevir), negative currency impacts, a restructuring charge of $0.6 billion and higher intangible asset write-downs of
$0.1 billion in 2015 as compared to 2014. The decrease was partially offset by lower net litigation expense of $1.1 billion,
lower Synthes integration costs of $0.6 billion, a positive adjustment of $0.4 billion to previous reserve estimates including
Managed Medicaid rebates, and higher gains of $0.3 billion from divestitures as compared to the prior year. The fiscal year
2015 included higher gains of $0.3 billion primarily from the divestitures of the Cordis business, the SPLENDA®brand
and the U.S. divestiture of NUCYNTA®versus the gains recorded in 2014 from the divestitures of the Ortho-Clinical
Diagnostics business and the K-Y®brand. Additionally, 2014 included an additional year of the Branded Prescription Drug
Fee of $0.2 billion.
Consolidated earnings before provision for taxes on income increased to $20.6 billion in 2014 as compared to $15.5
billion in 2013, an increase of 32.9%. Earnings before provision for taxes on income were favorable due to strong sales
volume growth, particularly sales of OLYSIO®/SOVRIAD®(simeprevir), positive mix from higher sales of higher margin
products in the Pharmaceutical business, divestitures of lower margin businesses and cost reduction efforts across many
of the businesses. Additionally, 2014 included higher net gains on divestitures of $2.3 billion, primarily the divestiture of
the Ortho-Clinical Diagnostics business, lower litigation expense of $1.0 billion, lower in-process research and
development costs of $0.4 billion and lower expenses of $0.1 billion related to the DePuy ASR™ Hip program as
compared to the fiscal year 2013. This was partially offset by the inclusion of an additional year of the Branded
Prescription Drug Fee of $0.2 billion and $0.1 billion of higher Synthes integration/transaction costs in 2014. The fiscal
year 2013 included a net gain of $0.4 billion on equity investment transactions, primarily the sale of Elan American
Depositary Shares.
As a percent to sales, consolidated earnings before provision for taxes on income in 2015 was 27.4% versus 27.7% in
2014.
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 2015 2014 2013
Cost of products sold 30.7% 30.6 31.3
Percent point increase/(decrease) over the prior year 0.1 (0.7) (0.9)
Selling, marketing and administrative expenses 30.3% 29.5 30.6
Percent point increase/(decrease) over the prior year 0.8 (1.1) (0.4)
In 2015, cost of products sold as a percent to sales increased slightly as compared to the prior year. Favorable mix
between the segments was offset by $81 million associated with the restructuring activity in the Medical Devices segment,
negative transactional currency and lower sales of OLYSIO®/SOVRIAD®(simeprevir) in 2015. Intangible asset
amortization expense included in cost of products sold for 2015 and 2014 was $1.2 billion and $1.4 billion, respectively.
There was an increase in the percent to sales of selling, marketing and administrative expenses in 2015 compared to the
prior year, primarily due to incremental investment spending in all the segments and the impact from lower sales of
OLYSIO®/SOVRIAD®(simeprevir), partially offset by favorable mix and the inclusion of an additional year of the Branded
Prescription Drug Fee of $0.2 billion in 2014.
In 2014, cost of products sold as a percent to sales decreased compared to the prior year. This was primarily the result of
positive mix from higher sales of higher margin products in the Pharmaceutical business, divestitures of lower margin
businesses and cost improvements across many of the businesses. This was partially offset by pricing and the impact of
negative transactional currency. In addition, 2013 included an inventory step-up charge of $0.1 billion related to the
Synthes acquisition. Intangible asset amortization expense included in cost of products sold for both 2014 and 2013 was
$1.4 billion. There was a decrease in the percent to sales of selling, marketing and administrative expenses in 2014
compared to the prior year primarily due to leveraged costs resulting from growth in the Pharmaceutical business,
particularly sales of OLYSIO®/SOVRIAD®(simeprevir), and cost containment initiatives across many of the businesses.
This was partially offset by the inclusion of an additional year of the Branded Prescription Drug Fee of $220 million in the
fiscal third quarter of 2014.
Johnson & Johnson 2015 Annual Report •17