Johnson & Johnson’s COGS On the Rise?

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Johnson & Johnson’s (NYSE:JNJ) cost of goods sold (COGS) has been on a rise. It accounted for 41% of its total expenses in 2018, compared to 39% in 2016. In fact, Johnson & Johnson’s COGS, when looked at as a percentage of its revenue, grew from 30% in 2016 to 33% in 2018. This can primarily be attributed to higher amortization costs. The figure is expected to remain around the current levels going forward. Johnson & Johnson’s COGS as a percentage of revenue, at 33% in 2018, is higher than the 21% figure for Pfizer and 29% figure for Roche, but in line with the 32% figure for Merck. In this note we discuss the key drivers of Johnson & Johnson’s expenses. Look at our interactive dashboard analysis ~ JNJ Expenses: How Does Johnson & Johnson Spend Money? ~  for more details.

Johnson & Johnson’s Total Expenses Were $66.0 Billion, With Operating Expenses of $61.5 Billion, And $2.7 Billion In Tax Expenses In 2018.

  • Breakdown of Johnson & Johnson’s Total Expenses in 2018 :
  • Total = $66.3 Bil
    • Operating Expenses = $61.5 Bil
    • Provision for income taxes = $2.7 Bil
    • Non-operating expenses = $2.0 Bil

Johnson & Johnson’s Net Income Margin Has Declined Slightly Between 2016 And 2019, Although It Saw A Significant Decline In 2017, Due To The U.S. Tax Reforms

Johnson & Johnson’s Total Expenses Have Increased From $55.4 Billion In 2016 To $66.3 Billion In 2018

  • Johnson & Johnson’s total expenses have grown from $55.4 billion in 2016 to about $66.3 billion in 2018.
  • For 2020, we expect total expenses to be around $66.9 billion, which comprises of
    • 1) Operating Expenses: $61.0 billion
    • 2) Non-Operating Expense: $2.0 billion
    • 3) Income Taxes: $3.9 billion
  • Below, we take a look at how the company’s key expense components have trended and the key reasons for the change.

1. Operating Expenses Have Increased From $52.0 Billion In 2016 To $61.5 Billion In 2019, Driven By (A) $5.4 Billion Increase In COGS (B) $2.6 Billion Increase In SG&A Expenses, (C) $1.7 Billion Increase In R&D, And (D) $1.0 Billion Increase In Other Operating Expenses.

  • (A) Cost of Goods Sold (COGS) grew from $21.7 billion in 2016 to $27.1 billion in 2018, driven by higher amortization costs. As a % revenues, COGS has increased from 30% to 33% over the same period.
  • (B) SG&A expenses have increased from $19.9 billion in 2016 to $22.5 billion in 2018, driven by higher expenses incurred towards new product launches. As a % of revenues, SG&A has remained around the 28% mark over the past few years.
  • (C) R&D expenses increased from $9.1 billion in 2016 to about $10.8 billion in 2018, led by pharmaceuticals portfolio expansion. As a % of revenue, R&D expenses have grown slightly from 12.7% in 2016 to 13.2% in 2018.
  • (D) Other operating expenses have increased from <$50 million in 2016 to $1.1 billion in 2018, driven by higher impairment charges. As a % of revenues, other operating expenses grew from <0.5% to 1.4% during the same period.

2. Johnson & Johnson’s Non-Operating Expenses Are On The Rise

  • The company’s non-operating expenses includes interest & other expenses.
  • Non-operating expenses have increased from $1.3 billion in 2016 to $2.0 billion in 2018, driven by higher litigation expenses.
  • As a % of revenues, interest & other expenses grew from 1.9% to 2.1% during the same period.
  • It is expected to increase to 4.3% in 2019, driven by higher litigation expenses.

3. Taxes Have Declined

  • Johnson & Johnson’s income tax expense has declined from $3.8 billion in 2016 to about $2.7 billion in 2018.
  • This was driven by the U.S. federal income tax reforms.

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