JOHNSON & JOHNSON quarterly report, Q1 FY2022

Johnson & Johnson — Q1 2022 Form 10-Q

Reporting period: Fiscal first quarter ended April 3, 2022; comparisons are with the quarter ended April 4, 2021. Johnson & Johnson reports Consumer Health, Pharmaceutical and MedTech segments. Financial amounts are in U.S. dollars.

Financial performance and liquidity

MetricQ1 2022Prior-year quarter
Sales$23.426 billion$22.321 billion
Gross profit / gross margin$15.828 billion / 67.6%$15.258 billion / 68.3%
Net earnings / diluted EPS$5.149 billion / $1.93$6.197 billion / $2.32
Operating cash flow$3.979 billion$4.074 billion
Cash and cash equivalents, period end$10.463 billion$12.671 billion
Cash, cash equivalents and marketable securities, period end$30.4 billion$24.6 billion
  • Sales increased 5.0%; operational growth of 7.7% was partly offset by a 2.7% adverse currency impact. International sales grew 7.2% and U.S. sales 2.7%.
  • Net earnings fell 16.9% and diluted EPS fell from $2.32 to $1.93. Net margin declined to 22.0% from 27.8%; gross margin also decreased. The filing attributes earnings pressure to several factors, including a $0.6 billion bermekimab impairment, a $0.4 billion investment-security mark-to-market loss, higher R&D and marketing costs, and the comparison with prior-year divestiture gains.
  • Cash from operations was nearly flat year over year. Working-capital outflows included a $2.8 billion decrease in accounts payable and accrued liabilities.
  • At quarter end, current assets were $60.4 billion and current liabilities $43.4 billion. Short-term debt was $4.3 billion and long-term debt $28.9 billion; total debt was approximately $33.1 billion. Cash and marketable securities were approximately $30.4 billion, for reported net debt of $2.8 billion.
  • Investing activities used $3.6 billion and financing activities used $4.4 billion. The company paid $2.8 billion in dividends and repurchased $1.6 billion of stock. The board subsequently declared a quarterly dividend of $1.13 per share.

Segment results and changes

SegmentSalesYear-over-year sales changeIncome before tax
Consumer Health$3.6 billion(1.5)%$686 million, down 18.5%
Pharmaceutical$12.9 billion6.3%$3.9 billion, down 24.1%
MedTech$7.0 billion5.9%$1.5 billion, down 9.3%
  • Pharmaceutical growth included strong oncology franchises, notably DARZALEX and ERLEADA, and $457 million in COVID-19 vaccine sales. Declines included REMICADE, IMBRUVICA, XARELTO and ZYTIGA.
  • Consumer Health OTC sales grew, while Skin Health/Beauty, Oral Care and Baby Care declined. Management cited supply constraints, competition, SKU rationalization and comparison with prior-year demand.
  • MedTech growth was broad-based, with particularly strong Interventional Solutions and Vision sales. Management noted recovery in procedure volumes as a contributor.
  • The effective tax rate was 12.2%, versus 16.6% a year earlier. Management linked the lower rate primarily to income mix and lower income in higher-tax jurisdictions, partly offset by costs associated with the planned Consumer Health separation.

Outlook, commentary and notable items

  • The filing provides no company-wide sales or earnings guidance for 2022. It states that the company expects operating cash flow, borrowing capacity, external funding and commercial-paper access to be sufficient for operating needs and identified commitments.
  • Johnson & Johnson is targeting separation of Consumer Health into a publicly traded company 18 to 24 months after its November 2021 announcement. Separation-related costs were recorded in the quarter, and management expected significant additional international tax costs during 2022.
  • The Global Supply Chain restructuring is expected to generate $0.6–$0.8 billion in annual pretax savings, substantially by the end of 2022. Total program charges are expected to reach $2.1–$2.3 billion by completion in December 2022; approximately $1.8 billion had been recorded through the quarter.
  • Legal exposures remain material uncertainties. The company has accrued $5 billion for the opioid settlement; the agreement became effective in April 2022, with initial payments scheduled for July. It also reserved approximately $2 billion for a trust related to talc liabilities in the LTL bankruptcy proceedings. The company says it cannot estimate potential losses beyond amounts accrued for certain matters.
  • Other risks highlighted include product liability and regulatory proceedings, patent challenges and generic competition, supply constraints, inflation and foreign-exchange effects, healthcare pricing pressures, and uncertainty around COVID-19 and the Russia-Ukraine conflict. The company said the conflict’s Q1 financial impact was not material.
  • The quarter included a $610 million impairment charge for bermekimab after the company decided to terminate development for the atopic dermatitis indication. The filing also reports a $400 million mark-to-market loss on securities and $102 million of Consumer Health separation costs.

Key facts for investors to verify

  • Whether sales growth converts into improved margins and earnings, given the quarter’s lower gross and segment margins.
  • Progress and costs of the planned Consumer Health separation, including tax consequences and timing.
  • Cash generation, working-capital trends, debt levels and capacity to fund dividends and significant legal payments.
  • Settlement participation, payment timing and remaining exposure in opioid matters; developments in the LTL bankruptcy and talc litigation beyond the recorded reserve.
  • Pharmaceutical franchise trends, particularly patent and biosimilar competition affecting STELARA, REMICADE and other major products.
  • Whether inflation, currency movements, supply constraints and COVID-19-related changes affect future demand, costs or operations.