Business context and reporting period
Johnson & Johnson’s unaudited Form 10-Q covers the fiscal first quarter ended April 4, 2021. Comparisons are with the fiscal first quarter ended March 29, 2020, except balance-sheet comparisons, which are with January 3, 2021. The company operates in Consumer Health, Pharmaceutical, and Medical Devices.
Financial performance and liquidity
| Metric | Q1 2021 | Comparable period |
|---|---|---|
| Sales | $22.321 billion | $20.691 billion |
| Gross profit / gross margin | $15.258 billion / 68.3% | $13.629 billion / 65.9% |
| Earnings before income taxes | $7.429 billion | $6.509 billion |
| Net earnings / net margin | $6.197 billion / 27.8% | $5.796 billion / 28.0% |
| Diluted earnings per share | $2.32 | $2.17 |
| Operating cash flow | $4.074 billion | $3.358 billion |
- Worldwide sales rose 7.9%: operational growth of 5.5% and favorable currency impact of 2.4%. Acquisitions and divestitures reduced operational growth by 0.5%.
- Operating cash flow exceeded the prior-year period, while working-capital movements included increases in receivables and inventories and decreases in payables and accrued liabilities.
- Cash and cash equivalents were $12.671 billion; marketable securities were $11.948 billion. Total debt was approximately $33.6 billion, giving net debt of approximately $9.0 billion. The company reported net debt of $9.6 billion a year earlier.
- Cash and cash equivalents decreased $1.314 billion during the quarter. Investing activities used $185 million and financing activities used $5.125 billion, including $2.659 billion of dividends and $1.438 billion of share repurchases.
- The worldwide effective tax rate increased to 16.6% from 11.0%. The filing attributes the change in part to income mix across tax jurisdictions and prior-year tax benefits.
Material changes versus the prior period
- Pharmaceutical sales rose 9.6% to $12.199 billion; Medical Devices sales rose 10.9% to $6.579 billion. Consumer Health sales declined 2.3% to $3.543 billion.
- Pharmaceutical growth was led by oncology and immunology, including DARZALEX, ERLEADA, STELARA, and TREMFYA. REMICADE declined 21.5% amid biosimilar competition; ZYTIGA declined 7.6% amid generic competition.
- Medical Devices sales benefited from market recovery, particularly in Interventional Solutions and Surgery. Orthopaedics growth was more modest, with knee procedures affected by COVID-19 and channel mix.
- Consumer Health’s OTC sales fell 12.9%, reflecting prior-year COVID-19 pantry loading and a weaker cough, cold, and flu season. Other franchises, including Baby Care, grew.
- Pharmaceutical segment pretax earnings included approximately $0.6 billion in gains from divesting two non-U.S. brands. The prior-year comparison included a $1.0 billion Auris-related contingent consideration reversal and $0.3 billion of unrealized securities losses.
Outlook, commentary, risks, and unusual items
- The filing provides no specific full-year sales or earnings guidance. The company expects its global supply-chain restructuring to generate $0.6–$0.8 billion in annual pretax savings, substantially by 2022; expected total pretax charges are $1.9–$2.3 billion. Approximately $1.4 billion had been recorded through the quarter.
- Management said COVID-19 had no material impact on the quarter’s consolidated financial statements, but future effects could be material. The company reported $100 million of COVID-19 vaccine sales and continued vaccine development and manufacturing arrangements.
- The company cited approximately $1.0 billion in contractual vaccine supply commitments. It said operating cash flows, borrowing capacity, and capital-market access should provide sufficient resources for operating needs, including vaccine commitments and litigation-related payments.
- An agreement in principle to resolve opioid claims for up to $5 billion has been accrued, subject to conditions and final agreement. The company cannot predict if or when it will be finalized; related cases continue.
- Significant product-liability matters include talc, pelvic mesh, and other product claims. The filing describes approximately 28,900 U.S. talc plaintiffs and an appealed Missouri verdict of approximately $2.5 billion including interest. For probable or reasonably possible litigation matters, the company cannot estimate possible losses beyond accrued amounts. It says the ultimate outcome, net of accruals, is not expected to materially affect financial position, but resolution or increased accruals could materially affect results or cash flows in a period.
- Other stated risks include patent challenges and generic or biosimilar competition, pricing pressure, regulatory and product-safety matters, supply-chain disruptions, currency and market changes, and uncertainty from COVID-19. The company reported no material change in its market-risk assessment and said disclosure controls were effective.
Important facts for investors to verify
- Whether sales growth and segment performance persist, particularly in Pharmaceuticals and Medical Devices, and how much reflects currency, market recovery, or one-time items.
- The underlying earnings trend excluding the $0.6 billion divestiture gain and the prior-year Auris reversal and securities losses.
- Cash conversion, working-capital movements, debt levels, and the timing of expected vaccine, tax, dividend, and litigation payments.
- Progress, costs, and realized savings from the global supply-chain restructuring and COVID-19 vaccine commitments.
- Developments in talc, opioid, product-liability, and other legal matters, including the status and potential financial effects of settlements, appeals, and unestimable exposures.