Johnson & Johnson — Q1 2020 Form 10-Q
Reporting period: Fiscal first quarter ended March 29, 2020; comparisons are with the quarter ended March 31, 2019. Johnson & Johnson operates across Consumer Health, Pharmaceuticals and Medical Devices.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Sales | $20.691 billion | $20.021 billion |
| Net earnings | $5.796 billion | $3.749 billion |
| Diluted EPS | $2.17 | $1.39 |
| Gross margin | 65.9% | 67.0% |
| Pretax margin | 31.5% | 22.1% |
| Operating cash flow | $3.358 billion | $3.543 billion |
- Sales rose 3.3% overall, comprising 4.8% operational growth and a 1.5% negative currency effect. Management estimated COVID-19 reduced worldwide operational sales by about 1.0%.
- Pharmaceutical sales increased 8.7% to $11.134 billion; Consumer Health increased 9.2% to $3.625 billion; Medical Devices declined 8.2% to $5.932 billion.
- Net earnings included a roughly $1.0 billion benefit from reversing Auris Health contingent consideration, recorded in other income. The prior-year quarter included a $0.9 billion in-process R&D impairment charge. These items limit the comparability of reported earnings growth.
- Cost of products sold increased to 34.1% of sales from 33.0%, while selling, marketing and administrative expense declined to 25.1% from 26.1%, and R&D expense declined to 12.5% from 14.3%.
- Cash and cash equivalents were $15.530 billion at quarter-end, with $2.494 billion in marketable securities. Total debt was approximately $27.6 billion; reported net debt was $9.6 billion.
- Operating cash flow was $3.4 billion; investing activities used $0.6 billion and financing activities used $4.3 billion. Financing outflows included $2.5 billion of dividends and $1.7 billion of share repurchases.
Changes and management commentary
- COVID-19 drove elevated demand and stocking in parts of Consumer Health and Pharmaceuticals, while delayed or reduced procedures hurt Medical Devices sales. Management estimated a positive 7.0% impact on Consumer Health operational sales and a negative 7.5%–8.0% impact on Medical Devices operational sales.
- Pharmaceutical growth was led by products including STELARA, DARZALEX and IMBRUVICA; REMICADE continued to face biosimilar competition. Medical Devices weakness was broad, with procedure-related declines and the impact of the ASP divestiture.
- The worldwide effective tax rate fell to 11.0% from 15.2%, including estimated Swiss tax reform benefits and the Auris liability reduction, among other factors.
- The global supply-chain restructuring is expected to generate $0.6–$0.8 billion in annual pretax savings, substantially by 2022. Expected total pretax charges are $1.9–$2.3 billion over four to five years; approximately $1.0 billion had been recorded through the quarter.
- The company said COVID-19 had not materially affected the quarter’s consolidated financial statements as of March 29, but future effects could be material. It cited uncertainty around the pandemic’s duration, economic conditions, manufacturing, supply chains, sales and clinical trials.
- No clear company-wide full-year earnings or sales guidance is provided in the supplied filing text. The company said it expected adequate liquidity from operating cash flows, capital markets, credit facilities and commercial paper, including to fund a potential opioid settlement.
Risks, contingencies and unusual items
- Litigation includes product-liability claims concerning talc, opioids, pelvic mesh, hip devices and medicines, as well as patent, antitrust and government matters. The company said it could not estimate possible losses beyond amounts accrued for certain matters; resolution or higher accruals could materially affect results or cash flows in a period.
- A proposed agreement in principle to pay $4 billion to resolve specified opioid lawsuits and future claims by states, cities and counties remained subject to conditions and finalization. Other opioid cases continued, including an appealed Oklahoma judgment.
- COVID-19-related procedure reductions, supply-chain disruption, currency movements, pricing pressures, competition and patent challenges are significant business risks.
- The April 14, 2020 dividend declaration increased the regular quarterly dividend to $1.01 per share, payable June 9, 2020.
Investor verification priorities
- Separate underlying earnings and segment trends from the roughly $1.0 billion Auris contingent-consideration reversal and prior-year unusual charges.
- Track the duration and financial effects of COVID-19, especially Medical Devices procedure volumes and Consumer Health demand normalization.
- Review the status, terms and funding needs of opioid litigation proposals and other major legal matters, including talc-related claims.
- Monitor cash conversion, working-capital movements, debt and liquidity, alongside restructuring charges and delivery of projected savings.
- Confirm the effects of Swiss tax rulings and other tax-audit outcomes on subsequent effective tax rates and cash payments.