Johnson & Johnson — Q1 2010 Form 10-Q
Business context and period: Unaudited fiscal first quarter ended April 4, 2010; comparative quarter ended March 29, 2009. Johnson & Johnson operates across Consumer, Pharmaceutical, and Medical Devices & Diagnostics.
Financial performance
| Metric | Q1 2010 | Prior-year quarter | Change / context |
|---|---|---|---|
| Sales | $15.631 billion | $15.026 billion | +4.0% reported; -0.1% operational, +4.1% from currency |
| Gross profit / margin | $11.103 billion / 71.0% | $10.775 billion / 71.7% | Margin down 0.7 percentage points |
| Net earnings | $4.526 billion | $3.507 billion | +29.0%; includes a net litigation gain of about $1.5 billion |
| Diluted EPS | $1.62 | $1.26 | +28.6%; includes litigation-related benefit |
| Operating cash flow | $3.690 billion | $2.827 billion | Increased $863 million |
| Cash and cash equivalents | $13.743 billion | $15.810 billion at Jan. 3, 2010 | Down $2.067 billion during the quarter |
| Cash, cash equivalents and marketable securities | $18.010 billion | — | At quarter-end |
| Total debt | $12.103 billion | $14.1 billion at the prior-year quarter-end, per MD&A | Lower year over year |
| Quarterly dividend per share | $0.490 paid | $0.460 | Board later declared $0.540, a 10.2% increase |
Operating cash flow funded $397 million of capital expenditures, $772 million of net acquisition spending, and shareholder distributions. Investing activities used $1.882 billion; financing activities used $3.822 billion, including $1.350 billion of dividends and net retirement of short-term debt. Current assets were $38.861 billion versus current liabilities of $18.499 billion.
Material changes and business drivers
- Worldwide sales rose 4.0%, but operational sales declined 0.1%; international growth and favorable currency more than offset a 5.0% U.S. sales decline.
- Consumer sales increased 1.5% reported but declined 3.7% operationally; U.S. Consumer sales fell 9.6%, largely reflecting the OTC product recall and weaker cold-and-flu demand.
- Pharmaceutical sales fell 2.5% reported and 5.7% operationally. U.S. sales fell 12.7%; international sales grew 6.6% operationally. TOPAMAX sales dropped 75.4% as generic competition followed loss of U.S. exclusivity.
- Medical Devices & Diagnostics sales increased 12.5% reported and 8.1% operationally. Segment operating profit rose 107.2%, substantially reflecting a litigation gain.
- The Cordis–Boston Scientific settlement generated $1.725 billion in payments, with $1.0 billion received in February and a further $725 million plus interest due in January 2011. The company recorded the settlement in Q1; management reported a net litigation gain of about $1.5 billion.
Reported earnings growth should therefore be considered alongside the unusual litigation gain. The filing does not provide a clear adjusted earnings figure excluding that gain.
Outlook, risks and unusual items
- Liquidity: Management expected operating cash flows, existing credit facilities, and commercial-paper market access to provide sufficient resources for operating needs.
- Health reform: The company estimated the 2010 increase in sales rebates from newly enacted U.S. health-care legislation at $400–$500 million, including $60 million in Q1. Additional branded-drug fees and Medicare Part D discounts begin in 2011; a 2.3% medical-device excise tax begins in 2013.
- OTC recall: On April 30, 2010, McNeil voluntarily recalled unexpired lots of certain U.S.-manufactured children’s and infants’ liquid OTC products and temporarily suspended production at the facility. Resumption timing was uncertain; the recall did not significantly affect Q1 results.
- Restructuring: The program announced in Q4 2009 recorded $1.2 billion of pretax charges; approximately 7,500 positions were planned for elimination, with about 3,000 eliminated by quarter-end. The remaining severance reserve was $597 million.
- Litigation and regulatory exposure: Numerous product-liability, patent, generic-drug, marketing, government-investigation, and other proceedings remained pending. The company said ultimate outcomes could not be estimated with certainty; resolution of matters in a period could significantly affect results or cash flows, although management did not expect the aggregate outcome, net of accruals, to materially adversely affect financial condition.
- Other risks: Management cited pricing and reimbursement pressure, competition and generic entry, product safety and recalls, regulatory and patent challenges, economic conditions, and currency and interest-rate fluctuations. No formal earnings guidance was provided in the supplied filing text.
Most important facts for investors to verify
- How much of reported earnings and segment-profit growth came from the Cordis settlement and other litigation items, and what underlying earnings trend remains after those effects?
- Whether the McNeil recall and production suspension affect subsequent sales, costs, or supply beyond Q1.
- Progress and cash requirements for the restructuring, including the planned job reductions and severance payments.
- Actual effects of health-care reform rebates and later fees, discounts, and device taxes versus management’s estimates.
- Developments in major litigation, government investigations, patent disputes, and pending generic challenges that could affect products or cash flows.
- Whether operational sales momentum, especially in the U.S. and pharmaceuticals, improves as currency effects and the TOPAMAX comparison change.