Johnson & Johnson — Form 10-Q Summary
Reporting period: Fiscal first quarter ended April 2, 2017; comparable quarter ended April 3, 2016. Amounts are in U.S. dollars unless noted.
Financial performance and liquidity
| Metric | Q1 2017 | Comparable period / change |
|---|---|---|
| Sales | $17.766 billion | $17.482 billion; up 1.6% reported, 2.0% operational, with a 0.4% currency headwind |
| Gross profit / margin | $12.380 billion / 69.7% | $12.153 billion / 69.5% |
| Earnings before income taxes | $5.575 billion; 31.4% of sales | $5.294 billion; 30.3% of sales |
| Net earnings | $4.422 billion; 24.9% of sales | $4.457 billion; 25.5% of sales |
| Diluted earnings per share | $1.61 | $1.59 |
| Operating cash flow | $2.913 billion | $2.189 billion |
| Cash and cash equivalents | $20.909 billion | $18.972 billion at January 1, 2017 |
| Marketable securities | $18.434 billion | $22.935 billion at January 1, 2017 |
| Total debt | $32.370 billion | $23.3 billion at the comparable prior-year quarter, per management |
| Effective tax rate | 20.7% | 15.8% |
Cash provided by operations was $2.9 billion; investing activities used $0.9 billion and financing activities used $0.2 billion. Investing included $4.9 billion for acquisitions and net proceeds of $4.4 billion from investment sales. Financing included $3.3 billion of share repurchases and $2.2 billion of dividends, partly offset by $5.0 billion of net short- and long-term debt proceeds. Current assets were $63.347 billion versus current liabilities of $25.119 billion at quarter-end.
Material changes and business trends
- Sales growth was led by Medical Devices, up 3.0%, and Pharmaceutical, up 0.8%; Consumer sales rose 1.0%. Pharmaceutical U.S. sales declined 1.3%, while international sales grew 4.1%.
- Within Pharmaceuticals, oncology sales rose 17.7%, while cardiovascular/metabolism/other declined 7.2%. REMICADE sales fell 6.0%, with biosimilar competition cited; growth in oncology included IMBRUVICA and DARZALEX.
- Medical Devices growth included the AMO acquisition. Orthopaedics sales declined 0.7% and Diabetes Care declined 7.0%; Vision Care sales rose 24.7%, largely reflecting AMO.
- Net earnings declined 0.8% despite higher sales and pretax earnings; diluted EPS increased to $1.61 from $1.59. The higher effective tax rate, including a 3.8 percentage-point impact from discrete AMO-related tax costs, contributed to the net earnings decline.
- Gross margin increased 0.2 percentage points, and pretax margin increased 1.1 points. Management attributed pretax improvement primarily to higher sales volume, manufacturing cost improvements and lower selling, marketing and administrative costs.
Outlook, commentary, risks and unusual items
- Acquisitions and divestitures: J&J acquired Abbott Medical Optics for $4.4 billion net of cash acquired; purchase-price allocations were preliminary. It also acquired Torax Medical and Megadyne. The company expected its approximately $30 billion Actelion acquisition to close by the end of Q2 2017, subject to conditions, and expected to use foreign-subsidiary cash. A sale of Codman Neurosurgery for approximately $1.0 billion was pending. J&J was evaluating strategic options for its Diabetes Care businesses; no transaction was assured.
- Restructuring: Medical Devices actions are expected to produce $800 million–$1.0 billion in annualized pretax savings, with most expected by the end of 2018. The company expects $2.0 billion–$2.4 billion of total pretax restructuring and related charges, most by the end of 2017; $1.4 billion had been recorded through the quarter. Approximately 4%–6% of the segment’s global workforce is expected to be eliminated over 18 months.
- Capital returns: The board declared a $0.84 quarterly dividend in April 2017, payable in June. The $10 billion repurchase authorization had $8.6 billion executed through April 2; the program may be delayed, suspended or discontinued.
- Legal and regulatory: The company disclosed numerous product-liability, patent, government-investigation and other proceedings, including claims involving hip devices, pelvic mesh, RISPERDAL, XARELTO, talc products and opioids. It stated that loss ranges beyond recorded accruals could not be estimated for certain matters; an adverse resolution or higher accruals could materially affect results or cash flows in a period.
- Other risks: Patent challenges and generic or biosimilar competition, pricing and reimbursement pressure, product safety and regulatory matters, currency fluctuations, supply and manufacturing issues, and acquisition execution could affect results. Management said Brexit’s effects were uncertain but were not expected at that time to materially affect consolidated financial position or operating results.
- Tax and accounting: Unrecognized tax-benefit liabilities were approximately $3.1 billion; timing of related payments could not be reliably estimated. The filing reported no material impact from accounting standards adopted in the quarter and identified several future standards still under assessment.
Important facts for investors to verify
- Whether Actelion closed on the expected timeline and the resulting funding, debt and integration effects.
- Whether AMO and other acquisitions deliver expected growth, and how final purchase-price allocations affect amortization, goodwill and earnings.
- Progress and realized savings from the Medical Devices restructuring, compared with expected charges and workforce reductions.
- Subsequent sales trends, especially REMICADE and other products facing biosimilar or generic competition, and pressure in Diabetes Care and Consumer franchises.
- Developments in significant litigation and investigations, including any changes to accruals or potential cash exposure not estimable in this filing.
- Changes in the effective tax rate and resolution or payment timing for the approximately $3.1 billion of unrecognized tax benefits.