Johnson & Johnson — Q1 2016 Form 10-Q
Business context and period. The filing reports the fiscal first quarter ended April 3, 2016, compared with the quarter ended March 29, 2015. J&J operates in Consumer, Pharmaceutical and Medical Devices. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q1 2016 | Prior-year quarter | Change or context |
|---|---|---|---|
| Sales | $17.482 billion | $17.374 billion | Up 0.6% reported; operational growth 3.9%, offset by 3.3% adverse currency impact |
| Gross profit margin | 69.5% | 69.6% | Down 0.1 percentage point |
| Net earnings | $4.292 billion | $4.320 billion | Down 0.6% |
| Diluted EPS | $1.54 | $1.53 | Up 0.7% |
| Effective tax rate | 18.9% | 22.5% | Lower due to income mix, tax provisions and settlements |
| Operating cash flow | $1.763 billion | $2.872 billion | Down $1.109 billion |
| Capital expenditures | $639 million | $543 million | Investing cash outflow included net investment purchases of $917 million |
| Cash and marketable securities | $39.855 billion | $38.376 billion at Jan. 3, 2016 | April 3 balance: cash $13.861 billion; marketable securities $25.994 billion |
| Total debt | $23.349 billion | $19.861 billion at Jan. 3, 2016 | Current debt $3.116 billion; long-term debt $20.233 billion |
| Quarterly dividend per share | $0.75 paid | $0.70 in prior-year quarter | Board declared $0.80 per share on April 28, payable June 7, 2016 |
Material changes and segment performance
- U.S. sales increased 7.2% to $9.321 billion, while international sales fell 6.0% to $8.161 billion, mainly due to currency headwinds.
- Pharmaceutical sales rose 5.9% to $8.178 billion; segment income before tax increased 12.9% to $3.344 billion. Growth in immunology and oncology was partly offset by a steep decline in Hepatitis C products.
- Consumer sales declined 5.8% to $3.195 billion, with operational sales slightly lower and currency reducing reported results. OTC grew operationally; Baby Care, Women’s Health and Wound Care/Other declined.
- Medical Devices sales declined 2.4% to $6.109 billion, despite 0.5% operational growth. Cardiovascular and Diabetes Care were weak; the prior-year comparison included the Cordis business, divested in October 2015.
- Worldwide pretax earnings declined 5.0% to $5.294 billion. The prior-year quarter included a net litigation gain of approximately $0.4 billion, primarily associated with a $0.6 billion Guidant settlement. Q1 2016 included litigation expense and a $137 million Medical Devices restructuring charge. Lower selling, marketing and administrative expense and a lower DePuy ASR program cost partly offset these items.
- Research and development expense increased to 11.5% of sales from 10.9%, reflecting increased Pharmaceutical pipeline investment. Selling, marketing and administrative expense fell to 26.8% of sales from 27.9%.
Cash, debt and liquidity
Operating cash flow was lower year over year, in part because of cash outflows for accounts payable and accrued liabilities, including timing of tax and legal payments. The company paid $2.069 billion in dividends and spent $2.389 billion repurchasing shares. Financing included $7.435 billion of net long-term debt proceeds, largely from a February bond issuance; the company said proceeds were for general corporate purposes, primarily its share repurchase program. J&J reported access to commercial paper markets and a $10 billion 364-day credit facility expiring September 15, 2016, and expected these resources and operating cash flow to fund operating needs.
The October 2015 repurchase authorization permits purchases of up to $10 billion with no time limit. By April 3, 2016, J&J had bought 25.5 million shares for $2.6 billion under the program; Q1 cash flow shows $2.389 billion of total share repurchases.
Outlook, commentary, risks and unusual items
- No full-year revenue or earnings guidance is provided in the supplied filing text. Management expected the Medical Devices restructuring to generate $800 million to $1.0 billion in annualized pretax savings, with most realized by the end of 2018 and approximately $200 million expected in 2016. Estimated charges are $2.0 billion to $2.4 billion, mostly by 2017; $727 million had been recorded through Q1.
- Management cited currency fluctuations, health-care pricing and reimbursement pressure, economic conditions, competitor products and patent challenges as factors affecting results. It also identified manufacturing, product safety, regulatory and supply-chain risks.
- In April 2016, the FDA approved a REMICADE biosimilar for U.S. sale. J&J warned that its launch would reduce REMICADE U.S. sales, although it did not expect a material adverse effect on 2016 results or cash flows. Biosimilar competition was already reducing sales in some international markets.
- Significant product-liability matters include litigation involving DePuy hips, PINNACLE, pelvic mesh, RISPERDAL, XARELTO and JOHNSON’S Baby Powder. The company said it could not estimate possible losses beyond amounts accrued for specified matters; outcomes or increased accruals could materially affect results or cash flows in a period.
- Unrecognized tax-benefit liabilities were approximately $3.1 billion; timing of any related future tax payments could not be reliably estimated.
- After quarter-end, J&J completed its acquisition of NeuWave Medical and entered a definitive agreement to acquire NeoStrata. The planned sale of its controlled-substance raw-material and API business was expected to close in Q2, subject to customary conditions and approvals.
Most important facts for investors to verify
- Whether reported sales growth and Pharmaceutical momentum can offset international currency pressure and product competition.
- The timing and commercial impact of U.S. REMICADE biosimilar entry, including ongoing patent proceedings.
- Medical Devices restructuring execution, total charges, workforce reductions and delivery of projected savings.
- Cash conversion and working-capital trends, given the substantial year-over-year decline in operating cash flow.
- Debt and capital allocation after the $7.5 billion bond issuance, share repurchases and dividend increase.
- Developments in major product-liability, government and intellectual-property matters, including any changes to accruals or loss estimates.