Business context and reporting period
Johnson & Johnson’s unaudited Form 10-Q covers the fiscal first quarter ended April 1, 2018, compared with the quarter ended April 2, 2017. The company reports Consumer, Pharmaceutical and Medical Devices segments. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Sales | $20.009 billion | $17.766 billion; up 12.6% reported, including 8.4% operational growth and 4.2% favorable currency impact |
| Gross profit / margin | $13.395 billion / 66.9% | $12.357 billion / 69.6% |
| Earnings before tax / margin | $5.481 billion / 27.4% | $5.575 billion / 31.4% |
| Net earnings / net margin | $4.367 billion / 21.8% | $4.422 billion / 24.9% |
| Diluted earnings per share | $1.60 | $1.61 |
| Operating cash flow | $3.606 billion | $2.913 billion |
| Cash and cash equivalents | $14.639 billion | $17.824 billion at Dec. 31, 2017 |
| Debt | $32.533 billion: $2.696 billion current and $29.837 billion long-term | $34.581 billion at Dec. 31, 2017 |
| Current assets / current liabilities | $42.768 billion / $27.081 billion | $43.088 billion / $30.537 billion at Dec. 31, 2017 |
Cash used in investing was $0.925 billion, including $0.658 billion of capital spending. Cash used in financing was $5.970 billion, including $2.253 billion of dividends, $1.444 billion of share repurchases and $2.458 billion net repayment of short-term debt. Cash and cash equivalents declined $3.185 billion during the quarter. Cash, equivalents and current marketable securities totaled approximately $15.2 billion at quarter-end; management noted that debt exceeded those balances.
Segment sales
- Consumer: $3.398 billion, up 5.3% reported (1.3% operational growth).
- Pharmaceutical: $9.844 billion, up 19.4% reported (15.1% operational growth); acquisitions and divestitures contributed 7.6 percentage points to operational growth.
- Medical Devices: $6.767 billion, up 7.5% reported (3.2% operational growth).
Material changes versus the prior period
- Sales growth was broad, but earnings declined: net earnings fell about 1.2% and diluted EPS fell from $1.61 to $1.60. Gross margin contracted 2.7 percentage points and pretax margin 4.0 points.
- Cost of products sold rose to 33.1% of sales from 30.4%, primarily reflecting higher acquired-intangible amortization and acquisition-related costs. Amortization was $1.1 billion versus $0.3 billion.
- Pharmaceutical sales were led by oncology, up 45.0% (including DARZALEX up 69.4%, IMBRUVICA up 43.5%, and ZYTIGA up 61.6%). REMICADE sales declined 16.9%, amid biosimilar competition, discounts and rebates. Pharmaceutical pretax margin fell to 37.2% from 44.4%, principally due to amortization and acquisition costs.
- Medical Devices growth included acquired vision-care sales; Diabetes Care fell 15.0% and Orthopaedics fell 1.1%. Consumer pretax margin also declined, to 16.1% from 18.5%.
- Operating cash flow increased year over year, while quarter-end cash declined from year-end, primarily reflecting financing outflows and working-capital needs. The prior-year comparison included substantial acquisition and investment activity.
Outlook, commentary, risks and unusual items
- The filing provides no specific companywide sales or EPS guidance. Management said operating cash flow, external funding capacity and committed credit facilities should provide sufficient resources for operating needs; a $10 billion 364-day credit facility was available through September 13, 2018.
- Management declared a regular quarterly dividend of $0.90 per share on April 26, 2018, payable June 12, 2018; the quarter’s dividend was $0.84 per share.
- A new global supply-chain restructuring announced after quarter-end is expected to generate $0.6–$0.8 billion of annual pretax savings, substantially by 2022, with $1.9–$2.3 billion of pretax charges over four to five years; about 70% of cumulative costs are expected to be cash outlays. The existing Medical Devices restructuring had $2.1 billion of charges recorded toward an estimated $2.4 billion total and was expected to generate $0.8–$1.0 billion in annual savings.
- Johnson & Johnson announced a binding offer to sell LifeScan for approximately $2.1 billion, subject to customary adjustments. The divestiture was pending at quarter-end. It also announced its acquisition of Orthotaxy, a developer of robotic-assisted surgery technology.
- The worldwide effective tax rate was 20.3% versus 20.7%. The company’s 2017 provisional $13.0 billion charge associated with the U.S. Tax Cuts and Jobs Act remained subject to further analysis; revisions could materially affect future results. Unrecognized tax benefits were approximately $3.2 billion.
- Material risks include extensive product-liability and other litigation, government investigations, patent challenges and generic or biosimilar competition, pricing and reimbursement pressure, product safety and regulatory matters, foreign exchange, and supply-chain execution. The filing says potential losses for certain legal matters cannot be estimated beyond amounts accrued; resolution or higher accruals could materially affect results or cash flow in a period.
- Accounting changes adopted in 2018 included ASC 606, which management said had no material impact on sales or net earnings, and other standards that produced a net $1.496 billion cumulative increase to opening retained earnings. The quarter also included $107 million of restructuring charges.
Most important facts for investors to verify
- How much of reported sales growth reflects sustainable underlying demand versus currency and acquisitions, and whether oncology growth offsets declines in REMICADE and other pressured products.
- Progress, cash costs and realized savings from the Medical Devices and global supply-chain restructuring plans.
- Final Tax Cuts and Jobs Act calculations and any material changes to provisional tax amounts or uncertain-tax-position liabilities.
- Developments in major product-liability, government and patent matters, including talc, opioids, pelvic mesh, XARELTO, REMICADE and generic challenges to ZYTIGA.
- Completion and final proceeds from the proposed LifeScan sale, and the resulting effect on segment performance and liquidity.