Johnson & Johnson — Q1 2013 Form 10-Q
Reporting period: Fiscal first quarter ended March 31, 2013; comparable quarter ended April 1, 2012. Unaudited consolidated results; dollars in millions except per-share data.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Sales | $17,505 | $16,139 | +8.5% |
| Gross profit | $11,951 | $11,224 | +6.5% |
| Net earnings | $3,497 | $3,910 | -10.6% |
| Diluted EPS | $1.22 | $1.41 | -13.5% |
| Operating cash flow | $2,277 | $2,795 | -18.5% |
- Sales growth was 9.8% operational, offset by a 1.3% adverse currency effect. Synthes, net of the related trauma divestiture, contributed 5.7 percentage points to total and operational sales growth. A favorable Medicaid rebate estimate adjustment added 1.3 points to worldwide operational growth.
- Gross margin declined to 68.3% from 69.6%; net margin declined to 20.0% from 24.2%. Selling, marketing and administrative expenses fell to 29.8% of sales from 31.1%; R&D remained 10.2% of sales.
- Pretax earnings fell 15.5% to $4,261. The effective tax rate was 17.9%, versus 22.5%, mainly reflecting retroactive R&D tax credit and CFC look-through benefits and a greater share of income in lower-tax jurisdictions.
- Consumer sales rose 2.2% to $3,675; Pharmaceutical sales rose 10.4% to $6,768; Medical Devices & Diagnostics sales rose 10.2% to $7,062. Segment pretax profit was $547, $2,417 and $1,518, respectively; Medical Devices & Diagnostics profit declined 27.1%.
- Cash and cash equivalents were $14,855 and marketable securities $6,813 at quarter-end. Current assets were $47,228 versus current liabilities of $22,524. Total debt was approximately $15.9 billion ($4,529 current and $11,363 long-term), versus approximately $16.2 billion at year-end 2012.
- Operating cash flow of $2,277 less capital expenditures of $586 implies approximate free cash flow of $1,691. Dividends paid were $1,706. Investing activities used $1,403; financing activities used $777. Cash and equivalents decreased $56 from year-end.
Changes, unusual items and management commentary
- Lower earnings reflected approximately $0.5 billion of higher litigation expense, $0.4 billion of higher Synthes-related costs, a $0.1 billion Venezuela currency devaluation charge and a $0.1 billion Acclarent in-process R&D write-down. Increased sales and favorable mix, and cost containment, partly offset these items. Q1 2012 also included higher divestiture gains.
- Synthes acquisition costs included $258 million before tax; acquisition-related inventory step-up and amortization increased product costs. Synthes integration is ongoing. The company completed smaller acquisitions of Flexible Stenting Solutions and Shanghai Elsker during the quarter.
- Management said operating cash flows, existing credit facilities and commercial-paper access should provide sufficient resources for operating needs. No specific earnings or sales guidance is provided in the supplied filing text.
- The board declared a quarterly dividend of $0.66 per share for payment in June 2013, up from the $0.61 paid for the March quarter. The company expects to continue regular quarterly dividends.
- The 2013 medical-device excise tax is estimated to reduce full-year results by $200–$300 million, recorded in cost of products sold. The company was exploring strategic alternatives, including a possible divestiture, for Ortho-Clinical Diagnostics.
Risks and contingencies
- Product-liability matters include DePuy ASR and PINNACLE hip devices, pelvic mesh, LEVAQUIN and RISPERDAL. The company increased ASR-related accruals in Q1. It says the ultimate outcome of disclosed matters is not expected to materially harm financial position, but resolutions in an interim period could materially affect earnings and cash flow; possible loss ranges beyond accrued amounts are generally not estimable.
- Significant government and litigation exposures include pending RISPERDAL-related matters and appeals of large state judgments, as well as investigations concerning McNeil manufacturing and recalls, Synthes, hip devices and other products. A $176 million patent-infringement judgment involving HARMONIC was not accrued because the company considered an unfavorable outcome not probable.
- Generic competition, patent challenges, product safety and manufacturing issues, healthcare cost controls and regulatory changes, currency movements, economic conditions and acquisition integration are identified risks. Southern European trade receivables were $2.2 billion; approximately $0.9 billion related to government-supported healthcare customers and distributors affected by payment timing.
- Unrecognized tax-benefit liabilities were approximately $2.8 billion; audits, including an IRS audit of 2006–2009 tax years, may conclude in the next 12 months, but timing of other related payments is uncertain.
Most important facts for investors to verify
- Whether sales growth excluding Synthes, favorable Medicaid rebate adjustments and currency effects is sustainable, and how generic competition affects key medicines.
- The scale and timing of litigation accruals, settlements, appeals and any additional cash payments, especially for hip devices, pelvic mesh and RISPERDAL-related matters.
- Synthes integration costs, expected synergies and the effect of acquired-asset amortization on margins and segment profit.
- Cash generation, debt and liquidity trends, including collections from Southern European healthcare customers and distributors.
- The eventual cost of the medical-device excise tax and the outcome of the review of Ortho-Clinical Diagnostics.