Johnson & Johnson — Q1 2012 Form 10-Q
Reporting period: Fiscal first quarter ended April 1, 2012; comparisons are with the fiscal first quarter ended April 3, 2011. Dollar figures are U.S. dollars.
Business context and key financial metrics
Johnson & Johnson operates in Consumer, Pharmaceutical, and Medical Devices & Diagnostics businesses. The unaudited interim statements include normal recurring adjustments.
| Metric | Q1 2012 | Prior-year quarter | Change / context |
|---|---|---|---|
| Sales | $16.139 billion | $16.173 billion | Down 0.2%; operations +1.0%, currency −1.2% |
| Gross profit margin | 69.6% | 70.5% | Lower, primarily reflecting Consumer OTC remediation costs and unfavorable mix |
| Net earnings | $3.910 billion | $3.476 billion | Up 12.5%; 24.2% and 21.5% of sales, respectively |
| Diluted EPS | $1.41 | $1.25 | Up 12.8% |
| Operating cash flow | $2.795 billion | $2.316 billion | Up about 21% |
| Cash and cash equivalents | $30.267 billion | $24.542 billion at Jan. 1, 2012 | Quarter-end cash, cash equivalents and current marketable securities totaled $33.847 billion |
| Total debt | $19.449 billion | $19.627 billion at Jan. 1, 2012 | $6.439 billion current and $13.010 billion long-term |
| Effective tax rate | 22.5% | 22.9% | Lower rate primarily related to the Synthes currency adjustment gain |
Quarter-end total current assets were $57.007 billion and current liabilities were $21.198 billion. Cash from investing activities was $4.056 billion, including net investment sales and proceeds from asset disposals; financing activities used $1.183 billion, including $1.565 billion of dividends. Capital expenditures were $502 million.
Sales by segment were Consumer $3.595 billion (−2.4%), Pharmaceutical $6.133 billion (+1.2%), and Medical Devices & Diagnostics $6.411 billion (−0.3%). Segment operating profit rose 8.5% to $5.130 billion. U.S. sales declined 5.1%, while international sales increased 4.1% in reported dollars.
Material changes and unusual items
- Net earnings benefited from a large favorable change in other income/expense: Q1 2012 recorded $611 million of net other income, versus $13 million in the prior-year quarter. The 2012 quarter included gains associated with the BYSTOLIC divestiture and Swiss franc holdings related to the planned Synthes acquisition, partly offset by acquisition costs. The filing does not provide a clear separate amount for each gain.
- The prior-year quarter included $250 million of Pharmaceutical litigation expense and $96 million of litigation and DePuy ASR hip-recall costs in Medical Devices & Diagnostics; those items affected the comparison.
- Q1 2012 BYSTOLIC U.S. intellectual-property divestiture proceeds were approximately $357 million. No acquisitions were completed in the quarter.
- Consumer operating profit declined to $463 million from $573 million, with margin falling to 12.9% from 15.6%, mainly due to product mix and OTC remediation costs. Pharmaceutical operating profit rose to $2.586 billion; Medical Devices & Diagnostics operating profit rose to $2.081 billion.
- Sales trends were mixed: Pharmaceutical growth in immunology and oncology was offset in part by loss of LEVAQUIN exclusivity and generic competition; Medical Devices & Diagnostics was affected by the exit from drug-eluting stents and lower cardiovascular sales.
Outlook, management commentary, risks and contingencies
- The filing gives no consolidated sales or earnings guidance. Management said operating cash flow, existing credit facilities, and commercial-paper-market access were expected to provide sufficient operating liquidity.
- The company expected the approximately $21.3 billion Synthes acquisition (about $19.3 billion net of acquired cash) to close in Q2 2012. A related DePuy trauma-business divestiture was also expected in Q2, subject to regulatory approvals.
- Management estimated the 2012 U.S. branded prescription-drug fee at $120–$140 million in selling, marketing and administrative expense. It estimated the 2013 medical-device excise tax at $200–$250 million.
- McNeil facilities remained subject to an FDA consent decree and added review requirements. Management expected production impacts at Lancaster and Las Piedras to continue through 2012 and most of 2013; Fort Washington was not operating, with FDA certification review anticipated to begin in late 2013.
- Legal and regulatory matters include product-liability claims involving DePuy ASR hips and pelvic mesh, and government and state proceedings concerning RISPERDAL marketing. In April 2012, an Arkansas jury verdict and court penalties totaled approximately $1.2 billion; the company reported no accrual for that verdict, citing its view that an unfavorable outcome was not probable. The filing states it cannot estimate possible losses beyond amounts accrued for certain probable or reasonably possible matters. Resolutions could materially affect results or cash flows in an individual period.
- Management identified risks including generic competition and patent challenges, product safety and recalls, manufacturing issues, healthcare cost and pricing pressures, regulation, litigation, foreign exchange, and economic and sovereign-risk conditions. Southern European customer receivables were approximately $2.5 billion; about $1.0 billion related to certain government-supported healthcare customers and distributors affected by payment timing.
- The Board declared a $0.61-per-share dividend payable June 12, 2012. Management said it expected to continue regular quarterly dividends. Disclosure controls were concluded to be effective, with no material change in internal control reported.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the BYSTOLIC and Synthes-related gains and the prior-year litigation comparison.
- Progress, financing and regulatory conditions for the Synthes acquisition and associated trauma-business divestiture.
- Whether Consumer OTC production recovers as remediation and consent-decree requirements are addressed.
- Developments in major litigation and regulatory matters, particularly the Arkansas RISPERDAL verdict, DePuy ASR and pelvic-mesh claims, and the adequacy of recorded accruals.
- Collection of Southern European receivables and the effect of currency movements, generic competition and product supply constraints on sales and cash flow.