Johnson & Johnson — Q1 2015 Form 10-Q
Reporting period: Fiscal first quarter ended March 29, 2015. Unaudited consolidated results; comparable period ended March 30, 2014.
Business context and key financial metrics
Johnson & Johnson operates in Consumer, Pharmaceutical and Medical Devices. Worldwide sales were $17.374 billion, down 4.1% year over year. Operational growth of 3.1% was more than offset by a 7.2% adverse currency impact; the Ortho-Clinical Diagnostics divestiture also reduced reported operational growth.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Sales | $17.374 billion | $18.115 billion |
| Gross profit / margin | $12.092 billion / 69.6% | $12.660 billion / 69.9% |
| Earnings before tax | $5.575 billion | $5.424 billion |
| Net earnings | $4.320 billion | $4.727 billion |
| Diluted EPS | $1.53 | $1.64 |
| Operating cash flow | $2.872 billion | $3.923 billion |
| Cash dividends per share | $0.70 | $0.66 |
Net margin was 24.9%, compared with 26.1%. The effective tax rate rose to 22.5% from 12.9%; the prior-year rate benefited from a $398 million tax benefit associated with the Conor Medsystems divestiture. Q1 2015 other income included a material litigation gain, principally from a $600 million Guidant settlement.
At March 29, 2015, cash and cash equivalents were $11.988 billion and marketable securities were $19.331 billion, totaling $31.319 billion. Total debt was approximately $18.983 billion ($4.045 billion current and $14.938 billion long-term). Operating cash flow less capital expenditures was approximately $2.329 billion. The company reported $60.712 billion in total liabilities and $67.878 billion in shareholders’ equity.
Material changes versus the prior comparable period
- Sales declined 4.1% overall; U.S. sales increased 5.9%, while international sales decreased 12.4%, primarily reflecting currency headwinds.
- Pharmaceutical sales rose 3.0% to $7.726 billion, with operational growth of 10.2%. Medical Devices sales fell 11.4% to $6.258 billion, including the impact of the Diagnostics divestiture; Consumer sales fell 4.7% to $3.390 billion.
- Operating cash flow fell by $1.051 billion. Management cited working-capital outflows, including changes in payables and accrued liabilities, receivables, inventory and other assets.
- Net earnings declined despite higher pretax earnings, reflecting the higher tax rate. Diluted EPS also reflected fewer average diluted shares outstanding.
- Other comprehensive loss was $2.578 billion, mainly due to a $2.563 billion foreign-currency translation loss. Accumulated other comprehensive loss increased to $13.300 billion.
Management commentary, outlook and risks
Management attributed sales and margin pressures to currency, competition in hepatitis C medicines, product mix and the loss of higher-margin OLYSIO sales. Pharmaceutical results also benefited from favorable adjustments to prior rebate estimates. Management cited cost management and expense timing as support for Consumer profitability, while increased R&D spending and milestone timing raised R&D expense to 10.9% of sales from 10.1%.
No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expects operating cash flows, credit facilities and commercial paper access to provide sufficient resources for operating needs, and expects to continue regular quarterly dividends. The board declared a subsequent quarterly dividend of $0.75 per share, payable June 9, 2015.
- Commercial and currency risks: foreign exchange materially reduced reported sales; competition is affecting hepatitis C products, and biosimilar entry is pressuring REMICADE in certain markets. Patent challenges and expirations could affect product sales.
- Litigation and regulatory matters: product-liability cases include DePuy hip systems, pelvic mesh and RISPERDAL. The company recorded a $136 million Q1 accrual related to the South Carolina RISPERDAL matter. It also disclosed ongoing government inquiries and other litigation; potential losses beyond existing accruals could not be reliably estimated for certain matters.
- Unusual items and transactions: the $600 million Guidant settlement generated a gain in Q1. McNeil-PPC entered a guilty plea to a misdemeanor food and drug law violation and agreed to a $20 million fine and $5 million forfeiture. The NUCYNTA U.S. rights divestiture for approximately $1.05 billion closed April 2, 2015, after quarter-end. The proposed Cordis sale to Cardinal Health for approximately $2.0 billion was pending, subject to approvals and other closing conditions.
- Liquidity and capital allocation: Q1 financing cash use included $1.946 billion of dividends and $2.198 billion of share repurchases. The company had repurchased $4.6 billion under its $5.0 billion program by quarter-end.
Most important facts for investors to verify
- Whether operational sales trends, especially in Medical Devices and international markets, improve as currency and divestiture effects evolve.
- How much Pharmaceutical growth is recurring versus attributable to rebate-estimate adjustments, and how competition affects OLYSIO and REMICADE.
- Whether operating cash flow recovers from Q1 working-capital outflows while dividends and repurchases continue.
- Developments in major product-liability, government and patent proceedings, including any changes to accruals or potential exposure.
- Completion and financial effects of the Cordis transaction and the post-quarter NUCYNTA divestiture.