Johnson & Johnson — Q1 2011 Form 10-Q
Business context and period. The filing covers the fiscal first quarter ended April 3, 2011, compared with the quarter ended April 4, 2010. Johnson & Johnson operates in Consumer, Pharmaceutical, and Medical Devices & Diagnostics. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / prior balance date |
|---|---|---|
| Sales | $16.173 billion | $15.631 billion; up 3.5% |
| Gross profit / margin | $11.395 billion / 70.5% | $11.103 billion / 71.0% |
| Earnings before tax | $4.510 billion | $6.280 billion |
| Net earnings / diluted EPS | $3.476 billion / $1.25 | $4.526 billion / $1.62 |
| Net margin | 21.5% | 29.0% |
| Operating cash flow | $2.316 billion | $3.690 billion |
| Capital expenditures | $436 million | $397 million |
| Cash and cash equivalents | $22.356 billion | $19.355 billion at Jan. 2, 2011 |
| Cash, equivalents and current marketable securities | $26.867 billion | $27.658 billion at Jan. 2, 2011 |
| Total debt | $17.830 billion | $16.773 billion at Jan. 2, 2011 |
| Current assets / current liabilities | $49.221 billion / $24.011 billion | $47.307 billion / $23.072 billion at Jan. 2, 2011 |
| Quarterly dividend per share | $0.540 | $0.490 |
Worldwide sales growth included 1.8% operational growth and a 1.7% favorable currency effect. International sales rose 7.3%; U.S. sales declined 0.6%. Segment sales were Pharmaceutical $6.059 billion (+7.5%), Medical Devices & Diagnostics $6.432 billion (+3.3%), and Consumer $3.682 billion (-2.2%).
Material changes versus the prior period
- Net earnings fell 23.2% and diluted EPS declined from $1.62 to $1.25. The comparison is substantially affected by a $1.5 billion net litigation gain recorded in Q1 2010; Q1 2011 included litigation and DePuy ASR hip recall costs, partly offset by a gain related to the prior Crucell investment.
- Gross margin eased to 70.5% from 71.0%, while R&D expense increased 11.6% to $1.738 billion. Management attributed higher product costs primarily to Consumer remediation and higher selling, marketing and administrative expense partly to medical-device investment and the branded-drug fee under health reform.
- Operating cash flow declined to $2.316 billion from $3.690 billion, including larger working-capital outflows. Investing activities provided $1.440 billion, compared with $1.882 billion used in Q1 2010, reflecting net investment sales partly offset by $2.049 billion of acquisitions. Financing used $825 million, principally dividends and share repurchases, partly offset by net borrowing.
- Pharmaceutical segment operating profit increased 12.1% to $2.209 billion. Consumer operating profit fell 27.0% to $573 million; Medical Devices & Diagnostics fell 47.5% to $1.944 billion, with the prior-year segment result benefiting from a $1.584 billion net litigation gain.
Outlook, management commentary, risks and unusual items
- Management said operating cash flows, existing credit facilities and commercial-paper access are expected to provide sufficient resources for operating needs. The filing does not provide a clear consolidated sales or earnings forecast.
- Health reform was estimated to reduce 2011 sales by $400–$500 million through rebates, including about $120 million in Q1; the annual branded-drug fee was estimated to add $150–$200 million to selling, marketing and administrative expense. Medical-device excise tax was scheduled to begin in 2013.
- McNeil manufacturing and product recalls weighed on Consumer sales. A March 2011 consent decree requires remediation and oversight at three facilities; Fort Washington remains shut until specified certifications and FDA concurrence. Investigations and consumer claims related to recalls are ongoing.
- Major product and market risks include U.S. exclusivity expiration for LEVAQUIN in June 2011; an authorized generic of CONCERTA beginning May 1, 2011, expected to significantly reduce its sales; generic competition affecting other products; and competition in REMICADE markets.
- In April 2011, J&J settled FCPA and Oil-for-Food matters for approximately $78 million and agreed to enhanced compliance practices for three years. The filing also describes numerous product-liability, patent, government and other proceedings. Management says ultimate outcomes are not expected to materially adversely affect financial position, but a resolution in a particular period could materially affect earnings or cash flows.
- On April 27, 2011, the company agreed to acquire Synthes for approximately $21.3 billion, or $19.3 billion net of cash acquired. Separately, an amended Merck distribution arrangement for REMICADE and SIMPONI was announced; J&J received a one-time $500 million payment in April 2011, with changes effective July 1, 2011.
- The quarterly dividend was raised to $0.570 per share after quarter-end, payable June 14, 2011. The filing states this was the 49th consecutive annual increase.
Most important facts for investors to verify
- Whether reported sales growth translates into sustained operational growth, given the favorable currency contribution and weakness in U.S. sales.
- The scale, duration and cash impact of McNeil remediation, recall-related costs and the consent decree.
- Actual losses and timing associated with the disclosed litigation and government investigations, including matters for which no reserve was recorded.
- The sales and earnings impact of LEVAQUIN exclusivity expiration, the CONCERTA authorized generic, and ongoing generic competition.
- Funding, integration and financial effects of the proposed Synthes acquisition, alongside debt, liquidity and operating cash-flow trends.