Johnson & Johnson — Q1 2023 Form 10-Q
Reporting period: Fiscal first quarter ended April 2, 2023; amounts below are in U.S. dollars. Results compare with the fiscal first quarter ended April 3, 2022, unless otherwise noted.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Sales | $24.746 billion | $23.426 billion |
| Gross profit / margin | $16.351 billion / 66.1% | $15.828 billion / 67.6% |
| Operating costs: selling, marketing and administrative | $6.138 billion | $5.938 billion |
| Research and development | $3.563 billion | $3.462 billion |
| Income (loss) before tax | $(737) million | $5.862 billion |
| Net earnings (loss) | $(68) million | $5.149 billion |
| Diluted earnings (loss) per share | $(0.03) | $1.93 |
| Operating cash flow | $3.257 billion | $3.979 billion |
The net loss chiefly reflects a $6.9 billion charge related to the proposed talc settlement. The reported tax benefit was $669 million; the effective tax rate was 90.8%, compared with 12.2% a year earlier. Gross margin declined 1.5 percentage points. Segment earnings before tax rose 9.5% to $6.665 billion, before unallocated expenses and Consumer Health separation costs.
Revenue and material changes
- Worldwide sales increased 5.6%; operational growth was 9.0%, partly offset by a 3.4% negative currency impact. U.S. sales grew 9.7%; international sales increased 1.8% as reported.
- Consumer Health sales rose 7.4% to $3.852 billion; Pharmaceutical sales rose 4.2% to $13.413 billion; MedTech sales rose 7.3% to $7.481 billion. MedTech operational growth included a 4.6% contribution from Abiomed, acquired in December 2022.
- Notable product movements included growth in DARZALEX (+22.0%), ERLEADA (+35.6%) and STELARA (+6.8%), and declines in REMICADE (-26.5%), IMBRUVICA (-20.3%) and ZYTIGA (-54.5%). COVID-19 vaccine sales were $747 million versus $457 million; management said related revenue was substantially complete.
- Segment pre-tax margins were 20.1% in Consumer Health (19.1% prior year), 33.1% in Pharmaceuticals (30.5%), and 19.3% in MedTech (21.2%). The MedTech margin was pressured by Abiomed amortization and costs, inflation and an IPR&D charge.
Cash, debt and liquidity
- Cash, cash equivalents and restricted cash totaled $26.865 billion at quarter-end, including $7.695 billion restricted in connection with Kenvue financing. Current marketable securities were $5.443 billion. Management reported total cash, cash equivalents, restricted cash and marketable securities of $32.3 billion.
- Operating activities generated $3.257 billion; investing activities provided $3.315 billion, including $3.992 billion net sales of investments; financing activities provided $6.138 billion. The financing inflow included $7.674 billion of long-term debt proceeds, while dividends and share repurchases used $2.942 billion and $3.537 billion, respectively.
- Loans and notes payable were $17.979 billion and long-term debt was $34.928 billion. Management reported total debt of $52.9 billion, including $7.7 billion related to Kenvue, and a net debt position of $20.6 billion, versus $2.8 billion a year earlier. Current debt included $16.9 billion of commercial paper, with a weighted-average maturity of about three months.
- Management said operating cash flows, external funding, committed credit facilities and commercial paper access should provide sufficient resources for operating needs and identified legal payments. It reported no significant incremental liquidity risk from recent market conditions.
Outlook, management commentary and risks
- The filing does not provide a clear full-year sales or earnings guidance figure. The company expected regular quarterly dividends to continue; a $1.19-per-share dividend was declared after quarter-end.
- Johnson & Johnson continued preparations to separate Consumer Health as Kenvue. Kenvue’s $7.75 billion notes offering proceeds were released from escrow April 5 after the business transfer. On April 24, Kenvue launched an IPO roadshow; the proposed offering terms and ownership figures in the filing were expectations, not completed results.
- The company recorded an additional $6.9 billion talc-related charge and described a proposed $8.9 billion present-value contribution over 25 years, bringing the stated reserve to that amount. The proposal had not resolved all claims. Following dismissal of the first LTL bankruptcy on April 4, LTL filed a new bankruptcy case; a preliminary injunction temporarily restricted trials in many talc matters. The company said it could not estimate possible loss beyond amounts accrued.
- Other significant exposures include opioid litigation and settlements, product-liability matters, government proceedings, and patent and regulatory challenges. Management expected approximately $2.5 billion remaining on the opioid settlement agreement. The company also highlighted biosimilar competition, including the approaching September 2023 U.S. composition-of-matter patent expiry for STELARA.
- After quarter-end, the company reported approximately $3.5 billion of U.S. Treasury payments, including an estimated $1.4 billion for the 2013–2016 IRS audit and $1.5 billion related to foreign undistributed earnings. It also anticipated approximately $0.5 billion of incremental international tax costs in Q2 from the Consumer Health reorganization.
- Other cited risks include foreign exchange and inflation, healthcare pricing pressure, supply constraints, product development and approval uncertainty, cybersecurity and operational disruption, and changes in tax and regulatory requirements.
Important facts for investors to verify
- Whether the proposed talc resolution and LTL bankruptcy process proceed, and how related claims, cash payments and reserves evolve.
- How Kenvue’s separation and IPO affect Johnson & Johnson’s debt, cash, guarantees, ownership and continuing financial statements.
- Whether operating cash flow and margins remain resilient after the quarter’s decline in gross margin and operating cash flow.
- Sales trends and competitive or patent exposure for major pharmaceutical products, especially STELARA, REMICADE, IMBRUVICA and ZYTIGA.
- Final tax-audit outcomes, subsequent tax payments and the actual impact of separation-related tax costs.