Johnson & Johnson — Q1 2019 Form 10-Q
Reporting period: Fiscal first quarter ended March 31, 2019; comparable quarter ended April 1, 2018. Amounts are in U.S. dollars. The filing covers Johnson & Johnson and subsidiaries.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Sales | $20.021 billion | $20.009 billion | +0.1% reported; +3.9% operational, offset by 3.8% unfavorable currency |
| Gross profit margin | 67.0% | 66.9% | +0.1 percentage point |
| Earnings before tax | $4.422 billion | $5.481 billion | -19.3% |
| Net earnings | $3.749 billion | $4.367 billion | -14.2% |
| Diluted EPS | $1.39 | $1.60 | -13.1% |
| Operating cash flow | $3.543 billion | $3.606 billion | -1.7% |
- Net margin was 18.7%, versus 21.8%. R&D expense rose to $2.858 billion (14.3% of sales) from $2.404 billion (12.0%); selling, marketing and administrative expense declined to 26.1% of sales from 26.3%.
- Cash and cash equivalents were $14.734 billion at quarter-end, with $602 million of current marketable securities. Current liabilities were $29.111 billion; current assets were $41.987 billion.
- Debt was approximately $29.4 billion, including current and long-term debt. Management reported net debt of $14.0 billion, down from $17.3 billion a year earlier. Long-term debt carried a 3.19% weighted-average effective interest rate.
- Operating cash flow was $3.5 billion; investing activities used $1.4 billion and financing activities used $5.5 billion. Financing uses included $2.4 billion of dividends and $2.2 billion of share repurchases. Capital expenditures were $656 million.
Material changes and business performance
- Pharmaceutical sales increased 4.1% to $10.244 billion; Consumer sales fell 2.4% to $3.318 billion; Medical Devices sales fell 4.6% to $6.459 billion. Medical Devices results included a negative 5.3% operational sales impact from acquisitions and divestitures.
- Pharmaceutical growth included STELARA (+32.4%), DARZALEX (+45.5%) and IMBRUVICA (+33.5%). REMICADE fell 20.6% amid biosimilar competition and discounts; ZYTIGA fell 19.6%, largely reflecting U.S. generic competition. Consumer Baby Care sales declined 14.0%.
- Reported earnings were pressured by a $890 million write-off of the remaining AL-8176 in-process R&D asset after the company abandoned the RSV/hMPV development program. The filing also cites approximately $400 million in litigation expense. Favorable items included a $300 million gain on the previously held Ci:z Holdings investment and higher unrealized securities gains.
- The effective income tax rate was 15.2%, versus 20.3%; management attributed the lower rate partly to refined application of U.S. tax law and the mix of income and charges across jurisdictions.
Outlook, risks and unusual items
- No consolidated revenue or earnings guidance for the remainder of 2019 is stated in the supplied filing text. Management expects the global supply-chain restructuring to generate $600–$800 million in annual pretax savings, substantially by 2022, with $1.9–$2.3 billion of pretax charges over four to five years. $300 million of costs had been recorded through Q1 2019.
- After quarter-end, the company completed the Auris Health acquisition for approximately $3.4 billion, net of cash acquired, with up to $2.35 billion in potential milestone payments. It also completed the Advanced Sterilization Products divestiture for approximately $2.8 billion, including $2.7 billion cash proceeds.
- The Board declared a quarterly dividend of $0.95 per share in April, payable June 11, 2019. The $5.0 billion share-repurchase authorization had $1.8 billion repurchased through March 31.
- Material legal exposures include product-liability matters involving talc, opioids, pelvic mesh, XARELTO and other products, as well as patent, antitrust and government investigations. The company said it could not estimate possible losses beyond accrued amounts for certain probable or reasonably possible matters; resolution or increased accruals could materially affect results or cash flows in a period.
- Other risks highlighted include generic and biosimilar competition, pricing and reimbursement pressure, product development and regulatory uncertainty, foreign-exchange movements, supply-chain execution, and changing tax and healthcare rules. Management noted no material change in its market-risk assessment and said disclosure controls were effective.
Important facts for investors to verify
- Whether strong operational sales growth can offset currency effects and declines in Consumer and Medical Devices.
- How persistent REMICADE and ZYTIGA competition, and growth in newer pharmaceutical products, affect segment sales and margins.
- Progress, integration costs and any contingent payments for Auris, alongside proceeds and business effects of the ASP divestiture.
- Developments in major litigation and investigations, particularly talc and opioid matters, and any changes to recorded accruals.
- Execution and timing of the supply-chain restructuring savings relative to its expected charges.
- Cash generation, debt reduction, dividends and buybacks after the quarter-end acquisitions and divestiture.