Johnson & Johnson — Q1 2014 Form 10-Q
Reporting period: Fiscal first quarter ended March 30, 2014; unaudited consolidated results. Comparisons are with the fiscal first quarter ended March 31, 2013, unless otherwise noted. J&J operates in Consumer, Pharmaceutical, and Medical Devices & Diagnostics.
Financial performance and liquidity
| Metric | Q1 2014 | Prior comparable period / change |
|---|---|---|
| Sales | $18.115 billion | $17.505 billion; up 3.5% reported, 5.3% operational, with a 1.8% adverse currency effect |
| Gross profit / margin | $12.660 billion / 69.9% | $11.951 billion / 68.3% |
| Earnings before tax | $5.424 billion | $4.261 billion; up 27.3% |
| Net earnings / net margin | $4.727 billion / 26.1% | $3.497 billion / 20.0% |
| Diluted earnings per share | $1.64 | $1.22 |
| Operating cash flow | $3.923 billion | $2.277 billion |
| Cash and cash equivalents | $19.722 billion | $20.927 billion at fiscal year-end 2013 |
| Cash, cash equivalents and marketable securities | $29.392 billion | Up $7.7 billion from the prior-year quarter, per management |
| Total debt | $17.292 billion | $15.9 billion at the prior-year quarter-end, per management |
| Dividends | $0.66 per share paid; $1.867 billion total | $0.61 per share in Q1 2013; $0.70 per share declared for payment in June 2014 |
Cash flow from operations was offset by $2.026 billion used in investing and $3.057 billion used in financing. Financing use included dividends of $1.867 billion, $774 million of share repurchases, and net retirement of short- and long-term debt. The company reported a $10 billion 364-day credit facility expiring September 18, 2014, and said operating cash flow, credit facilities, and commercial paper access were expected to fund operating needs.
Material changes and segment performance
- Pharmaceutical: Sales of $7.498 billion, up 10.8% reported and 12.2% operational. Growth included STELARA, ZYTIGA, OLYSIO/SOVRIAD, and XARELTO; neuroscience sales declined 6.1%, including lower CONCERTA and generic-related pressure.
- Medical Devices & Diagnostics: Sales of $7.060 billion, essentially flat reported; operational growth of 1.8% was offset by 1.8% adverse currency. Diabetes Care declined 14.7% and Diagnostics declined 7.1% reported.
- Consumer: Sales of $3.557 billion, down 3.2% reported and 0.6% operationally. Women’s Health sales fell 18.5%, primarily reflecting the prior-year divestiture of U.S., Canadian, and Caribbean sanitary protection products.
- Worldwide sales included a 1.2 percentage-point growth headwind from the prior-year positive adjustment to Managed Medicaid rebate estimates.
Management attributed improved earnings and margins mainly to favorable Pharmaceutical product mix and cost reductions. Q1 2013 comparisons included approximately $0.5 billion of litigation costs and a $0.1 billion Synthes inventory step-up charge. Q1 2014 also benefited from a $398 million tax benefit related to the Conor Medsystems divestiture; the effective tax rate was 12.9%, versus 17.9% a year earlier.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific full-year sales or earnings guidance. Management said it expected operating cash flows and available financing sources to remain sufficient for operating needs and expected to continue regular quarterly dividends.
- J&J accepted Carlyle’s binding offer to acquire Ortho-Clinical Diagnostics for approximately $4.0 billion, subject to customary adjustments and closing conditions; closing was expected around mid-2014. A separate agreement to sell global rights to the K-Y brand was also expected to close around midyear.
- The company used Venezuela’s official exchange rate of 6.3 bolivars per U.S. dollar. Venezuelan subsidiaries represented less than 0.5% of consolidated assets, liabilities, revenue, and profit; management said a future loss of access to the rate could affect an interim period.
- Material exposures include product-liability litigation (including ASR hip, PINNACLE hip, pelvic mesh, and RISPERDAL matters), patent disputes and possible generic or biosimilar competition, and government investigations. J&J stated that litigation outcomes net of recorded accruals were not expected to materially affect financial position, but resolutions could materially affect results or cash flows in a period. It could not estimate possible losses beyond amounts accrued for certain matters.
- The disclosed U.S. ASR settlement program was valued at approximately $2.5 billion, based on an estimated 8,000 eligible participants; the filing noted that U.S. claims would remain and the program did not resolve litigation outside the U.S.
- Management cited currency movements, pricing and health-care cost pressures, economic conditions, product safety and manufacturing risks, regulatory actions, and patent challenges among factors that could cause actual results to differ from expectations.
Most important facts for investors to verify
- How much of earnings growth is sustainable after separating the $398 million tax benefit and prior-year litigation and Synthes comparison items.
- Whether Pharmaceutical growth and favorable product mix can offset pressure in Consumer and selected Devices & Diagnostics franchises, and the effect of currency and rebate comparisons.
- Closing timing, proceeds, and retained liabilities associated with the Ortho-Clinical Diagnostics divestiture, plus the K-Y transaction.
- Developments in major product-liability, government, and patent matters, including the ASR settlement participation and potential biosimilar competition for REMICADE.
- Receivables and collection trends in Southern Europe, where net trade receivables were approximately $2.0 billion at quarter-end, including about $0.7 billion from certain government-supported health-care customers and distributors.