Johnson & Johnson Q1 2009 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the fiscal first quarter ended March 29, 2009. Johnson & Johnson operates through three primary segments: Consumer, Pharmaceutical, and Medical Devices & Diagnostics. The company is a large accelerated filer incorporated in New Jersey. As of April 26, 2009, there were approximately 2.76 billion shares of common stock outstanding.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 | Change |
|---|---|---|---|
| Sales to Customers | $15,026 million | $16,194 million | -7.2% |
| Net Earnings | $3,507 million | $3,598 million | -2.5% |
| Diluted EPS | $1.26 | $1.26 | 0.0% |
| Gross Margin | 71.7% | 71.5% | +0.2 pts |
| Operating Profit | $4,643 million | $4,747 million | -2.2% |
| Effective Tax Rate | 24.5% | 24.2% | +0.3 pts |
| Cash & Equivalents (End) | $12,589 million | $10,539 million | +19.5% |
| Operating Cash Flow | $2,827 million | $3,236 million | -12.6% |
| Total Debt (Short + Long) | $14,074 million | $11,852 million* | +18.7% |
*Q1 2008 debt calculated from cash flow statement activity and balance sheet context; Q1 2009 debt is $6,022M (current) + $8,052M (long-term).
Material Changes vs. Prior Period
- Sales Decline: Worldwide sales decreased 7.2%, driven by a 6.0% negative currency impact and a 1.2% operational decline. International sales fell 9.6% (12.6% currency headwind), while U.S. sales declined 5.0%.
- Segment Performance:
- Consumer: Sales down 8.7% (7.7% currency, 1.0% operational). OTC Pharmaceuticals declined 15.4% due to prior year inventory builds for Zyrtec and a mild flu season.
- Pharmaceutical: Sales down 10.1% (5.0% currency, 5.1% operational). Significant declines in Risperdal (-66.0%) and Levaquin (-14.3%) due to patent expirations and generic competition. REMICADE grew 3.0%.
- Medical Devices: Sales down 2.9% (6.0% currency, 3.1% operational growth). Cordis declined 16.6% due to stent competition, while DePuy grew 7.3%.
- Profitability: Despite lower sales, operating margins improved across all segments due to cost containment initiatives. Gross margin increased slightly to 71.7%.
- Acquisitions: The company acquired Mentor Corporation for a net purchase price of $1.1 billion, primarily allocated to intangible assets and goodwill.
Outlook, Risks, and Management Commentary
- Dividends: The Board declared a quarterly dividend of $0.490 per share (a 6.5% increase), marking the 47th consecutive year of dividend increases.
- Capital Allocation: The company repurchased $834 million of common stock in Q1 2009. Total debt increased to fund acquisitions and share repurchases.
- Legal Proceedings: Significant litigation risks remain, including:
- Product Liability: Ongoing claims regarding Risperdal, Ortho Evra, Duragesic, and Cypher Stents.
- Patent Litigation: Active disputes with Boston Scientific regarding stent patents (Cypher, Taxus) and generic challenges to Concerta, Levaquin, and Risperdal.
- Regulatory Investigations: Investigations into marketing practices (Risperdal, Topamax, Natrecor) and the Foreign Corrupt Practices Act (FCPA) regarding medical device sales in small-market countries.
- Market Risks: Management cites currency fluctuations, generic competition, healthcare cost containment, and global economic downturns as key risks.
Investor Verification Checklist
- Currency Impact: Verify the extent to which the 6.0% currency headwind is temporary versus a structural shift in global exchange rates.
- Patent Expirations: Monitor the timeline for generic entry of Risperdal, Levaquin, and Concerta, which are driving significant revenue declines.
- Legal Reserves: Review the adequacy of accrued liabilities for product liability and patent litigation, particularly regarding Risperdal and stent patents.
- Debt Levels: Assess the sustainability of the increased debt load ($14.1 billion) used for acquisitions and buybacks in a low-interest-rate environment.
- FCPA Investigations: Track the resolution of the voluntary disclosures regarding improper payments in foreign markets.