Johnson & Johnson — Q2 2022 Form 10-Q
Business context and reporting period
Johnson & Johnson reported results for the fiscal second quarter ended July 3, 2022, and the first six fiscal months of 2022. Its businesses comprise Consumer Health, Pharmaceutical, and MedTech. The filing is unaudited.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | First six months 2022 | First six months 2021 |
|---|---|---|---|---|
| Sales | $24.02B | $23.31B | $47.45B | $45.63B |
| Gross margin | 67.0% | 67.5% | 67.3% | 67.9% |
| Earnings before tax | $5.84B | $6.66B | $11.70B | $14.09B |
| Net earnings | $4.81B | $6.28B | $9.96B | $12.48B |
| Diluted EPS | $1.80 | $2.35 | $3.73 | $4.67 |
- Q2 sales rose 3.0% reported, comprising 8.0% operational growth and a 5.0% negative currency effect. First-half sales rose 4.0% reported, with 7.8% operational growth and a 3.8% negative currency effect.
- Q2 pretax margin was 24.3%, versus 28.6%; net margin was 20.0%, versus 26.9%. First-half pretax margin was 24.7%, versus 30.9%; net margin was 21.0%, versus 27.3%.
- Q2 segment sales: Pharmaceutical $13.32B, up 6.7%; Consumer Health $3.81B, down 1.3%; MedTech $6.90B, down 1.1%. Pharmaceutical growth included strong oncology and COVID-19 vaccine sales; reported segment results were materially affected by foreign exchange.
- First-half operating cash flow was $9.56B, compared with $9.39B. Investing activities used $6.27B and financing activities used $6.65B. Cash and cash equivalents declined to $10.98B from $14.49B at year-end.
- At July 3, cash, cash equivalents, and marketable securities totaled $32.57B, approximately equal to $32.60B of notes payable and long-term debt. Current assets were $63.85B and current liabilities $44.82B. Long-term debt was $28.29B.
Material changes versus prior comparable periods
- Despite sales growth, Q2 net earnings fell 23% and diluted EPS fell 23%; first-half net earnings declined 20%. Higher costs, litigation and separation expenses, investment valuation losses, and the prior-year comparison contributed. In particular, 2021 included a favorable tax benefit from an international subsidiary reorganization and pharmaceutical divestiture gains; 2022 recorded a $0.6B bermekimab R&D asset impairment in the first half.
- Q2 cost of products sold increased to 33.0% of sales from 32.5%, reflecting inflation, MedTech mix, and COVID-19 vaccine supply-network costs. First-half R&D expense rose to $7.17B from $6.57B.
- The first-half effective tax rate was 14.9%, versus 11.5%; the comparison benefited from a net tax benefit in 2021. The filing also reports approximately $0.3B of incremental separation-related tax costs after quarter-end, to be recorded in Q3.
Outlook, commentary, risks, contingencies, and unusual items
- The provided filing text does not give a clear full-year sales or EPS guidance figure. Management said operating cash flows, borrowing capacity, and market access should be sufficient to fund operating needs and expected commitments.
- The Consumer Health separation, announced in November 2021, was targeted for completion 18–24 months after announcement. The company expects additional international tax costs related to the separation.
- The Global Supply Chain restructuring is expected to generate $0.6B–$0.8B in annual pretax savings, substantially by year-end 2022; total program charges are expected to reach $2.1B–$2.3B by December 2022. Approximately $2.0B had been recorded by quarter-end.
- Legal exposures include a $5B accrued opioid settlement, with initial payments made in July 2022 and approximately $4.2B remaining to be paid, and a separately reserved approximately $2B trust related to talc liabilities. The filing says it cannot estimate possible losses beyond amounts accrued for certain matters. A $302M California surgical-mesh penalty was recorded in Q2 after the state’s highest court declined review.
- Other notable commitments include approximately $0.9B associated with COVID-19 vaccine contract-manufacturing arrangements. The company said it was adjusting vaccine research and manufacturing capacity to meet customer commitments, with incremental costs expected for the year.
- Key risks include litigation and regulatory outcomes, patent challenges and generic or biosimilar competition (including REMICADE and upcoming STELARA U.S. patent expiry), inflation, foreign-exchange movements, supply constraints, pricing pressure, pandemic effects, and execution of the planned Consumer Health separation. The company reported no material Q2 financial impact from the Russia-Ukraine conflict.
Important facts for investors to verify
- Whether operational growth continues to offset currency headwinds, and the resulting reported revenue and margin trends across all three segments.
- The trajectory of earnings and cash flow after litigation, restructuring, separation, vaccine-network, and investment-mark-to-market effects.
- Timing and cash requirements for the opioid settlement, talc trust, and other legal matters, including potential outcomes beyond recorded accruals.
- Progress, costs, tax effects, and timing of the Consumer Health separation and delivery of restructuring savings.
- Pharmaceutical product growth and exposure to REMICADE biosimilar competition and STELARA patent expiry, alongside performance of growth products.