Johnson & Johnson — Q2 2021 Form 10-Q
Business context and period. The filing covers the fiscal quarter ended July 4, 2021, and the first six fiscal months of 2021. Johnson & Johnson reports Consumer Health, Pharmaceutical and Medical Devices. Comparisons are with the corresponding 2020 periods; prior-year results were affected by COVID-19 disruptions, particularly in medical procedures.
Key financial metrics
| Metric | Fiscal Q2 2021 | First six months 2021 |
|---|---|---|
| Sales | $23.312 billion, up 27.1% | $45.633 billion, up 16.9% |
| Gross profit / gross margin | $15.725 billion / 67.5% (64.1% prior year) | $30.983 billion / 67.9% (65.0% prior year) |
| Net earnings | $6.278 billion, versus $3.626 billion | $12.475 billion, versus $9.422 billion |
| Diluted EPS | $2.35, versus $1.36 | $4.67, versus $3.53 |
| Operating cash flow | The filing does not provide a quarterly cash-flow figure | $9.388 billion, versus $6.810 billion |
Q2 pretax earnings were $6.662 billion (28.6% of sales), compared with $3.940 billion (21.5%). Six-month pretax earnings were $14.091 billion (30.9% of sales), compared with $10.449 billion (26.8%). The reported earnings increase reflects, among other factors, stronger sales and medical-device recovery, lower prior-year litigation expense, and favorable other income; it should not be viewed as solely underlying operating growth.
For the first six months, sales by segment were Consumer Health $7.278 billion (+5.2%), Pharmaceutical $24.798 billion (+13.3%) and Medical Devices $13.557 billion (+32.7%). Pharmaceutical growth included strong STELARA, TREMFYA and oncology product sales, while Medical Devices benefited substantially from recovery in procedure volumes. Q2 COVID-19 vaccine sales were $164 million; six-month sales were $264 million.
Liquidity, debt and capital allocation
- At July 4, cash and cash equivalents were $14.332 billion and marketable securities were $10.974 billion, totaling $25.306 billion.
- Total debt was approximately $33.5 billion; management reported net debt of $8.2 billion, versus $11.3 billion a year earlier. Long-term debt on the balance sheet was $30.310 billion and current loans and notes payable were $3.173 billion.
- Six-month financing cash use was $8.404 billion, including $5.450 billion of dividends and $2.069 billion of share repurchases. The board declared a regular $1.06-per-share dividend in July, payable September 7, 2021.
- Management said operating cash flow, external financing access, committed credit facilities and commercial-paper capacity were expected to provide sufficient resources for operating needs, including vaccine commitments and opioid settlement obligations.
Material changes and unusual items
- Worldwide Q2 sales rose 27.1%, including 23.0% operational growth and a 4.1% favorable currency effect. Six-month sales rose 16.9%, including 13.7% operational growth and a 3.2% currency effect.
- Medical Devices Q2 sales increased 62.7%, driven chiefly by procedure-volume recovery from the prior-year pandemic disruption. Pharmaceutical Q2 sales grew 17.2%; Consumer Health grew 13.3%.
- A Q2 international-subsidiary reorganization generated a $0.6 billion net deferred-tax benefit, reducing the year-to-date effective tax rate by 4.4 percentage points. The six-month effective tax rate was 11.5%, versus 9.8%.
- Six-month Pharmaceutical results included approximately $0.6 billion of gains from divesting two non-U.S. brands. The prior-year comparison included a $983 million reversal of Auris Health contingent consideration.
- Johnson & Johnson paid approximately $2.5 billion, including interest, on the Ingham talc verdict during Q2. It also paid about $1.5 billion to the U.S. Treasury, including a tax installment and estimated tax payments.
- The ongoing global supply-chain restructuring generated $212 million of charges in the first six months; cumulative charges since announcement were approximately $1.5 billion. The company expects $0.6–$0.8 billion of annual pretax savings, substantially by 2022, and total charges of $1.9–$2.3 billion.
Outlook, commentary and risks
- The filing does not provide a clear full-year sales or earnings guidance figure. Management described liquidity as sufficient and said it expects regular quarterly cash dividends to continue.
- Management cited continued COVID-19 uncertainty, global supply-chain and manufacturing risks, healthcare pricing pressure, currency and inflation exposure, and potential changes in regulation and tax law. It said COVID-19 had not materially affected the quarter’s consolidated financial statements, but future periods could be affected.
- After quarter-end, the company voluntarily recalled all lots of five NEUTROGENA and AVEENO aerosol sunscreen product lines following detection of low levels of benzene in some samples. It said the recall was not expected to materially affect the remainder of the year.
- Significant litigation includes talc product claims, opioid matters, medical-device product-liability cases and patent disputes. The company said it could not estimate possible losses beyond recorded accruals for certain matters; adverse developments could materially affect results or cash flows in a period.
- The company had accrued up to $5 billion for an opioid settlement framework. In July 2021, it said finalized terms contemplated payment of up to 20% within 18 months, subject to state and local participation, and reserved a right to opt out if participation proved insufficient.
- Product and patent risks include continuing biosimilar competition for REMICADE and potential generic challenges to key products. The company also reported ongoing COVID-19 vaccine manufacturing commitments of approximately $1.3 billion, paid and contractually obligated amounts reflected across balance-sheet accounts.
Important facts for investors to verify
- How much reported earnings growth is repeatable after the tax benefit, divestiture gains, prior-year litigation costs and COVID-19 comparison effects.
- Participation, timing, cash payments and final scope of the opioid settlement; and developments in talc litigation following the $2.5 billion Ingham payment.
- Whether strong Medical Devices growth persists as procedure volumes normalize, and the continued performance of major Pharmaceutical products amid competition and patent challenges.
- The financial and operational effects of the sunscreen recall, vaccine production commitments and any related supply or regulatory developments.
- Progress against restructuring savings and charges, and changes in net debt, working capital and operating cash flow.