Johnson & Johnson — Q2 2020 Form 10-Q
Business context and reporting period. Johnson & Johnson reported its unaudited fiscal second quarter ended June 28, 2020, and the six months then ended. Its businesses span Consumer Health, Pharmaceuticals and Medical Devices. Results were materially affected by COVID-19, particularly the postponement of medical procedures and related declines in Medical Devices sales.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $18.336 billion | $20.562 billion | $39.027 billion | $40.583 billion |
| Gross profit / margin | $11.757 billion / 64.1% | $13.622 billion / 66.2% | $25.386 billion / 65.0% | $27.028 billion / 66.6% |
| Net earnings | $3.626 billion | $5.607 billion | $9.422 billion | $9.356 billion |
| Diluted EPS | $1.36 | $2.08 | $3.53 | $3.47 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $6.810 billion | $9.491 billion |
Q2 sales declined 10.8% year over year, including a 9.0% operational decline and 1.8% adverse currency impact. Q2 net earnings fell 35.3%; diluted EPS fell 34.6%. For the first half, sales declined 3.8% (2.2% operational decline and 1.6% adverse currency impact), while net earnings rose 0.7% and diluted EPS rose 1.7%. First-half operating cash flow declined 28.3%.
Q2 earnings before tax were $3.940 billion, or 21.5% of sales, versus $7.041 billion, or 34.2%, a year earlier. Q2 net margin was 19.8%, compared with 27.3%. The filing attributes higher cost of products sold as a share of sales partly to COVID-related Medical Devices idle capacity and additional inventory reserves. Q2 R&D was $2.707 billion (14.8% of sales), versus $2.666 billion (13.0%).
Segments and material changes
- Consumer Health: Q2 sales fell 7.0% to $3.296 billion; first-half sales increased 0.9% to $6.921 billion. OTC and Oral Care benefited from COVID-related stocking demand, while Skin Health/Beauty, Baby Care and Women’s Health were pressured.
- Pharmaceuticals: Q2 sales rose 2.1% to $10.752 billion; first-half sales rose 5.4% to $21.886 billion. Growth in products including STELARA, TREMFYA, DARZALEX, IMBRUVICA and pulmonary hypertension medicines was partly offset by REMICADE biosimilar competition and declines in certain mature products.
- Medical Devices: Q2 sales fell 33.9% to $4.288 billion; first-half sales fell 21.1% to $10.220 billion. Reduced procedures amid COVID-19 drove broad declines across surgery, orthopaedics and vision. Management reported improvement during the quarter as markets reopened, including a return to growth in China, but said the full-year impact remained uncertain.
For the first half, segment earnings before tax were $802 million for Consumer Health, $8.348 billion for Pharmaceuticals and $1.671 billion for Medical Devices. Q2 Medical Devices recorded a $354 million segment loss before tax. Q2 comparisons were also affected by the prior-year $2.0 billion gain on the Advanced Sterilization Products divestiture.
Cash, debt and liquidity
- At June 28, 2020, cash and cash equivalents were $11.174 billion and current marketable securities were $7.961 billion, totaling $19.135 billion. Cash alone was down from $17.305 billion at year-end 2019; marketable securities had increased from $1.982 billion.
- Total debt was approximately $30.4 billion, including $5.332 billion of current debt and $25.062 billion of long-term debt. The company reported net debt of $11.3 billion, versus $14.1 billion a year earlier. It had $2.7 billion of commercial paper outstanding at quarter-end.
- First-half investing cash use was $8.103 billion, including $6.134 billion net purchases of investments and $949 million net acquisition spending. Financing cash use was $4.672 billion, including $5.164 billion of dividends and $2.417 billion of share repurchases.
- Management said operating cash flow, capital-market access, committed credit facilities and commercial-paper access should provide sufficient resources for operating needs, including potential opioid settlement payments. A $10 billion credit facility was due to expire September 10, 2020.
Outlook, commentary, risks and unusual items
- The filing provides no clear updated full-year sales or earnings guidance. Management said COVID-19’s future effects depend on its duration, economic conditions, recovery pace and government and business responses; future-period financial effects could be material.
- The global supply-chain restructuring is expected to produce $0.6–$0.8 billion in annual pretax savings, substantially by 2022, with total pretax charges of $1.9–$2.3 billion over four to five years. Approximately $1.1 billion of charges had been recorded through June 28, 2020.
- A $983 million first-quarter reversal of Auris Health contingent consideration, related to revised milestone timing, benefited first-half results; remaining estimated contingent consideration was approximately $169 million. Q2 also included $0.5 billion of unrealized securities gains.
- The first-half effective tax rate was 9.8%, versus 18.4% in 2019, reflecting Swiss tax-reform benefits, reversals of certain tax reserves and other factors. The company warned that proposed IRS rules could limit tax deductions for opioid settlement payments and materially affect results when finalized.
- Legal exposures include product-liability matters, talc-related claims and opioid litigation. A proposed $4 billion opioid settlement agreement in principle remained subject to finalization and conditions; the company said it could not predict whether or when it would be finalized. The filing states that potential losses beyond accrued amounts generally could not be reasonably estimated. Trials and other proceedings had been delayed by COVID-19.
- On July 20, 2020, the board declared a regular quarterly dividend of $1.01 per share, payable September 8, 2020. The filing says the company expected to continue regular quarterly dividends.
Most important facts for investors to verify
- Whether Medical Devices sales recover as procedures resume, and how renewed COVID-19 disruptions affect demand, manufacturing and inventory.
- The status, timing, payment structure and tax treatment of the proposed opioid settlement, as well as developments in talc and other significant litigation.
- Whether Pharmaceutical growth offsets mature-product declines, biosimilar competition and patent challenges.
- Progress, total charges and realized savings from the supply-chain restructuring.
- Changes in operating cash generation, commercial-paper borrowing, debt and liquidity after the quarter-end reporting date.