Business context and reporting period
Johnson & Johnson’s unaudited Form 10-Q covers the fiscal quarter and six months ended June 30, 2013, compared with periods ended July 1, 2012. The company reports Consumer, Pharmaceutical, and Medical Devices & Diagnostics segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | $17.877 billion | $16.475 billion | $35.382 billion | $32.614 billion |
| Gross margin | 69.3% | 68.8% | 68.8% | 69.2% |
| Net earnings | $3.833 billion | $1.408 billion | $7.330 billion | $5.318 billion |
| Diluted EPS | $1.33 | $0.50 | $2.55 | $1.91 |
| Operating cash flow | Not separately stated | Not separately stated | $7.328 billion | $7.040 billion |
- Q2 sales rose 8.5% reported and 10.0% operationally; currency reduced growth by 1.5 percentage points. Six-month sales also rose 8.5% reported, with 9.9% operational growth and a 1.4-point currency headwind.
- Q2 earnings before tax were $4.793 billion versus $2.035 billion; six-month earnings before tax were $9.054 billion versus $7.080 billion. Six-month effective tax rates were 19.0% and 24.9%, respectively.
- At June 30, cash and cash equivalents were $17.307 billion and marketable securities were $7.822 billion. Total debt was approximately $15.0 billion: $5.339 billion current and $9.643 billion long-term. Total assets were $124.325 billion; shareholders’ equity was $69.665 billion.
- Six-month dividends paid were $3.562 billion. The company declared a $0.66-per-share dividend payable in September 2013 and said it expected to continue regular quarterly dividends.
Material changes versus the prior comparable period
- Q2 segment sales: Consumer $3.658 billion, up 1.1%; Pharmaceutical $7.025 billion, up 11.7%; Medical Devices & Diagnostics $7.194 billion, up 9.6%. For the six months, the segments grew 1.6%, 11.0%, and 9.9%, respectively.
- Synthes, acquired in June 2012, contributed 4.4 percentage points to Q2 operational sales growth company-wide and 5.1 points for the six months, net of the related trauma divestiture. It contributed 11.5 points to Q2 Medical Devices & Diagnostics operational growth.
- Reported earnings growth was amplified by comparison with 2012, which included substantial intangible-asset and in-process R&D write-downs, higher litigation expense, and Synthes-related costs. 2013 results benefited from a $0.4 billion net gain on equity investment transactions, primarily the sale of Elan shares, and a positive adjustment to managed Medicaid rebate estimates. The latter contributed 0.6 percentage points to six-month company-wide operational sales growth.
- Medical Devices & Diagnostics pre-tax profit fell 23.2% for the six months despite higher sales, reflecting litigation expense, Synthes inventory step-up and incremental amortization, and DePuy ASR hip-program costs. Pharmaceutical growth was strong in immunology and oncology; generic competition weighed on neuroscience and certain other products. Diabetes Care sales declined amid pricing and competitive pressures.
Outlook, commentary, risks and unusual items
- No consolidated earnings or sales guidance was provided in the supplied filing text. Management said operating cash flows, existing credit facilities, and access to commercial-paper markets were expected to provide sufficient resources for operating needs.
- The company estimated the full-year 2013 medical-device excise tax at $200 million to $300 million. It announced an agreement to acquire Aragon Pharmaceuticals for $650 million upfront plus up to $350 million in contingent milestone payments; closing was expected in Q3 2013.
- Final settlement of Synthes-related accelerated share repurchase agreements was expected in Q3 2013. Based on the June 30 theoretical settlement, either 32.5 million additional shares could be issued or approximately $2.8 billion cash used. The company also disclosed potential U.S. tax exposure if the IRS challenges the transaction structure.
- Litigation and regulatory matters include product-liability claims involving ASR and PINNACLE hip systems, pelvic mesh, and several drugs; government investigations; and patent disputes. The company increased accruals for the DePuy ASR hip recall program in Q2. It says the ultimate resolution of disclosed proceedings is not expected to materially harm its financial position, but one or more matters could materially affect results or cash flows in a reporting period. For disclosed matters with probable or reasonably possible losses, it could not estimate potential losses beyond amounts accrued.
- Other exposures include approximately $2.9 billion of unrecognized tax-benefit liabilities, uncertain tax audit outcomes, currency and economic volatility, pricing and health-care cost pressures, generic competition, product safety or manufacturing issues, and the continuing McNeil facility remediation requirements under a consent decree.
- The filing revised presentation of the 2012 cash-flow statement for the non-cash Synthes share issuance. The company said the prior misclassification was not material; earnings statements and the balance sheet were unchanged.
Most important facts for investors to verify
- How much reported sales and earnings growth is sustainable after separating Synthes contribution, currency effects, Medicaid rebate adjustments, investment-sale gains, and prior-year write-downs and litigation costs.
- Developments and potential cash costs in major product-liability, government, and patent matters, especially ASR hips, pelvic mesh, and RISPERDAL-related proceedings.
- Settlement form and final cost of the Synthes accelerated share repurchase agreements, including the potential tax challenge.
- Progress in Medical Devices & Diagnostics profitability and in challenged franchises, including Diabetes Care, Diagnostics, and products facing generic competition.
- Collections from Southern European health-care customers and changes in receivables, liquidity, debt, and cash generation.