Johnson & Johnson — Q2 2012 Form 10-Q
Reporting period: Fiscal second quarter and six months ended July 1, 2012. Unaudited consolidated results; comparative periods ended July 3, 2011. Johnson & Johnson operates across Consumer, Pharmaceutical, and Medical Devices & Diagnostics.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales | $16.475B | $16.597B | $32.614B | $32.770B |
| Gross margin | 68.8% | 68.8% | 69.2% | 69.6% |
| Net earnings | $1.408B | $2.776B | $5.318B | $6.252B |
| Diluted EPS | $0.50 | $1.00 | $1.91 | $2.25 |
| Net margin | 8.5% | 16.7% | 16.3% | 19.1% |
- Q2 sales declined 0.7% year over year despite 3.5% operational growth; currency reduced sales by 4.2%. For the six months, sales fell 0.5%, with 2.2% operational growth offset by a 2.7% currency impact.
- Q2 pretax earnings fell 40.5% to $2.035B; six-month pretax earnings fell 10.7% to $7.080B. Reported results included substantial impairment, acquisition-related, and litigation costs.
- Six-month operating cash flow was $7.523B, versus $6.225B a year earlier. Capital spending was $1.100B. Investing used $13.405B, principally reflecting $17.659B of net cash paid for acquisitions; financing used $4.586B, including $3.241B of dividends.
- At July 1, cash and cash equivalents were $14.042B and marketable securities $2.873B, together $16.915B. Total debt was about $17.565B: $6.040B current and $11.525B long-term. Total assets were $115.750B and shareholders’ equity $60.434B.
- Quarterly cash dividend was $0.61 per share, up from $0.57 in the prior-year quarter. The company declared another $0.61 dividend payable September 11, 2012.
Material changes and unusual items
- J&J completed its Synthes acquisition on June 14 for consideration valued at $20.2B in cash and stock; net cash paid was $17.659B. Synthes contributed $193M in sales and $28M in net earnings after acquisition. Purchase-price allocation remained preliminary.
- The six-month balance sheet reflects the acquisition: intangible assets rose to $29.199B from $18.138B and goodwill to $21.412B from $16.138B. Synthes accounted for approximately $12.9B of acquired intangible assets and $5.4B of goodwill.
- Q2 and first-half results included approximately $0.9B of intangible-asset write-downs and $0.4B of in-process R&D impairment, primarily associated with Crucell vaccine projects. J&J also reported higher litigation expense and Synthes acquisition/integration costs; 2012 acquisition-related costs were $457M before tax. The filing attributes about $0.7B of higher Synthes-related costs to Q2 and $0.6B to the first half in its earnings discussion.
- Segment sales for the first half: Consumer $7.214B, down 3.5%; Pharmaceutical $12.424B, up 1.1%; Medical Devices & Diagnostics $12.976B, down 0.2%. Pharmaceutical growth included strength in immunology and oncology, while generic competition and product supply constraints affected several franchises. Synthes materially contributed to orthopaedics growth.
- The worldwide effective tax rate increased to 24.9% for the first half from 21.2%, reflecting Synthes-related costs and litigation accruals, as well as expiration of the R&D tax credit.
Outlook, risks, and contingencies
- Management said operating cash flows, existing credit facilities, and commercial-paper market access were expected to provide sufficient resources for operating needs. The filing provides no overall earnings or sales guidance.
- J&J estimated the 2012 U.S. branded-drug fee at $120M–$140M and the 2013 medical-device excise tax at $200M–$300M.
- McNeil consumer-health manufacturing remained subject to an FDA consent decree. Production at Lancaster and Las Piedras continued under additional review; Fort Washington remained shut. Management expected these impacts to continue throughout 2012 and most of 2013.
- Litigation and regulatory matters include product-liability claims involving DePuy hip systems, pelvic mesh, and several medicines; pharmaceutical marketing investigations; and patent disputes. The company stated that ultimate outcomes, net of accruals, were not expected to materially harm financial position, but resolution in a period could materially affect results or cash flows. Possible losses beyond recorded accruals were generally not estimable.
- Notable exposures include an approximately $1.2B Arkansas RISPERDAL-related verdict under appeal, other RISPERDAL matters and proposed settlements, and a $593M judgment in a CYPHER stent patent case that J&J appealed and for which it recorded no accrual. The Synthes ASR transaction also carried potential tax exposure if challenged by the IRS: tax on up to the total Synthes share purchase price, plus interest.
- Other risks identified include currency and economic volatility, pricing and health-care cost pressures, generic competition and patent challenges, product safety or manufacturing issues, supplier disruptions, and regulatory changes. Southern European customer receivables totaled about $2.0B at July 1; collection timing from some government-supported customers remained a monitoring concern.
Important facts for investors to verify
- How much of the earnings decline reflects recurring operations versus impairment charges, litigation, and Synthes transaction and integration costs.
- The final Synthes purchase-price allocation, integration costs, divestiture effects, and realization of expected synergies.
- Developments in major litigation and investigations, including RISPERDAL, DePuy hip, pelvic-mesh, and patent matters, and whether existing accruals prove adequate.
- Recovery in McNeil production and the effects of consent-decree restrictions, product availability, and remediation spending.
- Cash generation, debt and liquidity after the acquisition, and collection trends for Southern European receivables.
- Ongoing sales trends by segment, including currency effects, generic competition, and supply constraints.