Johnson & Johnson — Q2 2015 Form 10-Q
Business context and period. Unaudited results cover the fiscal second quarter and six months ended June 28, 2015. Johnson & Johnson reports Consumer, Pharmaceutical, and Medical Devices segments. The comparable periods ended June 29, 2014.
Financial performance
| Metric | Q2 2015 | Six months 2015 | Comparable change |
|---|---|---|---|
| Sales | $17.787 billion | $35.161 billion | Down 8.8% and 6.5%, respectively |
| Gross margin | 69.9% | 69.8% | Up from 69.0% and 69.4% |
| Net earnings | $4.516 billion | $8.836 billion | Up 4.4% and down 2.4% |
| Diluted EPS | $1.61 | $3.13 | Up from $1.51; down from $3.15 |
| Operating cash flow | Not stated for quarter | $8.072 billion | Down from $9.452 billion |
Q2 earnings before tax were $5.741 billion, up 2.0%; six-month earnings before tax were $11.316 billion, up 2.4%. Q2 net margin was 25.4%, compared with 22.2%; six-month net margin was 25.1%, compared with 24.1%. The filing attributes much of the earnings improvement to asset-sale gains, litigation-related items, and favorable adjustments to prior rebate reserves, rather than stronger sales.
Cash and cash equivalents were $10.639 billion at June 28, 2015, and marketable securities were $23.315 billion. Current assets were $61.001 billion and current liabilities $24.512 billion. Total debt was approximately $19.3 billion, comprising $5.222 billion of current debt and $14.085 billion of long-term debt. Total assets were $132.036 billion and shareholders’ equity $71.131 billion.
Six-month investing cash use was $5.343 billion, including $1.308 billion of capital expenditures; financing cash use was $5.730 billion, including $4.025 billion of dividends and $3.094 billion of share repurchases. Cash declined by $3.884 billion, including an $883 million unfavorable currency effect. The $5.0 billion share-repurchase authorization was completed April 28, 2015. Quarterly dividends were $0.75 per share.
Material changes and business drivers
- Six-month worldwide sales included operational growth of 1.1%, more than offset by a 7.6% negative currency impact. In Q2, sales included an operational decline of 0.9% and a 7.9% negative currency impact.
- International sales fell 13.4% for six months; U.S. sales increased 1.5%. The Q2 international decline was 14.3%, while U.S. sales declined 2.4%.
- Six-month segment sales: Consumer $6.873 billion, down 5.9%; Pharmaceutical $15.672 billion, down 2.1%; Medical Devices $12.616 billion, down 11.8%. Foreign exchange weighed on each segment. Medical Devices also reflected the Ortho-Clinical Diagnostics divestiture.
- Pharmaceutical sales were pressured by competition for hepatitis C products OLYSIO/SOVRIAD and INCIVO. Six-month OLYSIO/SOVRIAD sales fell 58.0%. XARELTO and INVOKANA/INVOKAMET grew strongly; oncology growth included IMBRUVICA.
- Q2 gross margin improved, while selling, marketing and administrative expense rose to 30.3% of sales from 28.1%, and R&D rose to 12.0% from 10.3%, reflecting increased investment and pharmaceutical milestone-payment timing.
Outlook, commentary, risks and unusual items
- The filing provides no specific full-year sales or earnings guidance. Management said operating cash flow, credit facilities, and commercial-paper access were expected to provide sufficient resources for operating needs, and expected to continue regular quarterly dividends.
- Unusual earnings items included a $981 million pretax gain on the U.S. NUCYNTA rights divestiture; a $600 million Guidant settlement gain recorded in Q1; and favorable adjustments to prior reserve estimates, including Medicaid rebates. The company also recorded $136 million of Q1 litigation expense related to the South Carolina RISPERDAL matter. These items make reported earnings less indicative of underlying operating trends.
- The proposed Cordis sale to Cardinal Health, valued at approximately $2.0 billion, was pending customary conditions and regulatory approvals, with closing expected in the second half of 2015. The filing also notes remaining Ortho-Clinical Diagnostics closings in certain countries.
- Key risks include currency movements, competition and patent expiry, biosimilar entry for REMICADE, healthcare pricing and reimbursement pressure, product safety and manufacturing issues, and litigation or regulatory actions. The company said probable legal liabilities were accrued, but it could not estimate possible losses beyond amounts accrued; resolution of matters could materially affect results or cash flows in a period.
- Other exposures include approximately $2.6 billion of unrecognized tax-benefit liabilities and collection timing for certain Southern European government-related receivables. Management said Venezuelan subsidiaries represented less than 0.5% of consolidated assets, liabilities, revenues, and profits.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the NUCYNTA divestiture, Guidant settlement, and rebate-reserve adjustments.
- Whether foreign-exchange pressure and hepatitis C competition continue to offset operational growth, and how REMICADE biosimilar competition develops.
- The status, timing, and proceeds of the pending Cordis transaction and remaining Ortho-Clinical Diagnostics divestiture closings.
- Developments in significant product-liability, patent, and government matters, including potential costs beyond recorded accruals.
- Cash conversion, receivables collections, debt levels, and capital allocation after completion of the $5.0 billion repurchase program.