Johnson & Johnson — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended June 28, 2009; unaudited. Comparisons are with the corresponding 2008 periods unless stated otherwise. Amounts are in U.S. dollars.
Business context and results
Johnson & Johnson reports Consumer, Pharmaceutical, and Medical Devices & Diagnostics segments. Second-quarter worldwide sales were $15.239 billion; first-half sales were $30.265 billion. Reported sales fell in both periods, with currency translation accounting for most of the decline. Management reported operational sales declines of 1.4% for the quarter and 1.3% for the first half.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Sales | $15.239bn | $16.450bn | $30.265bn | $32.644bn |
| Net earnings | $3.208bn | $3.327bn | $6.715bn | $6.925bn |
| Diluted EPS | $1.15 | $1.17 | $2.41 | $2.43 |
| Gross margin | 70.8% | 71.1% | 71.3% | 71.3% |
| Net margin | 21.1% | 20.2% | 22.2% | 21.2% |
| Operating cash flow | Not separately stated | Not separately stated | $6.190bn | $6.078bn |
Financial position and cash flows
- At June 28, cash and cash equivalents were $11.686 billion and marketable securities were $3.048 billion, totaling approximately $14.7 billion. Current assets were $35.494 billion versus current liabilities of $19.886 billion.
- Current loans and notes payable plus long-term debt totaled $13.614 billion, compared with $11.852 billion at December 28, 2008. Management cited debt of $13.6 billion at quarter-end versus $13.9 billion a year earlier.
- First-half operating cash flow was $6.190 billion. Investing activities used $3.379 billion, including $1.291 billion for acquisitions and $1.002 billion for capital expenditures. Financing activities used $1.928 billion, including $2.623 billion in dividends and $1.123 billion in share repurchases.
- Quarterly dividend per share rose to $0.490 from $0.460; first-half dividends per share were $0.950 versus $0.875.
Material changes and management commentary
- Quarter sales declined 7.4%; first-half sales declined 7.3%. Currency reduced reported sales by 6.0% in each period. International operations showed underlying growth, but currency and weaker U.S. sales weighed on reported results.
- Pharmaceutical sales fell 13.3% in Q2 and 11.7% in the first half. Major pressures included generic competition and loss of exclusivity: Q2 sales of TOPAMAX fell 73.1% and RISPERDAL fell 66.4%. REMICADE grew 24.4% in Q2.
- Medical Devices & Diagnostics sales fell 3.1% in Q2, while segment operating profit rose 22.7%, supported by favorable mix, efficiencies, cost containment, and a $270 million Medtronic settlement receipt. Cordis sales were affected by competition in drug-eluting stents.
- Consumer sales fell 4.5% in Q2, though operational sales grew 3.1%. Management cited growth in skin care and wound care, offset by currency and declines in several product lines.
- Q2 cost of products sold increased to 29.2% of sales from 28.9%, principally due to product mix. Selling, marketing and administrative expense fell to 31.5% of sales from 33.5%, and research expense declined to 10.7% from 11.5%.
- First-half effective tax rate was 24.6%, up from 24.1%. The company reported approximately $2.2 billion of unrecognized tax-benefit liabilities and did not expect a significant change over the next 12 months.
Outlook, risks and unusual items
- No specific full-year earnings or sales guidance is stated in the provided filing text. Management expected operating cash flows, existing credit facilities and commercial-paper access to provide sufficient resources for 2009 operating needs.
- Management highlighted economic weakness, consumer spending changes, healthcare cost containment, pricing pressure, currency and interest-rate movements, competition, regulatory and product-safety issues, and patent challenges as risks.
- Legal matters include extensive product-liability, patent, generic-drug, marketing and government-investigation proceedings. The company said ultimate outcomes cannot be estimated with certainty; it did not expect the matters, net of accrued liabilities, to materially adversely affect financial condition, but acknowledged one or more resolutions could significantly affect a period’s results or cash flows.
- A J&J subsidiary, Centocor, received a jury award of approximately $1.7 billion against Abbott in a Humira patent case; further proceedings and likely appeals remained. The filing does not establish this award as a recognized J&J asset.
- Subsequent events: J&J announced an Alzheimer’s immunotherapy transaction with Elan on July 2, including a proposed $1.0 billion investment in Elan, and completed its approximately $1.0 billion Cougar Biotechnology acquisition on July 9.
- J&J acquired Mentor for approximately $1.1 billion in the first quarter. It also continued a restructuring program announced in 2007; 4,100 of approximately 4,400 planned positions had been eliminated, with substantially all remaining severance payments expected during the rest of 2009.
Important facts for investors to verify
- How much of reported sales weakness reflects currency versus continuing operational trends, particularly in pharmaceuticals and international markets.
- The durability of cash generation and the effect of acquisitions, dividends, repurchases and increased debt on liquidity and capital allocation.
- Generic-entry and patent-litigation developments affecting TOPAMAX, RISPERDAL, CONCERTA and other products, as well as significant product-liability and government-investigation outcomes.
- Terms, timing, funding and integration effects of the Elan transaction and Cougar acquisition, and the accounting and commercial impact of the Mentor acquisition.