Johnson & Johnson — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended June 29, 2014; unaudited. Comparisons are with the corresponding 2013 periods. Johnson & Johnson operates across Consumer, Pharmaceutical, and Medical Devices & Diagnostics businesses.
Financial results and position
| Metric | Second quarter 2014 | Six months 2014 |
|---|---|---|
| Sales | $19.495 billion, up 9.1% | $37.610 billion, up 6.3% |
| Gross profit margin | 69.0%, versus 69.3% | 69.4%, versus 68.8% |
| Earnings before tax | $5.626 billion, up 17.4% | $11.050 billion, up 22.0% |
| Net earnings | $4.326 billion, versus $3.833 billion | $9.053 billion, versus $7.330 billion |
| Diluted EPS | $1.51, versus $1.33 | $3.15, versus $2.55 |
| Operating cash flow | Not presented separately for the quarter | $9.452 billion, versus $7.328 billion |
- Second-quarter net margin was 22.2%, versus 21.4%; six-month net margin was 24.1%, versus 20.7%. Six-month effective tax rate was 18.1%, down from 19.0%.
- At June 29, cash and cash equivalents were $14.236 billion; marketable securities were $17.388 billion. Combined cash, cash equivalents, and marketable securities totaled $31.624 billion.
- Current assets were $60.119 billion and current liabilities $24.359 billion. Current loans and notes payable were $3.819 billion; long-term debt was $13.303 billion, for total debt of approximately $17.122 billion.
- Six-month investing cash outflow was $10.118 billion, primarily reflecting $9.130 billion of net purchases of investments and $1.467 billion of capital expenditures. Financing cash outflow was $5.925 billion, including $3.845 billion of dividends and $1.966 billion of share repurchases.
Material changes and operating trends
- Pharmaceutical sales were the main growth driver: up 21.1% in the quarter and 16.1% year to date. OLYSIO/SOVRIAD, STELARA, SIMPONI, ZYTIGA, and XARELTO contributed to growth. Neuroscience sales declined, including lower CONCERTA sales amid generic competition.
- Consumer sales rose 2.4% in the quarter but declined 0.4% for six months. Medical Devices & Diagnostics sales grew 0.7% in the quarter and 0.3% for six months, with softness in Diabetes Care and Diagnostics.
- Management attributed earnings growth to sales volume, favorable Pharmaceutical product mix, cost reduction efforts, and higher prior-year litigation and product-related charges. Six-month cost of products sold fell to 30.6% of sales from 31.2%; selling, marketing, and administrative costs fell to 28.3% from 30.0% of sales.
- Growth comparisons include significant unusual items. The 2014 period included a $332 million gain on the K-Y brand divestiture. Prior-year results included a $420 million net gain on equity investment transactions, other asset-sale gains, and higher litigation and product-related costs. The six-month 2014 tax rate also benefited from a $398 million tax benefit associated with the Conor Medsystems divestiture and tax adjustments.
Outlook, risks, and contingencies
- The filing provides no specific full-year sales or earnings guidance. Management said operating cash flows, credit facilities, and commercial paper access were expected to provide sufficient resources for operating needs.
- On June 30, 2014, after quarter-end, the company completed the sale of Ortho-Clinical Diagnostics for approximately $4.0 billion and expected an after-tax gain of approximately $1.0 billion in the third quarter.
- On July 21, the board authorized up to $5.0 billion of share repurchases, to be funded from available cash; the program has no time limit and may be suspended or discontinued. A quarterly dividend of $0.70 per share was declared for payment in September.
- Key risks include product-liability and government proceedings, patent challenges and potential generic or biosimilar competition, pricing and reimbursement pressure, foreign exchange and economic conditions, and product safety, regulatory, or manufacturing issues. The company said it could not estimate possible losses beyond amounts accrued for certain litigation; outcomes in a period could materially affect results or cash flows, though management did not expect the matters, net of accruals, to materially affect financial position.
- Management identified potential competition for Hepatitis C products and future REMICADE biosimilar competition, including European patent expirations beginning in February 2015. Southern European receivables from certain government-related customers were approximately $0.8 billion; the company reported ongoing collections and increased allowances that had been immaterial to date.
Important facts for investors to verify
- How much of Pharmaceutical growth is sustainable after the strong launch contribution from OLYSIO/SOVRIAD, and how competition affects product sales.
- The timing, proceeds, and reported gain from the Ortho-Clinical Diagnostics sale, and the continuing effect of the divestiture on segment comparisons.
- Whether litigation accruals adequately reflect developments in ASR hip, pelvic mesh, PINNACLE, RISPERDAL, and other significant matters; several potential losses remain difficult to estimate.
- Cash deployment under the new $5.0 billion repurchase authorization, alongside dividends, investment purchases, and debt management.
- Effects of foreign exchange, pricing pressure, product patent expirations, and collections from Southern European customers on future operating results and cash flow.