Johnson & Johnson — Q2 2023 Form 10-Q Summary
Business context and reporting period
Quarter ended July 2, 2023. Johnson & Johnson reports Consumer Health, Pharmaceutical and MedTech segments. Kenvue completed its IPO on May 8; J&J retained about 89.6% ownership and continued consolidating Kenvue’s results. On July 24, after quarter-end, J&J announced an intended exchange offer to split off at least 80.1% of Kenvue.
Financial performance
| Metric | Q2 2023 | Q2 2022 |
|---|---|---|
| Sales | $25.53 billion | $24.02 billion |
| Gross margin | 67.8% | 67.0% |
| Net earnings | $5.14 billion | $4.81 billion |
| Diluted EPS | $1.96 | $1.80 |
| Earnings before tax | $6.76 billion | $5.84 billion |
- Q2 sales rose 6.3%: operational growth of 7.5% was partly offset by a 1.2% currency headwind. Acquisitions and divestitures contributed 1.3% to operational growth.
- Q2 segment sales: Consumer Health $4.01 billion, up 5.4%; Pharmaceutical $13.73 billion, up 3.1%; MedTech $7.79 billion, up 12.9%. MedTech growth included a 4.8% contribution from Abiomed.
- For the six months, sales were $50.28 billion, up 6.0%, but net earnings fell to $5.08 billion from $9.96 billion and diluted EPS to $1.93 from $3.73. The decline mainly reflects a roughly $7 billion charge related primarily to the talc settlement proposal.
- Six-month operating cash flow was $7.44 billion versus $9.56 billion. Capital expenditures were $1.99 billion. Cash and cash equivalents were $21.18 billion; marketable securities were $7.32 billion.
- At July 2, cash, cash equivalents and marketable securities totaled $28.5 billion against $45.6 billion of notes payable and long-term debt, a reported net debt position of $17.1 billion. Net debt had been approximately neutral a year earlier.
- Current liabilities were $54.17 billion and current assets $60.57 billion. Long-term debt was $33.90 billion, compared with $26.89 billion at January 1, 2023.
Material changes and management commentary
- Sales growth was strongest in MedTech, including Abiomed, and in U.S. sales. Pharmaceutical growth was uneven: DARZALEX, ERLEADA and TREMFYA grew, while REMICADE, IMBRUVICA and ZYTIGA declined. COVID-19 vaccine sales dropped 47.7% in Q2.
- Q2 gross margin improved year over year, with favorable mix and lower one-time COVID-19 vaccine manufacturing exit costs partly offset by commodity inflation and Abiomed amortization. For the six months, cost of products sold as a share of sales increased.
- Interest income and expense both rose as rates increased; six-month interest expense was $561 million versus $48 million, reflecting higher debt and rates. The effective tax rate for the six months was 15.8%, versus 14.9%.
- Management said operating cash flow, borrowing capacity and access to capital markets are expected to provide sufficient funding for operating needs and anticipated legal payments. The filing gives no quantified full-year sales or earnings guidance.
- The Board declared a regular quarterly dividend of $1.19 per share in July and said J&J expects to continue regular quarterly dividends. The previously authorized $5 billion share repurchase program was completed in Q1 2023.
Outlook, risks and contingencies
- Talc litigation: J&J recorded an estimated probable loss reserve with a present value of approximately $9 billion, payable over 25 years, to resolve current and future claims. The LTL 2 bankruptcy was dismissed July 28, 2023, after the reporting date; J&J stated it intended to appeal. The filing says possible losses beyond the accrued amount cannot be estimated. A July trial resulted in an $18.8 million compensatory verdict against J&J; the company said it would appeal.
- Other legal matters: The company continues to face opioid, product-liability, intellectual-property and other proceedings. It expects about $2.2 billion of remaining payments under the opioid settlement schedule through Q2 2024. Management cautions that resolutions or increased accruals could materially affect results or cash flows in a particular period.
- Product and market risks: Patent expiry and generic or biosimilar competition pose risks to key medicines. STELARA’s latest U.S. composition-of-matter patent expires in September 2023; J&J said it did not anticipate biosimilar launches before January 1, 2025, under settlements and other agreements.
- Separation and tax: The Consumer Health separation remains subject to completion of the planned exchange offer. J&J recorded about $0.6 billion of incremental international tax costs related to the reorganization and expected a roughly $0.5 billion tax benefit in Q3 2023 following new IRS guidance.
- Other cited risks include pricing and reimbursement pressure, regulatory and product-safety matters, supply constraints, inflation, foreign exchange, cybersecurity, and geopolitical conditions.
Important facts for investors to verify
- How the talc reserve and July 28 LTL 2 dismissal and appeal affect future liabilities, cash payments and litigation timing.
- Completion terms, timing and accounting effects of the proposed Kenvue exchange offer, and the resulting treatment of Kenvue as discontinued operations.
- Whether operating cash flow and debt levels remain sufficient to fund legal obligations, investment, dividends and other needs.
- Trends in pharmaceutical competition and growth, especially STELARA, REMICADE, IMBRUVICA and ZYTIGA, and the durability of MedTech growth excluding Abiomed.
- Realization and timing of the anticipated Q3 tax benefit and any further separation-related costs.