Johnson & Johnson — Q2 2019 Form 10-Q
Business context and reporting period: Unaudited results for the fiscal quarter and six months ended June 30, 2019. Johnson & Johnson reports Consumer, Pharmaceutical and Medical Devices segments.
Key financial metrics
| Metric | Q2 2019 | Comparison |
|---|---|---|
| Sales | $20.562 billion | Down 1.3% from $20.830 billion |
| Net earnings | $5.607 billion | Up from $3.954 billion |
| Diluted EPS | $2.08 | Up from $1.45 |
| Gross margin | 66.2% | Down from 66.7% |
For the first six months, sales were $40.583 billion, down 0.6%; net earnings were $9.356 billion, up from $8.321 billion; and diluted EPS was $3.47, versus $3.05. Six-month gross margin was 66.6%, compared with 66.8%.
- Sales drivers: Q2 operational sales grew 1.6%, offset by a 2.9% adverse currency impact and a 2.1% negative net impact from acquisitions and divestitures. Six-month operational growth was 2.7%, with currency reducing sales 3.3% and acquisitions/divestitures reducing operational growth 1.9%.
- Segment sales, Q2: Consumer $3.544 billion, up 1.2%; Pharmaceutical $10.529 billion, up 1.7%; Medical Devices $6.489 billion, down 6.9%. Medical Devices’ decline reflected divestitures, currency and operational weakness.
- Operating cash flow: $9.491 billion for the six months, versus $9.685 billion. Investing used $3.205 billion and financing used $10.050 billion. Cash and cash equivalents ended the period at $14.376 billion, with $902 million of marketable securities.
- Debt and liquidity: Current and long-term debt totaled approximately $29.4 billion; the company reported net debt of $14.1 billion. Total current assets were $41.799 billion and current liabilities were $31.353 billion. Management said operating cash flows, borrowing capacity and market access should provide sufficient funds for operating needs.
- Capital returns: Six-month dividends were $4.918 billion and share repurchases were $4.692 billion. The company had repurchased $3.8 billion under its authorized $5.0 billion program by June 30.
Material changes and unusual items
- Reported Q2 earnings benefited substantially from the approximately $2.0 billion pretax gain on the divestiture of Advanced Sterilization Products (ASP). The sale generated $2.7 billion in cash proceeds; reported earnings growth should therefore be considered alongside underlying sales and expenses.
- Six-month results included a $0.9 billion in-process R&D impairment after the company abandoned the AL-8176 development program, and a $0.3 billion gain on its previously held investment in Ci:z Holdings.
- The April acquisition of Auris Health cost approximately $3.4 billion net of acquired cash. Additional contingent payments of up to $2.35 billion may be payable on milestones.
- Six-month R&D expense rose to $5.524 billion from $5.043 billion, including higher pipeline investment and an upfront argenx payment. Selling, marketing and administrative expense declined as a share of sales, while cost of products sold rose as a share of sales.
- The worldwide effective tax rate for the first six months was 18.4%, versus 20.4%. Management estimated Swiss tax reform could add $0.3–$0.5 billion of tax expense in Q3 2019; impacts from cantonal changes and transitional provisions remained uncertain.
Outlook, commentary and risks
- The filing provides no clear full-year sales or earnings guidance. The company expects its global supply-chain restructuring to produce $0.6–$0.8 billion in annual pretax savings, substantially by 2022, with total pretax charges of approximately $1.9–$2.3 billion over four to five years.
- Management identified pricing and reimbursement pressure, foreign exchange, generic and biosimilar competition, product development and regulatory uncertainty, supply-chain execution and litigation as risks. REMICADE, ZYTIGA, XARELTO and INVOKANA faced notable sales pressure; STELARA, DARZALEX and IMBRUVICA were among the growth drivers.
- Significant legal exposures include product-liability claims involving talc products, pelvic mesh, XARELTO, Risperdal and other products, as well as opioid-related litigation and government investigations. The company stated it could not estimate possible losses beyond amounts accrued for relevant matters; ultimate outcomes could materially affect results or cash flows in a period.
- Controls and procedures were assessed as effective, and the filing reported no material change in internal control over financial reporting during the period.
Most important facts for investors to verify
- How much of reported earnings growth reflects the ASP divestiture gain and other non-recurring items, versus ongoing operations.
- Whether operational sales trends and segment profitability improve, particularly in Medical Devices and products facing generic or biosimilar competition.
- The eventual cost and timing of talc, opioid and other legal matters; disclosed plaintiff counts and accruals do not establish the ultimate exposure.
- Realization of the announced restructuring savings relative to expected charges, and the final tax impact of Swiss reform.
- Future cash generation and capital allocation after acquisition spending, dividends and repurchases, including potential Auris milestone payments.