Johnson & Johnson — Q2 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the fiscal quarter and six months ended July 2, 2017, compared with periods ended July 3, 2016. Johnson & Johnson operates in Consumer, Pharmaceutical, and Medical Devices. Results include Actelion only from its June 16, 2017 acquisition date.
Financial performance and position
- Q2 revenue: $18.84 billion, up 1.9% year over year; operational growth was 2.9%, offset by a 1.0% negative currency effect. Six-month revenue: $36.61 billion, up 1.8%.
- Q2 earnings: Net earnings were $3.83 billion, down 4.3%; diluted EPS was $1.40 versus $1.43. Net margin was 20.3%, down from 21.6%. Gross margin declined to 69.1% from 71.1%.
- Six-month earnings: Net earnings were $8.25 billion, down 2.4%; diluted EPS was $3.00 versus $3.02. Pretax margin was 28.2%, versus 28.4%.
- Segment sales, six months: Consumer $6.71 billion (+1.4%); Pharmaceutical $16.88 billion (+0.3%); Medical Devices $13.02 billion (+4.0%). Pharmaceutical Q2 sales declined 0.2%; Medical Devices rose 4.9% and Consumer rose 1.7%.
- Cash flow: Six-month operating cash flow was $8.69 billion, versus $6.75 billion. Investing used $13.18 billion, chiefly reflecting $34.07 billion of acquisitions, partly offset by net investment-security sales. Financing used $2.07 billion, including $5.23 billion of share repurchases and $4.43 billion of dividends.
- Liquidity and debt: July 2 cash and cash equivalents were $12.60 billion, with $0.26 billion of current marketable securities. Total current and long-term debt was approximately $34.57 billion, versus $27.13 billion at January 1, 2017. Management said operating cash flow, borrowing capacity, and capital-market access should provide sufficient resources for operating needs.
- Dividends: Q2 dividends were $0.84 per share, compared with $0.80 a year earlier. A further $0.84 quarterly dividend was declared in July.
Material changes versus the prior comparable period
- Actelion was acquired for approximately $28.8 billion net of cash acquired; the company also acquired Abbott Medical Optics for $4.4 billion net in Q1. Acquisitions substantially increased intangible assets and goodwill. Actelion contributed $91 million in sales and a $116 million net loss during the reported post-acquisition period.
- Q2 and six-month profitability was pressured by higher acquisition-related amortization and costs, transactional currency impacts, product mix, and a $0.2 billion impairment primarily related to the insulin-pump business. Lower litigation and restructuring costs and a $0.2 billion gain from monetizing future royalty receivables partly offset these effects.
- Six-month worldwide sales growth included a positive 1.7% operational contribution from net acquisitions and divestitures; currency reduced reported growth by 0.7%. Pharmaceutical performance was mixed: oncology grew strongly, while REMICADE, neuroscience, and cardiovascular/metabolism/other sales declined.
- Medical Devices restructuring charges totaled $289 million in the first half; cumulative charges since announcement were $1.6 billion. The company completed its previously authorized $10 billion share-repurchase program in June.
Outlook, risks, contingencies, and unusual items
- Restructuring outlook: Management estimates total pretax restructuring and related charges of $2.0–$2.4 billion and annualized pretax savings of $800 million–$1.0 billion, with most savings expected by the end of 2018. Approximately $200 million of additional savings was expected in 2017. The plan targets elimination of 4%–6% of Medical Devices’ global workforce over 18 months.
- Acquisition uncertainty: Actelion’s purchase-price allocation remains preliminary. Johnson & Johnson recorded a $0.7 billion current liability for shares not tendered and expected to pay it in the second half of 2017. The filing does not provide clear full-year earnings or revenue guidance.
- Commercial risks: Management highlighted pricing and reimbursement pressure, competition, patent challenges, biosimilar and generic launches, foreign-exchange movements, and uncertainty around product development, approvals, safety, and supply. REMICADE biosimilar competition was already reducing sales; further impact was expected.
- Litigation and investigations: The filing lists significant product-liability matters, including pelvic mesh, talc, XARELTO, RISPERDAL, and hip-device claims, as well as government investigations and patent disputes. Management stated that losses beyond recorded accruals could not be reasonably estimated for certain matters. It did not expect the ultimate outcome, net of accruals, to materially affect financial position, but period results and cash flows could be materially affected.
- Taxes and other risks: The six-month effective tax rate rose to 20.1% from 17.1%, partly due to AMO-related tax costs and income mix. Unrecognized tax-benefit liabilities were approximately $3.2 billion. Management described Brexit-related uncertainty but did not expect a material consolidated impact at that time.
Important facts for investors to verify
- Whether acquired Actelion and AMO businesses deliver expected growth and synergies, and how final purchase accounting affects amortization, margins, and goodwill.
- Whether Medical Devices restructuring charges, workforce reductions, and projected savings proceed on the stated timetable.
- How REMICADE biosimilar competition, generic challenges, and declines in products such as INVOKANA affect Pharmaceutical sales and margins.
- Developments in major product-liability, patent, and government matters, including any changes to accruals or potential cash exposure.
- Cash generation, debt levels, and liquidity after the Actelion acquisition and completion of the share-repurchase program.