Johnson & Johnson — Q2 2016 Form 10-Q
Business context and reporting period. Unaudited results cover the fiscal second quarter ended July 3, 2016, and the first six fiscal months of 2016. Johnson & Johnson reports Consumer, Pharmaceutical and Medical Devices segments. Comparisons are with the fiscal quarter ended June 28, 2015, and the corresponding six-month period.
Key financial results
| Metric | Q2 2016 | Q2 2015 | First six months 2016 | First six months 2015 |
|---|---|---|---|---|
| Sales | $18.482B | $17.787B | $35.964B | $35.161B |
| Gross profit | $13.146B | $12.430B | $25.299B | $24.522B |
| Gross margin | 71.1% | 69.9% | 70.4% | 69.8% |
| Earnings before taxes | $4.904B | $5.741B | $10.198B | $11.316B |
| Net earnings | $3.997B | $4.516B | $8.454B | $8.836B |
| Diluted EPS | $1.43 | $1.61 | $3.02 | $3.13 |
| Cash dividends per share | $0.80 | $0.75 | $1.55 | $1.45 |
- Q2 sales rose 3.9%; management attributed growth to 5.3% operational growth, partly offset by a 1.4% currency impact. First-half sales rose 2.3%, with 4.6% operational growth and a 2.3% negative currency impact.
- Q2 net earnings fell about 11.5% and diluted EPS about 11.2%. First-half net earnings fell about 4.3% and diluted EPS about 3.5%.
- Q2 selling, marketing and administrative expenses were 28.0% of sales versus 30.3%; R&D was 12.2% versus 12.0%. First-half SG&A was 27.4% versus 29.1%; R&D was 11.9% versus 11.5%.
- Operating cash flow for the first six months was $6.753B, down from $8.344B. Capital expenditures were $1.396B. Investing activities used $0.215B and financing activities used $1.642B.
- At July 3, cash and cash equivalents were $18.640B and marketable securities were $23.944B, totaling $42.584B. Current assets were $66.291B and current liabilities $21.536B.
- Debt totaled approximately $26.243B ($1.708B current and $24.535B long-term), versus approximately $19.861B at January 3, 2016. The company issued $11.951B of long-term debt net of issuance costs during the half; management said borrowing proceeds were used for general corporate purposes, primarily share repurchases.
Material changes and segment performance
- Q2 Pharmaceutical sales increased 8.9% to $8.654B, led by Immunology and Oncology. Medical Devices sales increased 0.8% to $6.409B; Consumer sales declined 1.8% to $3.419B. First-half sales were up 7.4% in Pharmaceuticals, down 0.8% in Medical Devices and down 3.8% in Consumer.
- Q2 segment pre-tax income declined in Pharmaceuticals to $3.687B from $4.122B and in Medical Devices to $0.939B from $1.584B; Consumer segment pre-tax income rose to $0.571B from $0.317B. Medical Devices results included litigation and restructuring costs.
- Lower year-over-year earnings reflected higher litigation expense and lower gains on asset and business sales. Q2 2015 included an approximately $0.981B pre-tax gain from the U.S. NUCYNTA rights divestiture; 2016 included the controlled-substance raw-material and API divestiture. First-half 2015 also included a net litigation gain, primarily related to a Guidant settlement.
- Other (income) expense was a $557M expense in Q2 2016, compared with $931M of income in Q2 2015. First-half figures were $518M of expense versus $1.279B of income.
Outlook, commentary and risks
- No numerical consolidated full-year sales or earnings guidance is provided in the supplied filing text. Management expects operating cash flow, credit facilities and commercial-paper access to provide sufficient funding for operating needs.
- A Medical Devices restructuring is expected to generate annualized pre-tax savings of $800M–$1.0B, mostly by the end of 2018, including about $200M in 2016. Estimated total pre-tax charges are $2.0B–$2.4B, mostly by 2017; $868M had been recorded since announcement. The plan anticipates eliminating 4%–6% of the segment’s global workforce over two years.
- After quarter-end, the company completed its $3.3B cash acquisition of Vogue International. It also declared a regular $0.80-per-share dividend payable September 6, 2016. Its $10B share-repurchase authorization had used $4.3B as of July 3, 2016.
- Key business risks include product-liability and other litigation, patent challenges and generic or biosimilar competition, pricing and reimbursement pressure, currency and economic volatility, product safety and regulatory matters, and execution of restructuring plans. The filing says possible losses beyond recorded legal accruals cannot be reasonably estimated for certain matters; outcomes could materially affect results or cash flows in a period, although management does not expect the ultimate outcome to materially harm financial position.
- The FDA approved a U.S. REMICADE biosimilar in April 2016. The filing notes a possible launch on or after October 3, 2016, which would reduce U.S. REMICADE sales; management did not expect a material adverse effect on 2016 results or cash flows.
- Brexit introduces uncertainty over currency, trade, regulatory and economic effects; management did not then expect a material impact. First-half international sales were also affected by currency and operations in Venezuela.
- The six-month effective tax rate was 17.1%, compared with 21.9%, reflecting income mix, early adoption of stock-compensation tax accounting, tax provisions and settlements. Unrecognized tax-benefit liabilities were approximately $3.1B.
Important facts for investors to verify
- Whether operational sales growth and pharmaceutical-product momentum persist, particularly as currency, Hepatitis C competition and product mix change.
- Timing and commercial impact of REMICADE biosimilar competition, alongside the status of related patent litigation.
- Developments in significant product-liability, government and intellectual-property proceedings, and whether legal accruals change.
- Progress, total costs and realized savings from the Medical Devices restructuring.
- Debt, repurchases and cash generation: the filing reports substantial new borrowing alongside buybacks and dividends.
- Acquisition integration and subsequent-period effects of the Vogue International purchase.