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JNJ > SEC Filings for JNJ > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for JOHNSON & JOHNSON


3-May-2013

Quarterly Report


Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Analysis of Consolidated Sales

For the fiscal first quarter of 2013, worldwide sales were $17.5 billion, a total increase of 8.5%, including operational growth of 9.8% as compared to 2012 fiscal first quarter sales of $16.1 billion. Currency fluctuations had a negative impact of 1.3% for the fiscal first quarter of 2013. The acquisition of Synthes, Inc., net of the related trauma business divestiture, increased both total sales growth and operational growth by 5.7%. Worldwide operational growth was impacted by 1.3% due to a positive adjustment to previous estimates for managed Medicaid rebates under the Affordable Care Act, primarily related to new data received from the states.

Sales by U.S. companies were $8.0 billion in the fiscal first quarter of 2013, which represented an increase of 11.2% as compared to the prior year. Sales by international companies were $9.5 billion, which represented a total increase of 6.3%, including an operational increase of 8.7%, and a negative currency impact of 2.4% as compared to the fiscal first quarter sales of 2012.

Sales by companies in Europe achieved growth of 6.8%, including operational growth of 6.2%, and a positive currency impact of 0.6%. Sales by companies in the Western Hemisphere, excluding the U.S., achieved growth of 4.0%, including operational growth of 9.1%, and a negative currency impact of 5.1%. Sales by companies in the Asia-Pacific, Africa region achieved sales growth of 6.8%, including operational growth of 11.8%, and a negative currency impact of 5.0%.

U.S. Health Care Reform

Under the provisions of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, beginning in 2013, the Company will be required to pay a tax deductible 2.3% excise tax imposed on the sale of certain medical devices. The 2013 full year impact of the excise tax is estimated to be between $200 - $300 million and will ultimately be recorded in cost of products sold within the statement of earnings.

ANALYSIS OF SALES BY BUSINESS SEGMENTS

Consumer

Consumer segment sales in the fiscal first quarter of 2013 were $3.7 billion, an
increase of 2.2% as compared to the same period a year ago, including
operational growth of 3.3% and a negative currency impact of 1.1%. U.S. Consumer
segment sales increased by 2.4%. International Consumer segment sales increased
by 2.1%, including operational growth of 3.8% and a negative currency impact of
1.7%.

Major Consumer Franchise Sales - Fiscal First Quarters Ended
                                                                               Total     Operations    Currency
(Dollars in Millions)                  March 31, 2013       April 1, 2012      Change      Change       Change
OTC Pharm. & Nutritionals            $          1,183     $         1,104        7.2 %         7.6 %     (0.4 )%
Skin Care                                         902                 907       (0.6 )        (0.2 )     (0.4 )
Baby Care                                         564                 540        4.4           7.0       (2.6 )
Oral Care                                         403                 387        4.1           5.1       (1.0 )
Women's Health                                    401                 409       (2.0 )         0.8       (2.8 )
Wound Care/Other                                  222                 248      (10.5 )       (10.0 )     (0.5 )
Total Consumer Sales                 $          3,675     $         3,595        2.2 %         3.3 %     (1.1 )%


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The OTC Pharmaceuticals and Nutritionals franchise achieved operational growth of 7.6% as compared to the prior year fiscal first quarter. The strong sales results in the U.S. were driven by analgesics and upper respiratory products, due to progress in returning a reliable supply of products to the marketplace and sales of cough and cold products. Strong growth of analgesics drove results outside the U.S.

The Skin Care franchise experienced an operational decline of 0.2% as compared to the prior year. Strong results for NEUTROGENA® were offset by the impact of divestitures, the initial stocking related to new product launches last year, and competitive pressures.

The Baby Care franchise achieved operational growth of 7.0% as compared to the prior year, primarily due to operational growth of 7.7% outside the U.S.

The Oral Care franchise achieved operational growth of 5.1% as compared to the prior year, primarily attributable to strong sales of LISTERINE®, due to the continued success of new product launches. This growth was partially offset by the impact of the divestiture of the manual toothbrush product line in the U.S.

The Women's Health franchise achieved operational growth of 0.8% as compared to the prior year. Strong growth in liners was partially offset by lower sales of KY products.

The Wound Care/Other franchise experienced an operational decline of 10.0% as compared to the prior year, due to competitive pressures and the impact of divestitures.

Pharmaceutical

Pharmaceutical segment sales in the fiscal first quarter of 2013 were $6.8 billion, a total increase of 10.4% as compared to the same period a year ago with an operational increase of 11.4% and a negative currency impact of 1.0%. U.S. Pharmaceutical sales increased by 14.7% as compared to the same period a year ago. International Pharmaceutical sales increased by 6.1%, including operational growth of 8.1% and a negative currency impact of 2.0%. Pharmaceutical operational growth was impacted by 3.3% due to a positive adjustment to previous estimates for managed Medicaid rebates.


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Major Pharmaceutical Therapeutic Area Sales - Fiscal First Quarters Ended*

                                                                                 Total     Operations    Currency
(Dollars in Millions)                    March 31, 2013       April 1, 2012      Change      Change       Change
Total Immunology                       $          2,204     $         1,895       16.3 %        16.8 %     (0.5 )%
   REMICADE®                                      1,600               1,521        5.2           5.5       (0.3 )
   SIMPONI®                                         237                 116     **         **              (2.0 )
   STELARA®                                         346                 221       56.6          57.0       (0.4 )
   Other Immunology                                  21                  37      (43.2 )       (42.9 )     (0.3 )
Total Infectious Diseases                           815                 755        7.9           8.6       (0.7 )
   INCIVO®                                          162                 132       22.7          24.9       (2.2 )
   INTELENCE®                                        89                  80       11.3          11.6       (0.3 )
   PREZISTA®                                        367                 324       13.3          13.5       (0.2 )
   Other Infectious Diseases                        197                 219      (10.0 )        (9.3 )     (0.7 )
Total Neuroscience                                1,744               1,647        5.9           7.7       (1.8 )
   CONCERTA®/methylphenidate                        256                 308      (16.9 )       (16.4 )     (0.5 )
   INVEGA®                                          132                 121        9.1          11.1       (2.0 )
   INVEGA® SUSTENNA®/XEPLION®                       284                 161       76.4          76.1        0.3
   RISPERDAL® CONSTA®                               335                 361       (7.2 )        (6.0 )     (1.2 )
   Other Neuroscience                               737                 696        5.9           8.9       (3.0 )
Total Oncology                                      794                 596       33.2          35.0       (1.8 )
   VELCADE®                                         353                 353        0.0           2.5       (2.5 )
   ZYTIGA®                                          344                 200       72.0          72.2       (0.2 )
   Other Oncology                                    97                  43     **         **              (4.0 )
Total Other                                       1,211               1,240       (2.3 )        (1.7 )     (0.6 )
   ACIPHEX®/PARIET®                                 152                 222      (31.5 )       (31.2 )     (0.3 )
   PROCRIT®/EPREX®                                  378                 376        0.5           0.5        0.0
   XARELTO®                                         158                  27     **         **                 -
   Other                                            523                 615      (15.0 )       (13.9 )     (1.1 )
Total Pharmaceutical Sales             $          6,768     $         6,133       10.4 %        11.4 %     (1.0 )%

*Prior year amounts have been reclassified to conform to current year product disclosure.
** Percentage greater than 100%

Immunology products achieved operational sales growth of 16.8% as compared to the same period a year ago. The increased sales of STELARA® (ustekinumab), SIMPONI® (golimumab) and REMICADE® (infliximab) were primarily due to market growth. Immunology operational growth was impacted by approximately 5.0% due to a positive adjustment to previous estimates for managed Medicaid rebates partially offset by a decrease in U.S. export sales due to customer inventory planning.

Infectious disease products achieved operational sales growth of 8.6% as compared to the same period a year ago. Major contributors were INCIVO® (telaprevir), due to the success of the continued roll-out, primarily in Latin America,
the continued momentum and market share growth of PREZISTA® (darunavir) and sales of EDURANT® (rilpivirine).

Neuroscience products achieved operational sales growth of 7.7% as compared to the same period a year ago. Strong sales of INVEGA® SUSTENNA®/XEPLION® (paliperidone palmitate) and INVEGA® (paliperidone palmitate) were partially offset by a decline in RISPERDAL® CONSTA®(risperidone) as well as lower sales of CONCERTA®/methylphenidate and DURAGESIC®/Fentanyl Transdermal (fentanyl transdermal system) due to continued generic competition. Additionally, Other Neuroscience operational growth was impacted by a positive adjustment to previous estimates for managed Medicaid rebates. The Company's U.S. Supply and Distribution Agreement with Watson Laboratories, Inc. to distribute an authorized generic version of CONCERTA® became effective May 1, 2011. The original CONCERTA® patent expired in 2004, and parties have received approval from the U.S. Food and Drug Administration (FDA) to manufacture and market a generic version of


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CONCERTA®. Another generic version of CONCERTA® was launched on December 31, 2012 resulting in a further reduction in CONCERTA® sales.

Oncology products achieved strong operational sales growth of 35.0% as compared to the same period a year ago. This growth was primarily due to sales of ZYTIGA®(abiraterone acetate) and VELCADE® (bortezomib) although timing of tender business negatively impacted the growth rate of VELCADE®in the first quarter of 2013. Additionally, Other Oncology increased, primarily due to DOXIL®(doxorubicin HCI liposome injection)/CAELYX®(pegylated liposomal doxorubicin hydrochloride). In the U.S., Janssen Products, LP is releasing additional DOXIL® produced by an alternate manufacturing approach under the regulatory discretion of the U.S. FDA. The longer term solution for DOXIL®/CAELYX® production, involving transitioning manufacturing to additional suppliers, continues to meet expected milestones.

In the fiscal first quarter of 2013, Other Pharmaceutical sales experienced an operational decline of 1.7% as compared to the prior year fiscal first quarter. Lower sales of EPREX® (Epoetin alfa) and PARIET®(rabeprazole sodium) were primarily due to generic competition. PROCRIT® (Epoetin alfa) sales were impacted by a positive adjustment to previous estimates for managed Medicaid rebates partially offset by a decline in the market. Additionally, strong sales of XARELTO®(rivaroxaban) partially offset the decline in Other Pharmaceuticals.

Medical Devices and Diagnostics

Medical Devices and Diagnostics segment sales in the fiscal first quarter of 2013 were $7.1 billion, an increase of 10.2% as compared to the same period a year ago, including operational growth of 11.9% and a negative currency impact of 1.7%. U.S. Medical Devices and Diagnostics sales increased 11.4%. The international Medical Devices and Diagnostics sales increase of 9.1% included operational growth of 12.2% and a negative currency impact of 3.1%. The acquisition of Synthes, Inc., net of the related trauma business divestiture, increased operational growth for the total Medical Devices and Diagnostics segment by 14.3%.

Major Medical Devices and Diagnostics Franchise Sales - Fiscal First Quarters

Ended
                                                                                        Total     Operations    Currency
(Dollars in Millions)                           March 31, 2013       April 1, 2012      Change      Change       Change
Orthopaedics                                  $          2,385     $         1,493      59.7  %       60.7  %     (1.0 )%
Surgical Care                                            1,508               1,625      (7.2 )        (5.4 )      (1.8 )
Vision Care                                                740                 757      (2.2 )         1.6        (3.8 )
Specialty Surgery                                          627                 628      (0.2 )         1.0        (1.2 )
Diabetes Care                                              600                 670     (10.4 )        (9.8 )      (0.6 )
Cardiovascular Care                                        513                 482       6.4           8.5        (2.1 )
Diagnostics                                                477                 512      (6.8 )        (4.9 )      (1.9 )
Infection Prevention/Other                                 212                 244     (13.1 )       (10.5 )      (2.6 )
Total Medical Devices and Diagnostics Sales   $          7,062     $         6,411      10.2  %       11.9  %     (1.7 )%

The Orthopaedics franchise achieved operational sales growth of 60.7% as compared to the prior year fiscal first quarter. Growth was primarily due to sales of newly acquired products from Synthes, Inc. and Mitek sports medicine products. The positive impact on the Orthopaedics franchise operational sales growth due to the newly acquired products from Synthes, Inc. net of the related trauma business divestiture was 61.4%.

The Surgical Care franchise experienced an operational sales decline of 5.4% as compared to the prior year fiscal first quarter. Competitive pressures and business exits negatively impacted growth.

The Vision Care franchise achieved operational sales growth of 1.6% as compared to the prior year fiscal first quarter. The growth was driven by ACUVUE® TruEye ™, 1-DAY ACUVUE® MOIST® for Astigmatism and 1-DAY ACUVUE® MOIST®, partially offset by lower sales of reusable lenses.

The Specialty Surgery franchise achieved operational sales growth of 1.0% as compared to the prior year fiscal first quarter. Strong international sales of energy products and solid results for biosurgical products were substantially offset by lower sales of Mentor aesthetic products.


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The Diabetes Care franchise experienced an operational sales decline of 9.8% as compared to the prior year fiscal first quarter. Sales declined primarily due to the impact of the initial stocking related to new product launches last year, lower price and competitive pressures.

The Cardiovascular Care franchise achieved operational sales growth of 8.5% as compared to the prior year fiscal first quarter. Growth was primarily due to sales of Biosense Webster and endovascular products.

The Diagnostics franchise experienced an operational sales decline of 4.9% as compared to the prior year. The decline was primarily due to the divestitures of RhoGAM® and the Therakos business partially offset by U.S. growth in clinical labs and donor screening. In January 2013, the Company announced it is exploring strategic alternatives for the Ortho-Clinical Diagnostics business, including a possible divestiture.

The Infection Prevention/Other franchise experienced an operational sales decline of 10.5% as compared to the prior year fiscal first quarter was primarily due to competitive pressures.

ANALYSIS OF CONSOLIDATED EARNINGS BEFORE PROVISION FOR TAXES ON INCOME Consolidated earnings before provision for taxes on income for the fiscal first quarter of 2013 decreased to $4.3 billion as compared to $5.0 billion in the fiscal first quarter of 2012, a decrease of 15.5%. The fiscal first quarter of 2013 was unfavorably impacted by $0.7 billion versus the same period a year ago primarily due to higher litigation expenses of $0.5 billion, higher costs of $0.4 billion related to the acquisition of Synthes, Inc., a $0.1 billion charge related to the devaluation of the Venezuelan currency and an in-process research and development charge of $0.1 billion. This was partially offset by $0.7 billion primarily due to increased sales and positive mix of $0.4 billion and cost containment initiatives of $0.3 billion. Additionally, the fiscal first quarter of 2012 included higher gains on divestitures of $0.3 billion, recorded in other income, as compared to the fiscal first quarter of 2013.

Cost of Products Sold

Consolidated costs of products sold for the fiscal first quarter of 2013 increased to 31.7% from 30.4% of sales as compared to the same period a year ago. Increased costs of $0.3 billion recorded in costs of products sold was primarily the result of an inventory step-up charge and incremental amortization expense related to Synthes. This was partially offset by positive mix and cost reduction efforts. Amortization expense for the fiscal first quarters of 2013 and 2012 was $335 million and $205 million, respectively. The increase in amortization expense was primarily related to Synthes.

Selling, Marketing and Administrative Expenses

Consolidated selling, marketing and administrative expenses for the fiscal first quarter of 2013 decreased to 29.8% from 31.1% of sales as compared to the same period a year ago. The decrease was primarily due to timing of expenditures and cost containment initiatives in the Pharmaceutical and Consumer segments.

Research and Development Expense

Research and development activities represent a significant part of the Company's business. These expenditures relate to the processes of discovering, testing and developing new products, improving existing products, as well as ensuring product efficacy and regulatory compliance prior to launch. The Company remains committed to investing in research and development with the aim of delivering high quality and innovative products. Worldwide costs of research and development activities for the fiscal first quarter of 2013 were 10.2% of sales. This was flat compared to the fiscal first quarter of 2012.

In-Process Research and Development (IPR&D)

During the fiscal first quarter of 2013, the Company recorded a charge in the amount of $0.1 billion for the write-down of the IPR&D for Acclarent related to the discontinuation of development projects.


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Interest (Income) Expense

Interest income was relatively flat as compared to the same period a year ago. The ending balance of cash, cash equivalents and marketable securities, was $21.7 billion at the end of the fiscal first quarter of 2013. This is a decrease of $12.1 billion from the same period a year ago. The decline in the average cash balance was due to the Synthes acquisition partially offset by cash generated from operating activities.

Interest expense decreased in the fiscal first quarter of 2013 as compared to the same period a year ago due to a lower average debt balance. At the end of the fiscal first quarter of 2013, the Company's debt position was $15.9 billion compared to $19.4 billion from the same period a year ago. The decrease in debt was primarily due to a reduction in commercial paper.

Other (Income) Expense, Net

Other (income) expense, net is the account where the Company records gains and losses related to the sale and write-down of certain equity securities of the Johnson & Johnson Development Corporation, gains and losses on the disposal of assets, currency gains and losses, acquisition related costs, litigation settlements, as well as royalty income. The change in other (income) expense, net for the fiscal first quarter of 2013, was unfavorable by $1.1 billion as compared to the same period a year ago. The fiscal first quarter of 2013 included higher litigation expenses of $0.5 billion, higher costs of $0.2 billion related to the Synthes acquisition and a $0.1 billion charge related to the devaluation of the Venezuelan currency. Additionally, the fiscal first quarter of 2012 included higher gains of $0.3 billion related to divestitures.

SEGMENT PRE-TAX PROFIT

Consumer Segment

Pre-tax profit for the Consumer segment as a percent to sales in the fiscal first quarter of 2013 was 14.9% versus 12.9% for the same period a year ago. The favorable pre-tax profit was primarily due to a gain of $55 million on the sale of intangible and other assets as well as cost containment initiatives realized in selling, marketing and administrative expenses partially offset by higher remediation costs in the McNeil OTC business.

Pharmaceutical Segment

Pre-tax profit for the Pharmaceutical segment as a percent to sales in the fiscal first quarter of 2013 was 35.7% versus 42.2% for the same period a year ago. The unfavorable pre-tax profit was primarily due higher litigation expense of $0.2 billion and a gain of $0.3 billion related to the divestiture of BYSTOLIC® recorded in the fiscal first quarter of 2012. This was partially offset by a positive adjustment of approximately $0.2 billion to previous estimates for managed Medicaid rebates and cost containment initiatives.

Medical Devices and Diagnostics Segment

Pre-tax profit for the Medical Devices and Diagnostics segment as a percent to sales in the fiscal first quarter of 2013 was 21.5% versus 32.5% for the same period a year ago. Pre-tax profit was unfavorably impacted by higher costs of $0.3 billion for litigation expense, $0.2 billion for integration costs and amortization of the inventory step-up associated with the Synthes acquisition and $0.1 billion attributed to the write-down of intangible assets and the medical device excise tax.

Provision for Taxes on Income

The worldwide effective income tax rates for the fiscal first quarter of 2013 and 2012 were 17.9% and 22.5%, respectively. The lower effective tax rate in 2013 as compared to 2012 was primarily due to the inclusion of the benefit from the U.S. Research & Development (R&D) tax credit, the Controlled Foreign Corporation (CFC) look-through provisions from the 2012 fiscal year and increases in taxable income in lower tax jurisdictions relative to higher tax jurisdictions. The R&D tax credit and the CFC look-through provisions were enacted into law in January 2013 and were retroactive to January 1, 2012. The entire 2012 R&D tax credit and the CFC look-through provisions were reflected in the fiscal first quarter of 2013 and decreased the tax rate by 2.4 points. Additionally, the quarterly impact of the 2013 R&D tax credit and the CFC look-through provisions is reflected in the 2013 fiscal first quarter financial results.


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As of March 31, 2013, the Company had approximately $2.8 billion of liabilities from unrecognized tax benefits. The Company believes it is possible that audits may be completed by tax authorities in some jurisdictions over the next twelve months, including the U.S. Internal Revenue Service audit related to tax years 2006-2009. However, the Company is not able to provide a reasonably reliable estimate of the timing of any other future tax payments relating to uncertain tax positions.

See Note 8 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the fiscal year ended December 30, 2012 for more detailed information regarding unrecognized tax benefits.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Cash and cash equivalents were $14.9 billion at the end of both the fiscal first quarter of 2013 and the fiscal year end of 2012. The primary sources of cash were approximately $2.3 billion net cash generated from operating activities offset by $1.4 billion used by investing activities and $0.8 billion used by financing activities.

Cash flow from operations of $2.3 billion was the result of $3.5 billion of net earnings and $1.8 billion of non-cash charges primarily related to depreciation and amortization, stock-based compensation, the Venezuela currency devaluation, asset write-downs and deferred tax provision reduced by $3.0 billion related to changes in assets and liabilities, net of effects from acquisitions.

Investing activities use of $1.4 billion of cash was primarily for net purchases of investments in marketable securities of $0.8 billion, additions to property, plant and equipment of $0.6 billion and acquisitions, net of cash acquired, of $0.2 billion partially offset by $0.1 billion of proceeds from the disposal of assets.

Financing activities used $0.8 billion of cash primarily for dividends to shareholders of $1.7 billion and net retirement of short and long-term debt of $0.2 billion partially offset by $1.1 billion of net proceeds from stock options exercised/excess tax benefits.

In the fiscal first quarter of 2013, the Company continued to have access to liquidity through the commercial paper market. The Company anticipates that operating cash flows, existing credit facilities and access to the commercial paper markets will continue to provide sufficient resources to fund operating needs. However, the Company monitors the global capital markets on an ongoing basis and from time to time may raise capital when market conditions are favorable.

Dividends
On January 2, 2013, the Board of Directors declared a regular quarterly cash dividend of $0.61 per share, payable on March 12, 2013, to shareholders of record as of February 26, 2013.

On April 25, 2013, the Board of Directors declared a regular cash dividend of $0.66 per share, payable on June 11, 2013 to shareholders of record as of May 28, 2013. The Company expects to continue the practice of paying regular quarterly cash dividends.

Concentration of Credit Risk

Global concentration of credit risk with respect to trade accounts receivables continues to be limited due to the large number of customers globally and adherence to internal credit policies and credit limits. Economic challenges in Italy, Spain, Greece and Portugal (the Southern European Region) have impacted certain payment patterns, which have historically been longer than those experienced in the U.S. and other international markets. The total net trade accounts receivable balance in the Southern European Region was approximately . . .

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