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JNJ > SEC Filings for JNJ > Form 10-Q on 2-May-2014All Recent SEC Filings

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Form 10-Q for JOHNSON & JOHNSON


2-May-2014

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 2014, worldwide sales were $18.1 billion, a total increase of 3.5%, including operational growth of 5.3% as compared to 2013 fiscal first quarter sales of $17.5 billion. Currency fluctuations had a negative impact of 1.8% for the fiscal first quarter of 2014. The fiscal first quarter of 2013 worldwide sales were positively impacted by an adjustment to previous estimates for Managed Medicaid rebates under the Affordable Care Act, primarily related to new data received from the states. This negatively impacted the fiscal first quarter of 2014 worldwide sales growth by 1.2% as compared to 2013.

Sales by U.S. companies were $8.2 billion in the fiscal first quarter of 2014, which represented an increase of 2.2% as compared to the prior year. Sales by international companies were $9.9 billion, which represented a total increase of 4.5%, including an operational increase of 7.9%, and a negative currency impact of 3.4% as compared to the fiscal first quarter sales of 2013.

Sales by companies in Europe achieved growth of 9.0%, including operational growth of 6.6%, and a positive currency impact of 2.4%. Sales by companies in the Western Hemisphere, excluding the U.S., experienced a decline of 4.9%, including operational growth of 7.1%, offset by a negative currency impact of 12.0%. Sales by companies in the Asia-Pacific, Africa region achieved growth of 3.6%, including operational growth of 10.3% and a negative currency impact of 6.7%.

ANALYSIS OF SALES BY BUSINESS SEGMENTS

Consumer

Consumer segment sales in the fiscal first quarter of 2014 were $3.6 billion, a decrease of 3.2% as compared to the same period a year ago, including an operational decline of 0.6% and a negative currency impact of 2.6%. U.S. Consumer segment sales decreased by 2.9%. International Consumer segment sales decreased by 3.4%, including operational growth of 0.7% and a negative currency impact of 4.1%.

Major Consumer Franchise Sales - Fiscal First Quarters Ended*

                                                                                 Total     Operations    Currency
(Dollars in Millions)                  March 30, 2014       March 31, 2013      Change       Change       Change
OTC                                  $          1,011     $          1,043       (3.1 )%       (1.2 )%     (1.9 )%
Skin Care                                         914                  902        1.3           2.7        (1.4 )
Baby Care                                         545                  564       (3.4 )         1.7        (5.1 )
Oral Care                                         411                  403        2.0           4.7        (2.7 )
Wound Care/Other                                  349                  362       (3.6 )        (2.6 )      (1.0 )
Women's Health                                    327                  401      (18.5 )       (13.4 )      (5.1 )
Total Consumer Sales                 $          3,557     $          3,675       (3.2 )%       (0.6 )%     (2.6 )%

* Prior year amounts have been reclassified to conform to current year presentation. Nutritionals, previously included in OTC, is included in Wound Care/Other.

The OTC franchise experienced an operational decline of 1.2% as compared to the prior year fiscal first quarter. Declining sales of analgesic products impacted by a weaker cold and flu season was partially offset by U.S. sales growth of 3.4% primarily due to the U.S. launch of ZYRTEC® Dissolve Tabs.

The Skin Care franchise achieved operational growth of 2.7% as compared to the prior year, primarily driven by sales of AVEENO® and DABAO® products.


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The Baby Care franchise achieved operational growth of 1.7% as compared to the prior year, primarily due growth in Asia Pacific, which includes newly acquired products from the acquisition of Elsker Mother & Baby Co., Ltd. in China and growth in Latin America.

The Oral Care franchise achieved operational growth of 4.7% as compared to the prior year. The growth was driven by increased sales of LISTERINE® primarily due to new product launches.

The Wound Care/Other franchise experienced an operational decline of 2.6% as compared to the prior year, due to lower sales of nutritional products.

The Women's Health franchise experienced an operational decline of 13.4% as compared to the prior year, primarily due to the divestiture of women's sanitary protection products in the U.S., Canada and Caribbean, which was completed in the fiscal fourth quarter of 2013.


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Pharmaceutical

Pharmaceutical segment sales in the fiscal first quarter of 2014 were $7.5 billion, a total increase of 10.8% as compared to the same period a year ago, with an operational increase of 12.2% and a negative currency impact of 1.4%. U.S. Pharmaceutical sales increased by 7.7% as compared to the same period a year ago. International Pharmaceutical sales increased by 14.0%, including operational growth of 16.9% and a negative currency impact of 2.9%. In the fiscal first quarter of 2013, Pharmaceutical segment sales included a positive adjustment to previous estimates for Managed Medicaid rebates. This negatively impacted 2014 fiscal first quarter Pharmaceutical operational sales growth by 3.4%.

Major Pharmaceutical Therapeutic Area Sales - Fiscal First Quarters Ended*

                                                                                   Total     Operations    Currency
(Dollars in Millions)                    March 30, 2014       March 31, 2013      Change       Change       Change
Total Immunology                       $          2,343     $          2,204        6.3  %         7.8 %     (1.5 )%
   REMICADE®                                      1,610                1,600        0.6            2.1       (1.5 )
   SIMPONI®/SIMPONI® ARIA™                          259                  237        9.3           11.6       (2.3 )
   STELARA®                                         456                  346       31.8           32.0       (0.2 )
   Other Immunology                                  18                   21      (14.3 )         (5.8 )     (8.5 )
Total Infectious Diseases                         1,200                  815       47.2           48.0       (0.8 )
   EDURANT®                                          81                   43       88.4           85.4        3.0
   INCIVO®                                           86                  162      (46.9 )        (47.4 )      0.5
   OLYSIO™/SOVRIAD™                                 354                    -     **          **               0.0
   PREZISTA®                                        445                  367       21.3           21.3        0.0
   Other Infectious Diseases                        234                  243       (3.7 )         (2.8 )     (0.9 )
Total Neuroscience                                1,638                1,744       (6.1 )         (4.0 )     (2.1 )
   CONCERTA®/methylphenidate                        150                  256      (41.4 )        (39.3 )     (2.1 )
   INVEGA®                                          165                  132       25.0           27.1       (2.1 )
   INVEGA® SUSTENNA®/XEPLION®                       373                  284       31.3           31.9       (0.6 )
   RISPERDAL® CONSTA®                               310                  335       (7.5 )         (6.3 )     (1.2 )
   Other Neuroscience                               640                  737      (13.2 )        (10.0 )     (3.2 )
Total Oncology                                    1,022                  794       28.7           30.2       (1.5 )
   VELCADE®                                         408                  353       15.6           18.6       (3.0 )
   ZYTIGA®                                          512                  344       48.8           48.8        0.0
   Other Oncology                                   102                   97        5.2      6.3             (1.1 )
Total Other                                       1,295                1,211        6.9            7.6       (0.7 )
   PROCRIT®/EPREX®                                  310                  378      (18.0 )        (17.6 )     (0.4 )
   XARELTO®                                         319                  158     **          **                 -
   Other                                            666                  675       (1.3 )         (0.2 )     (1.1 )
Total Pharmaceutical Sales             $          7,498     $          6,768       10.8  %        12.2 %     (1.4 )%

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

Immunology products achieved operational sales growth of 7.8% as compared to the same period a year ago. Increased sales of STELARA® (ustekinumab) and SIMPONI®/SIMPONI® ARIA™ (golimumab) were primarily due to market growth and market share gains. REMICADE® (infliximab) growth was primarily due to market growth. Additionally, in the first quarter of 2013, Immunology sales were positively impacted by an adjustment to previous estimates for Managed Medicaid rebates. This negatively impacted 2014 Immunology operational sales growth by approximately 4.6%.

Infectious disease products achieved operational sales growth of 48.0% as compared to the same period a year ago. Major contributors to the growth were the recent launch of OLYSIO™/SOVRIAD™ (simeprevir), PREZISTA® (darunavir), due to


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market share growth and sales of EDURANT® (rilpivirine). This was partially offset by lower sales of INCIVO® (telaprevir), due to competitive pressures. Competitive products for OLYSIO™/SOVRIAD™ (simeprevir), may be approved in the near future and, if approved, will have an impact on future sales.

Neuroscience products experienced an operational decline of 4.0% as compared to the same period a year ago. Strong sales of INVEGA® SUSTENNA®/XEPLION® (paliperidone palmitate) and INVEGA® (paliperidone palmitate) were offset by a decline in U.S. sales of CONCERTA®/methylphenidate as well as lower sales of RISPERDAL® (risperidone) and TOPAMAX® (topiramate) due to continued generic competition. Additionally, in the first quarter of 2013, Neuroscience sales were positively impacted by an adjustment to previous estimates for Managed Medicaid rebates.

Oncology products achieved strong operational sales growth of 30.2% as compared to the same period a year ago. This growth was primarily due to sales of ZYTIGA®(abiraterone acetate) and VELCADE® (bortezomib).

In the fiscal first quarter of 2014, Other Pharmaceutical sales achieved operational sales growth of 7.6% as compared to the prior year fiscal first quarter. Strong sales of XARELTO®(rivaroxaban) and the launch of INVOKANA®(canagliflozin) were partially offset by lower sales of ACIPHEX®(rabeprazole sodium) primarily due to generic competition. Additionally, in the fiscal first quarter of 2013, PROCRIT® (Epoetin alfa) sales were positively impacted by an adjustment to previous estimates for Managed Medicaid rebates.

Medical Devices and Diagnostics

Medical Devices and Diagnostics segment sales in the fiscal first quarter of 2014 were $7.1 billion, flat as compared to the same period a year ago. Operational growth of 1.8% was offset by a negative currency impact of 1.8%. U.S. Medical Devices and Diagnostics sales decreased 1.6%. International Medical Devices and Diagnostics sales increased by 1.3%, including operational growth of 4.6% and a negative currency impact of 3.3%.

Major Medical Devices and Diagnostics Franchise Sales - Fiscal First Quarters

Ended*
                                                                                         Total     Operations    Currency
(Dollars in Millions)                           March 30, 2014       March 31, 2013      Change      Change       Change
Orthopaedics                                  $          2,421     $          2,385       1.5  %         2.7 %     (1.2 )%
Surgical Care                                            1,508                1,508       0.0            1.9       (1.9 )
Specialty Surgery/Other                                    874                  839       4.2            6.4       (2.2 )
Vision Care                                                761                  740       2.8            6.8       (4.0 )
Cardiovascular Care                                        541                  513       5.5            7.2       (1.7 )
Diabetes Care                                              512                  600     (14.7 )        (13.7 )     (1.0 )
Diagnostics                                                443                  477      (7.1 )         (5.4 )     (1.7 )
Total Medical Devices and Diagnostics Sales   $          7,060     $          7,062       0.0  %         1.8 %     (1.8 )%

* Prior year amounts have been reclassified to conform to current year presentation. Infection Prevention is included in Specialty Surgery/Other.

The Orthopaedics franchise achieved operational sales growth of 2.7% as compared to the prior year fiscal first quarter. Growth was primarily driven by sales of trauma, knee and hip products. The growth was partially offset by continued pricing pressure.

The Surgical Care franchise achieved operational sales growth of 1.9% as compared to the prior year fiscal first quarter. The growth was primarily driven by sutures and the success of the ECHELON FLEX™ powered ENDOPATH® Stapler outside the U.S. The growth was partially offset by lower sales of women's health and urology products.

The Specialty Surgery/Other franchise achieved operational sales growth of 6.4% as compared to the prior year fiscal first quarter. Growth was attributable to new product launches and market growth for worldwide biosurgical products and energy products outside the U.S. Additional contributors to growth were sales of Advanced Sterilization and MENTOR® products.

The Vision Care franchise achieved operational sales growth of 6.8% as compared to the prior year fiscal first quarter. The growth was primarily attributable to inventory builds due to customer buying patterns. The positive impact from the inventory buying pattern will be offset during the balance of the year.


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The Cardiovascular Care franchise achieved operational sales growth of 7.2% as compared to the prior year fiscal first quarter. Growth was driven by sales of Biosense Webster products due to new catheter launches and continued market expansion.

The Diabetes Care franchise experienced an operational sales decline of 13.7% as compared to the prior year fiscal first quarter. U.S. sales declined due to the impact of lower prices primarily related to competitive bidding.

The Diagnostics franchise experienced an operational sales decline of 5.4% as compared to the prior year. The decline was primarily due to lower sales in donor screening and immunodiagnostics products. On March 31, 2014, the Company announced that it has accepted the binding offer from The Carlyle Group to acquire its Ortho-Clinical Diagnostics business (the Diagnostics franchise). The transaction is expected to close toward the middle of the year, upon satisfaction of customary closing conditions. For additional details see Note 10 to the Consolidated Financial Statements.

ANALYSIS OF CONSOLIDATED EARNINGS BEFORE PROVISION FOR TAXES ON INCOME Consolidated earnings before provision for taxes on income for the fiscal first quarter of 2014 increased to $5.4 billion as compared to $4.3 billion in the fiscal first quarter of 2013, an increase of 27.3%. The fiscal first quarter of 2014, was favorably impacted by $0.6 billion of positive mix from higher sales of higher margin products in the Pharmaceutical business and cost reduction efforts across many of the businesses. The fiscal first quarter of 2013, included litigation costs of $0.5 billion and an inventory step-up charge of $0.1 billion related to the Synthes acquisition.

Cost of Products Sold

Consolidated costs of products sold for the fiscal first quarter of 2014 decreased to 30.1% from 31.7% of sales as compared to the same period a year ago due to positive mix from higher sales of higher margin products in the Pharmaceutical business and cost improvements across many of the businesses. In addition, the fiscal first quarter of 2013 included an inventory step-up charge of $0.1 billion related to the Synthes acquisition. The amortization expense for the fiscal first quarter of 2014 was $351 million, relatively flat to the prior year.

Selling, Marketing and Administrative Expenses

Consolidated selling, marketing and administrative expenses for the fiscal first quarter of 2014 decreased to 28.6% from 29.8% of sales as compared to the same period a year ago leveraged from the growth in the Pharmaceutical business and cost containment initiatives, primarily in the Medical Devices and Diagnostics segment.

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 2014 decreased to 10.1% from 10.2% of sales, relatively flat to the same period a year ago.

In-Process Research and Development (IPR&D)

During the fiscal first quarter of 2014, the Company recorded a charge of $18 million for the discontinuation of a development program related to MENTOR®. During the fiscal first quarter of 2013, the Company recorded a charge in the amount of $64 million for the write-down of the IPR&D for Acclarent related to the discontinuation of development projects.

Interest (Income) Expense

Interest income decreased slightly in the fiscal first quarter of 2014 as compared to the same period a year ago, due to lower interest rates. The ending balance of cash, cash equivalents and marketable securities was $29.4 billion at the end of the fiscal first quarter of 2014. This is an increase of $7.7 billion from the same period a year ago. The increase in the average cash balance was due to cash generated from operating activities.

Interest expense increased in the fiscal first quarter of 2014 as compared to the same period a year ago due to a higher average debt balance. At the end of the fiscal first quarter of 2014, the Company's debt position was $17.3 billion compared to $15.9


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billion from the same period a year ago. The higher debt balance of approximately $1.4 billion was due to borrowings in December 2013. The Company increased borrowings, capitalizing on favorable terms in the capital markets.

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 2014, was favorable by $0.4 billion as compared to the same period a year ago. The fiscal first quarter of 2013, included litigation costs of $0.5 billion.

SEGMENT PRE-TAX PROFIT

Consumer Segment

Pre-tax profit for the Consumer segment as a percent to sales in the fiscal first quarter of 2014 was 13.5% versus 14.9% for the same period a year ago. The fiscal first quarter of 2013 included a gain of $55 million on the sale of intangible and other assets.

Pharmaceutical Segment

Pre-tax profit for the Pharmaceutical segment as a percent to sales in the fiscal first quarter of 2014 was 42.8% versus 35.7% for the same period a year ago. The favorable pre-tax profit was attributable to strong volume growth, positive sales mix of higher margin products and cost containment initiatives realized in selling, marketing and administrative expenses. Additionally, the fiscal first quarter of 2013 included litigation expense of $0.2 billion offset by a positive adjustment of $0.2 billion to previous estimates for Managed Medicaid rebates.

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 2014 was 27.8% versus 21.5% for the same period a year ago. The fiscal first quarter of 2013 included litigation expense of $0.3 billion, higher costs of $0.1 billion for integration costs and amortization of the inventory step-up associated with the Synthes acquisition and $0.1 billion attributable to the write-down of intangible assets.

Provision for Taxes on Income

The worldwide effective income tax rates for the fiscal first quarters of 2014 and 2013 were 12.9% and 17.9%, respectively. The lower effective tax rate in 2014 as compared to 2013 was primarily due to a tax benefit of $398 million associated with the Conor Medsystems divestiture which reduced the 2014 first quarter tax rate by 7.3%. The 2013 first quarter tax rate was reduced by 2.4% compared to the 2014 rate due to the benefit from the U.S. Research & Development (R&D) tax credit and the Controlled Foreign Corporation (CFC) look-through provisions. The 2013 first quarter tax rate included both the 2012 benefit and the 2013 benefit from the R&D tax credit and the CFC look-through provisions, since those provisions were enacted into law in January 2013 and were retroactive to January 1, 2012. The 2014 first quarter tax rate reflected no benefit from the R&D tax credit and CFC look-through, since those provisions expired at year end 2013.

During the first quarter of 2014, the Company reached a settlement agreement related to substantially all issues regarding the U.S. Internal Revenue Service audit related to tax years 2006 - 2009. As a result of this settlement, the Company adjusted the unrecognized tax benefits related to these matters, which lowered tax expense. The Company also recorded additional U.S. tax expense related to the planned increase in dividends from current year foreign earnings as compared to prior year.

As of March 30, 2014, the Company had approximately $2.3 billion of liabilities from unrecognized tax benefits, which reflects the settlement agreement described above. The Company believes it is possible that audits may be completed by tax authorities in some jurisdictions over the next twelve months. 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 29, 2013 for more detailed information regarding unrecognized tax benefits.


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LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Cash and cash equivalents were $19.7 billion at the end of the fiscal first quarter of 2014 as compared with $20.9 billion at the fiscal year end of 2013. The primary sources of cash were approximately $3.9 billion net cash generated from operating activities offset by $2.0 billion used by investing activities and $3.1 billion used by financing activities.

Cash flow from operations of $3.9 billion was the result of $4.7 billion of net earnings and $1.7 billion of non-cash charges for depreciation and amortization, stock-based compensation, asset write-downs and deferred taxes reduced by $1.0 billion related to accounts payable and accrued liabilities, $0.9 billion for inventories and receivables and $0.6 billion related to current and non-current assets and liabilities.

Investing activities use of $2.0 billion of cash was primarily for net purchases of investments in marketable securities of $1.4 billion and additions to property, plant and equipment of $0.6 billion.

Financing activities use of $3.1 billion of cash was primarily for dividends to shareholders of $1.9 billion, net retirement of short and long-term debt of $1.0 billion and $0.8 billion for the repurchase of common stock. Financing activities also included a source of $0.6 billion of net proceeds from stock options exercised and associated tax benefits.

The Company has access to substantial sources of funds at numerous banks worldwide. In September 2013, the Company secured a new 364-day Credit Facility. Total credit available to the Company under the facility, which expires September 18, 2014, approximates $10.0 billion. Interest charged on borrowings under the credit line agreement is based on either bids provided by banks, the prime rate or London Interbank Offered Rates (LIBOR), plus applicable margins. Commitment fees under the agreement are not material.
In the fiscal first quarter of 2014, 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, 2014, the Board of Directors declared a regular quarterly cash dividend of $0.66 per share, payable on March 11, 2014, to shareholders of record as of February 25, 2014.

On April 24, 2014, the Board of Directors declared a regular cash dividend of $0.70 per share, payable on June 10, 2014 to shareholders of record as of May 27, 2014. 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 $2.0 billion as of March 30, 2014 and approximately $2.3 billion as of December 29, 2013. Approximately $1.3 billion as of March 30, 2014 and December 29, 2013 of the Southern European Region net trade accounts receivable balance related to the Company's Consumer, Vision Care and Diabetes Care businesses as well as certain Pharmaceutical and Medical Devices and Diagnostics customers, which are in line with historical collection patterns.
The remaining balance of net trade accounts receivable in the Southern European Region has been negatively impacted by the timing of payments from certain government owned or supported health care customers as well as certain distributors of the Pharmaceutical and Medical Devices and Diagnostics local . . .

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