Johnson & Johnson — Q3 2021 Form 10-Q
Reporting period: Fiscal third quarter ended October 3, 2021; comparisons are with the quarter ended September 27, 2020. The filing also reports results for the first nine months of fiscal 2021. Dollar amounts are in U.S. dollars.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | First nine months 2021 | First nine months 2020 |
|---|---|---|---|---|
| Sales | $23.338B | $21.082B | $68.971B | $60.109B |
| Gross margin | 68.9% | 66.9% | 68.2% | 65.7% |
| Earnings before tax | $3.849B | $4.401B | $17.940B | $14.850B |
| Net earnings | $3.667B | $3.554B | $16.142B | $12.976B |
| Diluted EPS | $1.37 | $1.33 | $6.04 | $4.86 |
| Operating cash flow | — | — | $17.678B | $15.193B |
- Q3 sales rose 10.7% (9.9% operational growth and 0.8% favorable currency). Nine-month sales rose 14.7% (12.4% operational growth and 2.3% favorable currency).
- Q3 pretax earnings fell 12.5%, despite higher sales, while net earnings increased 3.2%. The Q3 tax provision was $182M versus $847M a year earlier; the filing attributes the quarter’s weaker pretax performance mainly to higher litigation expense and an Ottava in-process R&D impairment.
- Nine-month effective tax rate was 10.0%, down from 12.6%, including a net $0.6B benefit from a restructuring of certain international subsidiary ownership. Management said this restructuring is not expected to materially affect future effective tax rates.
- Nine-month gross margin improved, reflecting prior-year COVID-related production and inventory effects and Medical Devices recovery. R&D was 14.5% of nine-month sales, versus 13.5%, partly due to COVID-19 vaccine investment and pharmaceutical portfolio progression.
- Nine-month investing cash use was $3.323B and financing cash use was $10.611B. Dividends were $8.241B and share repurchases were $2.460B.
- At October 3, cash and cash equivalents were $17.604B and marketable securities were $13.397B. Debt was approximately $33.9B, leaving net debt of about $2.9B, versus $7.0B a year earlier. Current assets were $59.9B and current liabilities $44.6B. A $10B credit facility was available through September 8, 2022.
Business performance and changes
- Pharmaceutical: Q3 sales rose 13.8% to $12.994B; nine-month sales rose 13.5% to $37.792B. Growth included STELARA, TREMFYA, DARZALEX, ERLEADA and the COVID-19 vaccine. REMICADE declined 17.4% in Q3 amid biosimilar competition; INVOKANA/INVOKAMET declined 40.3%.
- Medical Devices: Q3 sales rose 8.0% to $6.644B, with management citing recovery in procedure volumes. Nine-month sales rose 23.4% to $20.201B. Q3 segment pretax margin was 6.4%, down from 16.4%, primarily reflecting the Ottava impairment and a prior-year contingent-consideration reversal.
- Consumer Health: Q3 sales rose 5.3% to $3.700B. Segment recorded a $636M pretax loss, compared with $191M pretax earnings a year earlier, primarily due to higher talc litigation expense ($1.4B versus $0.5B) and increased brand marketing.
- Worldwide Q3 growth was broad-based geographically, with U.S. sales up 7.9% and international sales up 13.8%. Management noted supply constraints and COVID-related disruption in some consumer categories.
Outlook, risks and unusual items
- The filing does not provide a clear updated full-year sales or earnings guidance figure. Management expects the Global Supply Chain restructuring to generate $0.6B–$0.8B in annual pretax savings, substantially delivered by 2022, against anticipated total restructuring charges of $1.9B–$2.3B. Approximately $1.6B of charges had been recorded through Q3 2021.
- In Q3, the company recorded a $0.9B partial impairment of the Ottava digital robotics in-process R&D asset after expected first-in-human procedures were delayed by about two years. It will continue monitoring the remaining $1.5B Ottava intangible asset.
- In October 2021, a newly formed entity holding talc-related liabilities filed for Chapter 11 protection. The company agreed to fund a $2B trust and recorded an approximately $2B reserve, including a $1.4B incremental litigation charge. The filing states LTL was deconsolidated after quarter-end; the bankruptcy court’s further decisions and potential litigation stays remained pending.
- The company had accrued up to $5B for a proposed opioid resolution involving states and subdivisions. Participation and opt-in processes were ongoing; the company retained the right to opt out if participation proved insufficient. Other significant legal exposures include talc, Risperdal, mesh and product-liability matters. Management says outcomes beyond accrued amounts cannot be reliably estimated and adverse developments could materially affect results or cash flow in a period.
- COVID-19 had no material impact on the reported quarter, according to the filing, but future effects remain uncertain. Risks also include supply-chain disruption, inflation and currency changes, pricing pressure, patent challenges and generic/biosimilar competition. Vaccine contract manufacturing commitments were approximately $1.2B.
Key facts investors should verify
- How the talc bankruptcy, proposed $2B trust, litigation stays and related claims develop, including any implications beyond recorded reserves.
- Whether states and subdivisions participate sufficiently in the proposed opioid settlement, and the timing and cash impact of payments.
- Underlying earnings and cash generation after separating the tax benefit, litigation charges, divestiture gains and Ottava impairment.
- Whether Ottava development milestones recover and whether further impairment is required.
- Whether pharmaceutical growth can offset REMICADE and other products facing biosimilar, generic or competitive pressure, and whether Medical Devices procedure recovery persists.
- Execution of the supply-chain savings plan, vaccine commitments and management’s subsequent full-year guidance.