Johnson & Johnson — Q3 2016 Form 10-Q
Reporting period: Fiscal third quarter ended October 2, 2016; comparative quarter ended September 27, 2015. Financial statements are unaudited. Johnson & Johnson reports Consumer, Pharmaceutical, and Medical Devices segments.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $17.82B | $17.10B | $53.78B | $52.26B |
| Gross margin | 69.2% | 69.5% | 70.0% | 69.6% |
| Earnings before tax | $5.28B | $4.12B | $15.48B | $15.44B |
| Net earnings | $4.27B | $3.36B | $12.73B | $12.19B |
| Diluted EPS | $1.53 | $1.20 | $4.55 | $4.33 |
Q3 sales rose 4.2% (4.3% operational growth); nine-month sales rose 2.9% (4.5% operational growth). Currency reduced nine-month sales growth by 1.6%. Q3 net margin was 24.0%, versus 19.6% a year earlier; nine-month net margin was 23.7%, versus 23.3%.
Segment sales, Q3: Pharmaceutical $8.40B, up 9.2%; Medical Devices $6.16B, up 1.1%; Consumer $3.26B, down 1.6%. Pharmaceutical growth included strong Immunology and Oncology sales, while Consumer performance was affected by declines in Baby Care, Women’s Health, and Wound Care/Other. Medical Devices growth was mixed, with gains in Orthopaedics, Surgery, and Vision Care offset by declines in Cardiovascular and Diabetes Care.
Cash flow and liquidity: Nine-month operating cash flow was $12.11B, down from $14.48B. Investing used $2.59B and financing used $5.09B. Cash and equivalents were $18.21B at quarter-end; marketable securities were $22.23B, or $40.43B combined. Current assets were $63.32B and current liabilities $23.23B.
Debt and capital returns: Current and long-term debt totaled about $26.99B at October 2, 2016, versus $19.86B at January 3, 2016. The company issued $11.95B of long-term debt net of issuance costs during the nine months. Dividends paid were $6.45B and share repurchases were $6.95B. The board declared a further $0.80-per-share dividend payable in December 2016.
Material changes and management commentary
- Q3 earnings before tax increased 28.1%, with higher sales volume, favorable business mix, lower selling and administrative costs, and lower litigation expense cited as key factors. Q3 2015 included an Acclarent intangible-asset write-down and a SPLENDA divestiture gain.
- Nine-month earnings before tax was nearly flat. Higher volume, favorable mix, and lower selling and administrative costs were offset by higher litigation and restructuring costs and larger prior-year divestiture gains.
- The worldwide effective tax rate for the first nine months fell to 17.8% from 21.0%, reflecting income mix by jurisdiction, adoption of share-based compensation tax accounting, tax provisions, and settlements of uncertain tax positions.
- The Medical Devices restructuring is expected to cost $2.0B–$2.4B pretax and deliver $800M–$1.0B in annualized pretax savings, mostly by the end of 2018. About 1,170 positions had been eliminated; planned reductions are approximately 4%–6% of the segment’s global workforce over two years.
- The company completed the $3.3B cash acquisition of Vogue International and agreed to acquire Abbott Medical Optics for $4.325B, subject to approvals and closing conditions; the latter was expected to close in Q1 2017.
Outlook, risks, and contingencies
- The filing gives no specific full-year sales or EPS guidance. Management stated that operating cash flow, credit facilities, and commercial paper access were expected to provide sufficient resources for operating needs.
- Management expected the U.S. launch of an infliximab biosimilar in late November 2016 to reduce REMICADE sales, though it did not expect a material adverse effect on 2016 results or cash flow. Further biosimilar and generic competition remains a risk to product sales and intellectual property.
- Product liability, intellectual property, government investigations, and other proceedings include claims involving DePuy hips, pelvic mesh, RISPERDAL, XARELTO, and JOHNSON’S Baby Powder. The company says the ultimate outcome, net of accruals, is not expected to materially harm financial position, but one or more resolutions or higher accruals could materially affect results or cash flows in a period. Possible losses beyond accrued amounts could not be reasonably estimated.
- Other risks cited include pricing and healthcare cost pressures, currency and economic volatility, product safety and manufacturing issues, regulatory changes, and execution of acquisitions and restructuring. The company noted uncertainty around Brexit but did not then expect a material impact.
- Unrecognized tax-benefit liabilities were approximately $3.1B; the timing of potential payments was not estimable. The company also reported $1.4B of net trade receivables in Southern Europe, including about $0.5B from certain government-supported healthcare customers and distributors affected by payment timing.
Investor facts to verify
- Whether Pharmaceutical growth can offset weakness in Consumer and selected Medical Devices franchises, including the effects of competition and currency.
- Actual REMICADE sales impact from U.S. biosimilar entry and the status of related patent litigation.
- Progress, cash costs, workforce reductions, and realized savings from the Medical Devices restructuring.
- Debt levels, repurchases, and acquisition spending relative to operating cash generation and liquidity.
- Developments in significant product-liability and government matters, tax uncertainties, and collection of Southern European receivables.