Johnson & Johnson — Q3 2009 Form 10-Q
Reporting period: Fiscal quarter ended September 27, 2009; comparative quarter ended September 28, 2008. Nine-month results cover the same respective periods. Financial statements are unaudited; amounts below are U.S. dollars unless noted.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Sales | $15.081bn | $15.921bn | $45.346bn | $48.565bn |
| Gross profit / margin | $10.647bn / 70.6% | $11.147bn / 70.0% | $32.211bn / 71.0% | $34.426bn / 70.9% |
| Net earnings / margin | $3.345bn / 22.2% | $3.310bn / 20.8% | $10.060bn / 22.2% | $10.235bn / 21.1% |
| Diluted EPS | $1.20 | $1.17 | $3.61 | $3.60 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $11.284bn | $10.971bn |
- Q3 sales fell 5.3% year over year, comprising a 2.8% operational decline and a 2.5% unfavorable currency effect. Nine-month sales fell 6.6%, including a 1.8% operational decline and 4.8% currency impact.
- Q3 pre-tax earnings were $4.245bn, down 1.0%; nine-month pre-tax earnings were $13.151bn, down 1.9%. Worldwide effective tax rates for the first nine months were 23.5% in 2009 and 23.7% in 2008.
- Q3 cost of products sold declined to 29.4% of sales from 30.0%; selling, marketing and administrative costs declined to 31.6% from 32.6%. Research expense was $1.617bn in Q3 and $4.773bn for nine months, down 13.1% and 12.7%, respectively.
- By segment, Q3 sales were Consumer $3.989bn (down 2.7%), Pharmaceuticals $5.249bn (down 14.1%), and Medical Devices & Diagnostics $5.843bn (up 2.3%). Nine-month segment operating profit was $2.307bn, $5.595bn, and $5.891bn, respectively; Pharmaceuticals declined while Consumer and Medical Devices & Diagnostics increased.
- At September 27, cash and cash equivalents were $11.856bn; current and non-current marketable securities totaled $2.500bn. Total debt was $11.600bn ($3.341bn current and $8.259bn long term), versus $14.6bn at the prior-year quarter end. Shareholders’ equity was $50.384bn.
- Nine-month investing cash use was $5.234bn, including $2.337bn for acquisitions and $1.521bn for property and equipment. Financing cash use was $5.170bn, including $3.974bn of dividends and $1.172bn of share repurchases. Cash increased $1.088bn from year-end 2008 to $11.856bn.
- Quarterly dividend was $0.49 per share; the board declared another $0.49 dividend payable in December 2009. Management stated it expected regular quarterly dividends to continue.
Material changes, outlook and commentary
- Pharmaceutical sales were pressured by loss of exclusivity and generic competition. Nine-month sales of TOPAMAX fell 53.2% and RISPERDAL/Risperidone fell 61.7%; in Q3 they fell 76.0% and 40.0%, respectively. Management also cited generic pressure on products including LEVAQUIN, CONCERTA, ACIPHEX and DURAGESIC.
- Medical Devices & Diagnostics delivered operational growth, but the Cordis franchise continued to face competition in drug-eluting stents. Consumer sales were affected by weak U.S. demand and some product-category softness. Management cited cost containment and manufacturing efficiencies as supporting margins.
- Acquisitions included Mentor, completed in Q1 for $1.1bn, and Q3 acquisitions of Cougar Biotechnology for $1.0bn and Elan’s Alzheimer’s Immunotherapy Program transaction. The Elan transaction included a 50.1% interest in a new company and an approximately 18.4% Elan stake; J&J committed up to $0.2bn toward the venture’s R&D spending.
- Subsequent events: On November 3, 2009, J&J announced global restructuring expected to generate annual pre-tax savings of $1.4–$1.7bn when fully implemented in 2011, including $0.8–$0.9bn in 2010. It expected $1.1–$1.3bn of pre-tax restructuring charges in Q4 2009 and workforce reductions of 6–7% globally. These are forward-looking estimates.
- On October 1, Cordis received $716m from Boston Scientific to settle several stent patent matters; J&J said it would record the amount in Q4 2009. On September 28, J&J announced a Crucell collaboration and purchased approximately 18% of Crucell for $448m.
- Management said operating cash flow, existing credit facilities and access to commercial paper were expected to provide sufficient funding for operating needs. The filing does not provide full-year earnings or sales guidance.
Risks, contingencies and unusual items
- The filing describes extensive product-liability, patent, pricing, marketing and regulatory proceedings. J&J stated that outcomes could not be estimated with certainty; it did not expect the matters, net of accrued liabilities, to materially adversely affect financial condition, but one or more resolutions could significantly affect results or cash flows in a period.
- Notable exposures include product claims involving ORTHO EVRA, RISPERDAL, LEVAQUIN, DURAGESIC, CHARITÉ and CYPHER; government investigations concerning pharmaceutical marketing and other matters; and patent disputes. A jury had awarded J&J subsidiary Centocor approximately $1.7bn in its HUMIRA patent case against Abbott, with post-trial issues still pending.
- Generic-entry risk is material: the filing notes that unsuccessful patent defenses or expiration of statutory stays could lead to substantial market-share and revenue losses. It also cites health-care cost containment, reimbursement and pricing pressures, economic weakness, currency and interest-rate movements, regulatory and product-safety risks, and competition.
- Other unusual items include patent-settlement income and expenses recorded in other income/expense, acquisitions and related acquired in-process R&D, and the planned Q4 restructuring charge. Nine-month results included $270m from a Medtronic settlement, partly offset by other charges; a further $115m net Medtronic settlement was recorded in Q3. The Boston Scientific settlement was subsequent to quarter-end.
- J&J reported approximately $2.3bn of unrecognized tax-benefit liabilities and did not expect the total to change significantly over the next 12 months.
Most important facts for investors to verify
- Whether the announced restructuring delivers the stated savings and how the expected Q4 charge affects reported earnings.
- Sales and earnings trends as generic competition continues to affect major pharmaceutical products, particularly TOPAMAX and RISPERDAL.
- Resolution, timing and potential financial impact of the disclosed litigation, investigations and patent challenges; the filing does not quantify ultimate exposure for many matters.
- Whether operational growth in Medical Devices & Diagnostics and selected international markets can offset pharmaceutical erosion and currency effects.
- Acquisition and collaboration execution, including the Alzheimer’s program and Crucell relationship, and their effects on future costs, R&D and returns.
- Cash conversion, debt levels, capital allocation and the sustainability of dividends amid acquisitions, restructuring and legal contingencies.