Johnson & Johnson — Q3 2013 Form 10-Q
Reporting period: Fiscal third quarter ended September 29, 2013; comparative quarter ended September 30, 2012. Nine-month results compare the periods ended on those dates. Unaudited consolidated results; amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales | $17.575bn | $17.052bn | $52.957bn | $49.666bn |
| Gross profit / margin | $12.231bn / 69.6% | $11.455bn / 67.2% | $36.570bn / 69.1% | $34.011bn / 68.5% |
| Earnings attributable to J&J | $2.982bn | $2.968bn | $10.312bn | $8.286bn |
| Diluted EPS | $1.04 | $1.05 | $3.58 | $2.96 |
| Operating cash flow | Not stated for the quarter | $13.275bn | $12.020bn |
- Q3 sales rose 3.1% year over year, with 4.7% operational growth and a 1.6% negative currency impact. Nine-month sales increased 6.6%; operational growth was 8.1%, including a 3.3% contribution from Synthes, net of the related trauma divestiture, and a 1.5% negative currency impact.
- Q3 earnings attributable to J&J were nearly flat, while diluted EPS declined 1 cent. The quarter included $943 million of net other expense, versus $90 million of net other income in Q3 2012, primarily reflecting higher litigation costs. Nine-month earnings and EPS increased substantially against the prior-year comparison, which included larger intangible-asset and in-process R&D charges.
- Cost of products sold improved to 30.4% of sales in Q3 from 32.8%; selling, marketing and administrative expense was 30.2% versus 30.6%. R&D expense increased to 11.6% of sales from 11.3%. Nine-month cost of products sold was 30.9% versus 31.5%; R&D was 10.9% versus 10.7%.
- Segment sales in Q3: Consumer $3.611bn (+0.8%); Pharmaceutical $7.036bn (+9.9%); Medical Devices & Diagnostics $6.928bn (-2.0%). Pharmaceutical growth was led by oncology, including ZYTIGA, and immunology. Devices results included declines in Diabetes Care and Diagnostics. Nine-month segment sales grew 1.4%, 10.6%, and 5.7%, respectively.
Balance sheet, cash flow and liquidity
- At September 29, 2013, cash and cash equivalents were $17.204bn and marketable securities $8.024bn; total current assets were $52.176bn and total assets $126.933bn. Current liabilities were $25.835bn.
- Current and long-term debt totaled approximately $15.107bn ($5.359bn and $9.748bn, respectively), compared with $16.165bn at December 30, 2012. Cash plus marketable securities exceeded reported debt by approximately $10.1bn.
- Nine-month operating cash flow of $13.275bn funded $3.525bn of investing outflows and $7.273bn of financing outflows. Investing included $2.166bn of capital expenditures and $819 million of net acquisition payments. Financing included $5.424bn in dividends, $3.050bn in share repurchases (including $2.9bn to settle Synthes-related accelerated share repurchase agreements), and net retirement of short- and long-term debt.
- Management said operating cash flows, credit facilities and commercial-paper access were expected to provide sufficient resources for operating needs. A new 364-day credit facility provides approximately $10bn and expires September 18, 2014. Cash dividends were $0.66 per share for Q3; the board declared another $0.66 dividend payable December 10, 2013.
Material changes, outlook and risks
- Q3 pre-tax earnings increased 2.0% to $3.667bn, despite higher litigation expense, which management reported was approximately $0.8bn above the prior-year quarter. Medical Devices & Diagnostics pre-tax profit fell 50.4% to $956 million; Pharmaceutical pre-tax profit rose 76.4% to $2.449bn. These comparisons were affected by litigation, impairments and other unusual items.
- Nine-month earnings were helped by a $400 million net gain on equity investment transactions, primarily the sale of Elan American Depositary Shares, and a lower effective tax rate: 18.9% versus 25.6%. The 2013 rate reflected tax-law changes and geographic mix, among other items. The company reported approximately $2.4bn of unrecognized tax-benefit liabilities.
- The company acquired Aragon Pharmaceuticals for an upfront $650 million, with up to $350 million of additional contingent payments. It recorded about $200 million of IPR&D impairment charges during the nine months, primarily related to CorImmun and Acclarent. The 2013 period also included $108 million related to Venezuela currency devaluation in the cash-flow reconciliation.
- Management estimated the 2013 medical-device excise tax impact at $200–$250 million. No specific earnings or sales guidance for future periods is stated in the provided filing text. J&J said it expects to continue regular quarterly dividends.
- Key risks include extensive product-liability and government proceedings; the company said outcomes in a period could materially affect results or cash flows, although it did not expect the disclosed matters, net of accruals, to materially harm financial position. It could not estimate possible losses beyond amounts accrued. Other risks include generic competition and patent challenges, regulatory and product-safety issues, pricing pressure, foreign exchange and economic conditions, and manufacturing and supply-chain disruptions.
- Notable litigation includes pending claims involving ASR hip devices, PINNACLE hip systems and pelvic mesh. The filing says ASR-related accruals increased in Q3. A $176 million HARMONIC Scalpel patent judgment was on appeal and was not accrued because an unfavorable outcome was not considered probable. McNeil manufacturing remediation and related investigations continued under a consent decree. The filing also describes potential tax exposure relating to the Synthes acquisition transactions.
Important facts for investors to verify
- Whether litigation accruals adequately reflect evolving claim volumes, settlements and trial outcomes, especially for hip devices, pelvic mesh and government proceedings.
- How much reported earnings growth reflects ongoing operating performance versus the prior-year impairments, the Elan-related gain, Medicaid rebate adjustment and tax-rate differences.
- Whether Pharmaceutical growth can offset generic erosion in products including CONCERTA, and whether weakness in Diabetes Care, Diagnostics and other device franchises persists.
- Collection trends and credit exposure in Southern Europe: net trade receivables there were approximately $2.3bn, including about $1.0bn from certain government-supported health-care customers and distributors.
- Progress on McNeil facility remediation, potential consequences of the medical-device excise tax, and developments in the Synthes-related tax position and unrecognized tax benefits.