Business context and reporting period
Johnson & Johnson’s unaudited Form 10-Q covers the fiscal third quarter and nine months ended September 29, 2019. The company reports Consumer, Pharmaceutical and Medical Devices segments.
Financial performance and position
| Metric | Fiscal Q3 2019 | Comparable period |
|---|---|---|
| Sales | $20.729 billion | $20.348 billion; up 1.9% |
| Gross profit / gross margin | $13.862 billion / 66.9% | $13.759 billion / 67.6% |
| Earnings before taxes / margin | $1.647 billion / 7.9% | $4.423 billion / 21.7% |
| Net earnings | $1.753 billion | $3.934 billion |
| Diluted EPS | $0.66 | $1.44 |
- For the first nine months, sales were $61.312 billion, up 0.2%; net earnings were $11.109 billion versus $12.255 billion, and diluted EPS was $4.13 versus $4.49. Nine-month gross margin was 66.7%, compared with 67.1%.
- Q3 worldwide sales growth included 3.2% operational growth and a 1.3% negative currency impact. By segment, Q3 sales rose 5.1% in Pharmaceuticals and 1.6% in Consumer, while Medical Devices declined 3.1%.
- Operating cash flow for the first nine months was $17.018 billion, compared with $15.957 billion. Capital expenditures were $2.238 billion. Cash and cash equivalents at quarter-end were $16.249 billion; marketable securities were $1.696 billion.
- Quarter-end debt was $29.218 billion: $2.299 billion current and $26.919 billion long-term. Net debt was $11.3 billion, versus $11.9 billion a year earlier. Current assets were $44.333 billion and current liabilities $35.162 billion.
- Financing used $13.943 billion in the first nine months, including $7.417 billion of dividends and $6.320 billion of share repurchases. The $5 billion repurchase authorization was completed in Q3. The board declared a further $0.95 per-share dividend in October.
Material changes and unusual items
- Q3 results included a $4.0 billion charge related to an agreement in principle to settle opioid litigation. This was the principal reason Pharmaceutical segment pretax earnings fell to a $222 million loss from $2.876 billion of income a year earlier, and consolidated pretax margin contracted sharply.
- First-nine-month results included a $2.0 billion pretax gain on the divestiture of Advanced Sterilization Products (ASP), which partially offset the opioid-related charge. The company also recorded a $0.9 billion impairment and abandoned the AL-8176 development program.
- Q3 tax expense was a $106 million benefit. For the first nine months, the effective tax rate was 15.3%, down from 17.6%, reflecting a net benefit from Swiss tax reform, partly offset by increased unrecognized tax benefits.
- First-nine-month operating cash flow increased year over year, while cash declined by $1.858 billion after acquisitions, dividends, repurchases and debt repayments. Acquisitions included Auris Health and Dr. Ci:Labo; the company paid $5.562 billion net for acquisitions.
Outlook, commentary and risks
- The filing provides no clear full-year revenue or earnings guidance. For its global supply-chain restructuring, management expects $0.6–$0.8 billion in annual pretax savings, substantially delivered by 2022, and $1.9–$2.3 billion of total pretax charges over four to five years.
- Management said operating cash flows, borrowing capacity and capital-market access should provide sufficient resources for operations, including potential opioid settlement payments over multiple years. A $10 billion 364-day credit facility was secured in September 2019.
- Opioid matters remain uncertain: the company recorded the $4 billion charge, but the proposed multi-state agreement was subject to conditions and finalization. The Oklahoma judgment of $572 million was being appealed. Litigation resolutions could materially affect results or cash flows in a period.
- Other significant exposures include talc-related product liability claims and government inquiries, and a reported October 2019 $8 billion punitive-damages verdict in a single Risperdal case, which the company said it intended to challenge. The filing states the company accrued only defense costs for talc product-liability litigation.
- Business risks include generic and biosimilar competition (including declining Remicade and Zytiga sales), pricing and reimbursement pressure, currency effects, product liability and regulatory matters, and supply-chain restructuring execution. The company said it could not estimate potential losses beyond amounts accrued for certain legal matters.
Important facts for investors to verify
- How the opioid settlement proposal develops, including its final amount, conditions, timing and payment schedule; distinguish the recorded $4 billion charge from any finalized obligation.
- Developments in talc litigation and government inquiries, the Risperdal verdict and other major product-liability proceedings, including changes to accruals.
- Whether operational sales trends and margins sustain, particularly Pharmaceutical growth versus erosion in Remicade and generic-pressured products, and Medical Devices performance.
- Cash generation, debt and liquidity after acquisitions, dividends and any litigation payments; also monitor the expected U.S. tax-audit settlement, which could affect cash flows.
- Progress and costs of the supply-chain restructuring and realization of projected savings; assess acquisition-related contingent payments, including up to $2.35 billion for Auris milestones.