Johnson & Johnson — Q3 2022 Form 10-Q
Reporting period: Fiscal third quarter ended October 2, 2022; year-to-date figures cover the first nine fiscal months. Comparisons are with the periods ended October 3, 2021. Dollar amounts are in millions unless stated otherwise.
Business context and results
Johnson & Johnson reports Consumer Health, Pharmaceutical and MedTech results. Q3 sales increased modestly in reported dollars, while currency movements significantly offset operational growth. Year-to-date reported sales also rose, but earnings fell.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $23.791bn | $23.338bn | $71.237bn | $68.971bn |
| Gross profit | $15.984bn | $16.088bn | $47.913bn | $47.071bn |
| Gross margin | 67.2% | 68.9% | 67.3% | 68.2% |
| Earnings before tax | $5.822bn | $3.849bn | $17.524bn | $17.940bn |
| Net earnings | $4.458bn | $3.667bn | $14.421bn | $16.142bn |
| Diluted EPS | $1.68 | $1.37 | $5.41 | $6.04 |
| Operating cash flow | Not provided separately | Not provided separately | $15.844bn | $17.678bn |
Q3 sales grew 1.9% reported, comprising 8.1% operational growth and a 6.2% unfavorable currency effect. Nine-month sales grew 3.3%, with 7.9% operational growth offset by a 4.6% currency headwind. Q3 earnings before tax increased 51.3%, while nine-month earnings before tax declined 2.3% and net earnings declined 10.7%. The year-over-year comparisons reflect unusual prior-period litigation and research charges, as well as differing tax effects; the filing does not present these comparisons as a like-for-like measure of underlying earnings.
Segments and material changes
- Q3 Consumer Health: Sales of $3.795bn, down 0.4% reported; operational growth of 4.7% was more than offset by currency. Nine-month sales were $11.186bn, down 1.1%.
- Q3 Pharmaceutical: Sales of $13.214bn, up 2.6% reported, with 9.0% operational growth and a 6.4% currency headwind. Oncology growth included DARZALEX up 29.8% and ERLEADA up 42.2%; REMICADE fell 26.6% and IMBRUVICA fell 14.6%. Nine-month sales rose 5.2%.
- Q3 MedTech: Sales of $6.782bn, up 2.1% reported, with 8.1% operational growth and a 6.0% currency headwind. Interventional Solutions grew 10.8% reported. Nine-month sales rose 2.2%.
Q3 cost of products sold rose to 32.8% of sales from 31.1%, reducing gross margin. Management cited commodity inflation and currency effects, partly offset by supply-chain benefits. Nine-month R&D expense increased to 15.1% of sales from 14.5%, reflecting portfolio progression and increased MedTech investment.
Cash, debt and liquidity
- Cash and cash equivalents were $11.355bn at October 2, 2022, down from $14.487bn at fiscal year-end. Current marketable securities were $22.724bn, bringing cash, cash equivalents and marketable securities to about $34.1bn.
- Loans and notes payable plus long-term debt totaled approximately $32.0bn; the company reported a net cash position of about $2.1bn. Long-term debt was $27.603bn. Current debt included $3.9bn of commercial paper.
- Nine-month operating cash flow was $15.844bn, down from $17.678bn. Investing activities used $7.974bn and financing activities used $10.571bn. Dividends paid were $8.728bn and share repurchases were $4.715bn.
- The company had approximately $10bn available under a credit facility expiring September 7, 2023. Management stated it expected operating cash flow, borrowing capacity and market access to provide sufficient resources for operations and identified commitments.
Outlook, commentary and significant items
- No quantified company-wide full-year sales or EPS guidance is provided in the supplied filing text. The company expects its global supply-chain restructuring to generate $0.7bn–$0.8bn in annual pretax savings, substantially by the end of 2022; expected total program charges are $2.2bn–$2.3bn by completion in December 2022. About $2.1bn of charges had been recorded through Q3.
- The planned Consumer Health separation, to be named Kenvue, was targeted for completion 18–24 months after its November 2021 announcement. The company reported $619m of separation costs year to date, including $249m in Q3, and about $0.4bn of incremental tax costs year to date.
- Year-to-date tax expense was affected by a 17.7% effective tax rate versus 10.0% a year earlier. The prior-year rate benefited from a net $0.6bn tax benefit from an international subsidiary reorganization, among other items.
- The company recorded a $0.6bn year-to-date impairment of the investigational drug bermekimab after ending development for atopic dermatitis. After quarter-end, it also ended development for hidradenitis suppurativa and expected a further impairment charge of about $0.2bn in Q4.
- COVID-19 vaccine supply-network costs were $0.7bn year to date. Management said it was adjusting research programs and manufacturing capacity to meet customer commitments, with incremental costs expected for the year.
- Legal matters remain significant. The company had accrued about $2bn for a trust related to talc liabilities and was unable to estimate potential losses beyond accrued amounts for certain matters. A roughly $5bn opioid settlement was effective in April 2022; by September, claims by all states except Washington had been settled, and the company cited about $2.8bn remaining to be paid.
- Other stated risks include product liability and government proceedings, patent challenges and loss of exclusivity, pricing pressure, inflation, foreign-exchange volatility, supply-chain disruption, and uncertainty around the planned Consumer Health separation. Management said the Russia-Ukraine conflict had no material financial impact through Q3; the company’s Russian subsidiary represented about 1% of revenue.
Important facts for investors to verify
- Whether operational sales growth continues to outweigh foreign-exchange headwinds, and whether margins recover from inflation and currency pressures.
- Drivers of the year-to-date decline in earnings and operating cash flow, including tax-rate differences, investment fair-value losses, vaccine costs and restructuring/separation spending.
- Progress and final costs of the Consumer Health separation and supply-chain restructuring, including delivery of the stated savings.
- Legal developments and cash requirements for talc and opioid matters, including the talc bankruptcy appeal and the remaining opioid settlement payments.
- Revenue exposure to product competition and patent expiry, notably REMICADE biosimilars and the September 2023 U.S. STELARA patent expiry.
- Whether vaccine demand, contractual commitments and manufacturing adjustments result in further costs or asset impairments.