Johnson & Johnson — Q3 2020 Form 10-Q
Reporting period: Fiscal quarter and nine months ended September 27, 2020. Comparisons are with the periods ended September 29, 2019, except balance-sheet comparisons, which are with December 29, 2019. Amounts are U.S. dollars.
Business context
Johnson & Johnson operates through Consumer Health, Pharmaceutical and Medical Devices. COVID-19 affected demand and operations unevenly, notably reducing elective procedures and Medical Devices sales. The filing states that the pandemic had no material impact on the quarter’s consolidated financial statements, but future effects remain uncertain.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $21.082B | $20.729B | $60.109B | $61.312B |
| Gross profit / margin | $14.110B / 66.9% | $13.862B / 66.9% | $39.496B / 65.7% | $40.890B / 66.7% |
| Earnings before tax | $4.401B | $1.647B | $14.850B | $13.110B |
| Net earnings / margin | $3.554B / 16.9% | $1.753B / 8.5% | $12.976B / 21.6% | $11.109B / 18.1% |
| Diluted EPS | $1.33 | $0.66 | $4.86 | $4.13 |
| Operating cash flow | Not separately presented for quarter | $15.193B | $17.018B |
Q3 sales rose 1.7% (1.7% operational growth); nine-month sales fell 2.0%, including a 0.8% operational decline and 1.2% adverse currency impact. Nine-month effective tax rate was 12.6%, versus 15.3% a year earlier.
Segment sales: Q3 Pharmaceutical $11.418B, up 5.0%; Consumer Health $3.514B, up 1.3%; Medical Devices $6.150B, down 3.6%. Nine-month results were $33.304B (+5.2%), $10.435B (+1.0%), and $16.370B (−15.3%), respectively. Pharmaceutical growth included strength in oncology and immunology; Medical Devices remained pressured by pandemic-related procedure reductions.
Cash, debt and capital: At quarter-end, cash and equivalents were $18.965B and marketable securities $11.816B, totaling $30.781B. Current and long-term debt were $5.078B and $32.680B, respectively; management reported net debt of $7.0B, compared with $11.3B a year earlier. Nine-month cash flow from operations was $15.193B; investing used $12.922B and financing used $0.476B. The company paid $7.823B in dividends and repurchased $2.900B of stock during the nine months.
Material changes and unusual items
- Reported earnings comparisons were substantially affected by litigation and acquisition-related items. Q3 2019 included $4.0B of litigation expense, primarily opioid-related, versus $1.5B in Q3 2020. Nine-month litigation expense was $2.2B versus $4.8B.
- In 2020, J&J reversed approximately $1.1B of Auris Health contingent consideration because certain developmental milestones were not expected on current timelines; it also recorded a $0.1B partial impairment of Auris digital-surgery in-process R&D.
- The prior-year nine months included a $2.0B gain from the Advanced Sterilization Products divestiture and a $0.9B Alios R&D impairment charge. These items affect year-over-year earnings comparisons.
- Q3 2020 included a $7.5B senior-note issuance and approximately $3.0B of commercial paper outstanding at quarter-end. The notes’ proceeds were intended partly to fund the subsequent Momenta acquisition.
- After quarter-end, on October 1, 2020, J&J completed its acquisition of Momenta Pharmaceuticals for approximately $6.5B. This is a subsequent event, not included in the quarter-end balance sheet.
Outlook, risks and contingencies
- No specific full-year sales or EPS guidance is provided in the supplied filing text. Management said operating cash flows, borrowing capacity, capital-market access and committed facilities should be sufficient for operating needs, including opioid-related payments.
- The global supply-chain restructuring is expected to generate $0.6B–$0.8B in annual pretax savings, substantially by 2022, with expected pretax charges of $1.9B–$2.3B over four to five years. About $1.2B of charges had been recorded since the program began.
- Management expects additional R&D investment for vaccines and the Momenta pipeline. Vaccine manufacturing contracts involved approximately $0.8B paid or contractually committed; government-related vaccine development cost-sharing arrangements were also entered into.
- In October 2020, after quarter-end, J&J agreed in principle to contribute up to an additional $1B to an all-in $5B opioid settlement, subject to conditions and final documentation. The filing says the agreement was not finalized and related cases remained ongoing. It is not an admission of liability.
- Other significant legal exposures include talc-related claims, product-liability matters and government proceedings. J&J says it cannot estimate possible losses beyond amounts accrued for certain matters; resolution or higher accruals could materially affect results or cash flows in a period. The company is appealing a $344M California surgical-mesh penalty.
- COVID-19 could continue to disrupt manufacturing, supply chains, sales, clinical trials and medical procedures. Other risks include pricing pressure, patent and biosimilar competition, regulatory changes, currency movements and uncertain legal outcomes. The filing identifies no material change to previously reported risk factors apart from the added pandemic risk discussion.
Important facts for investors to verify
- How much reported earnings growth reflects underlying operations versus reduced prior-year opioid litigation expense, the Auris contingent-consideration reversal and other unusual items.
- Whether Medical Devices demand and procedure volumes recover, and whether the nine-month sales declines persist.
- The final terms, timing, funding and tax deductibility of the proposed $5B opioid settlement, alongside changes in talc and other litigation exposures.
- The Momenta acquisition’s final purchase-price allocation, pipeline prospects and effect on debt and future R&D spending.
- Whether the supply-chain restructuring achieves its stated savings and cost targets, and how pandemic-related commitments and disruptions affect cash flow.