Johnson & Johnson — Form 10-Q Summary
Business context and period. This unaudited report covers the fiscal third quarter and nine months ended October 1, 2017, compared with the periods ended October 2, 2016. J&J reports Consumer, Pharmaceutical and Medical Devices segments. The quarter includes Actelion results from its June 16, 2017 acquisition.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $19.65B | $17.82B | $56.26B | $53.78B |
| Gross margin | 64.9% | 69.2% | 67.8% | 70.0% |
| Net earnings | $3.76B | $4.27B | $12.01B | $12.73B |
| Diluted EPS | $1.37 | $1.53 | $4.37 | $4.55 |
| Pre-tax earnings as % of sales | 24.4% | 29.6% | 26.9% | 28.8% |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $14.95B | $12.11B |
- Q3 sales rose 10.3% (operational growth 9.5%; currency added 0.8%); acquisitions and divestitures contributed 5.7 percentage points to operational growth. Nine-month sales increased 4.6% (operational growth 4.8%; currency reduced growth 0.2%), with acquisitions and divestitures contributing 3.0 percentage points.
- Profitability declined despite higher sales. Management attributed lower pre-tax margins primarily to acquisition-related amortization and costs, higher investment spending and restructuring; the nine-month period also included a $0.2B impairment primarily related to the insulin-pump business. Q3 included a $0.4B gain, primarily from the COMPEED divestiture.
- Nine-month cost of products sold rose to 32.2% of sales from 30.0%; R&D rose to 12.3% from 12.0%. Intangible amortization was $1.89B versus $0.90B.
Segments and notable product trends
- Consumer: Q3 sales $3.36B, up 2.9%; nine-month sales $10.06B, up 1.9%. Beauty and OTC grew in Q3; Baby Care and Oral Care declined amid competition and category pressure.
- Pharmaceutical: Q3 sales $9.70B, up 15.4%; nine-month sales $26.58B, up 5.3%. Oncology growth included Q3 increases of 94.5% for DARZALEX and 46.7% for IMBRUVICA. STELARA also grew strongly. REMICADE sales fell 7.6% in Q3 amid biosimilar competition; INVOKANA/INVOKAMET fell 19.2%.
- Medical Devices: Q3 sales $6.60B, up 7.1%; nine-month sales $19.62B, up 5.0%. Vision Care growth reflected AMO acquisition and product launches. Diabetes Care declined 6.9% in Q3; Orthopaedics was flat overall, with weakness in knees and spine.
Cash, debt and liquidity
- At October 1, cash and cash equivalents were $15.72B and current marketable securities were $0.51B. Current assets were $41.83B and current liabilities $31.81B; total assets were $155.66B and total liabilities $81.68B.
- Reported loans, notes payable and long-term debt totaled approximately $35.17B ($8.49B current and $26.68B long-term), up from $27.13B at January 1. The filing says debt exceeded cash, cash equivalents and marketable securities at quarter-end.
- Nine-month investing cash use was $14.36B, including $34.65B of net acquisition payments; financing cash use was $4.14B, including $6.69B of dividends and $5.54B of share repurchases. Cash declined $3.25B from year-end.
- J&J paid $29.1B, net of cash acquired, for 98.4% of Actelion shares tendered and expected to pay a further $0.5B for untendered shares by year-end. It reported a $10B repurchase program completed by July 2, 2017. A $10B, 364-day credit facility was secured in September 2017.
Outlook, management commentary and risks
- The filing provides no clear numerical full-year sales or EPS guidance. Management said operating cash flow, external financing access, committed credit facilities and commercial paper capacity should provide sufficient resources for operating needs.
- Medical Devices restructuring is expected to generate $0.8B–$1.0B in annual pre-tax savings, with most expected by the end of 2018. Estimated total pre-tax charges are $2.0B–$2.4B; $1.8B had been recorded since announcement. The plan targets elimination of 4%–6% of the segment’s global workforce over 15 months.
- After quarter-end, J&J announced it would exit the Animas insulin-pump business; it continues to evaluate strategic options for LifeScan. Codman Neurosurgery was divested on October 2, 2017 for approximately $1.0B.
- Actelion generated Q3 sales of $670M and a net loss of $552M; since acquisition, sales were $761M and net loss $668M. The purchase-price allocation remained preliminary. Actelion goodwill was approximately $5.8B, primarily attributed to expected synergies.
- Key exposures include product-liability and government proceedings, patent challenges and biosimilar/generic competition, pricing pressure, regulatory and product-safety risks, foreign exchange and economic uncertainty. The filing identifies substantial ongoing litigation, including claims involving hip devices, pelvic mesh, talc products, RISPERDAL, XARELTO and INVOKANA; for specified matters, potential losses beyond accrued amounts could not be estimated.
- The worldwide effective tax rate for the first nine months was 20.5%, versus 17.8% a year earlier. J&J cited acquisition-related tax costs and a shift toward higher-tax jurisdictions, partly offset by stock-based compensation tax benefits. Unrecognized tax-benefit liabilities were approximately $3.3B.
Most important facts for investors to verify
- How much reported sales growth is sustainable excluding acquisitions, and whether acquired businesses deliver expected returns.
- Whether gross and pre-tax margins recover as acquisition amortization, integration costs and restructuring evolve.
- Actelion’s ongoing performance, final purchase-price allocation and remaining share-purchase payment.
- Progress against restructuring savings and charge estimates, and the financial effects of exiting Animas and any LifeScan decision.
- Debt, cash generation and capital allocation after the large acquisition, alongside material litigation, patent and product-competition developments.