Johnson & Johnson — Q3 2015 Form 10-Q
Business context and reporting period. Unaudited quarterly report for the fiscal third quarter ended September 27, 2015, with comparisons to the quarter ended September 28, 2014. The company reports Consumer, Pharmaceutical and Medical Devices segments. Financial amounts below are in U.S. dollars.
Financial performance and position
- Q3 sales: $17.102 billion, down 7.4% year over year. Operational growth of 0.8% was more than offset by an 8.2% adverse currency impact.
- Q3 earnings: Net earnings were $3.358 billion, down 29.3%; diluted EPS was $1.20 versus $1.66. Net earnings margin was 19.6%, compared with 25.7%. Gross margin was 69.5%, versus 70.8%.
- Nine-month results: Sales were $52.263 billion, down 6.8%; operational growth of 1.0% was offset by a 7.8% adverse currency impact. Net earnings were $12.194 billion versus $13.802 billion; diluted EPS was $4.33 versus $4.81.
- Cash flow: Nine-month operating cash flow was $14.197 billion, compared with $14.106 billion. Capital spending was $2.097 billion. Dividends paid were $6.101 billion and share repurchases were $3.394 billion.
- Liquidity and debt: Cash and cash equivalents were $13.639 billion and marketable securities were $23.667 billion, totaling $37.306 billion. Current and long-term debt totaled $19.750 billion, versus $18.760 billion at December 28, 2014. Current assets were $63.494 billion and current liabilities $25.260 billion.
- Other metrics: Nine-month worldwide effective tax rate was 21.0%, versus 22.7%. Quarterly dividends were $0.75 per share, up from $0.70 a year earlier.
Material changes and drivers
- International sales fell 13.7% in Q3, chiefly reflecting currency; U.S. sales declined 0.6%. International sales were also down 13.5% for the first nine months, while U.S. sales rose 0.8%.
- Q3 segment sales declined across Consumer (7.7%), Pharmaceutical (7.4%) and Medical Devices (7.3%). Pharmaceutical sales were pressured by competition for the company’s Hepatitis C products; OLYSIO/SOVRIAD sales fell 90.1% in Q3. Medical Devices showed 0.9% operational growth in Q3, but reported sales were reduced by currency and prior-year divestiture comparisons.
- Q3 pretax earnings fell 39.5% to $4.122 billion. The comparison was heavily affected by the prior-year $1.9 billion net gain on the Ortho-Clinical Diagnostics divestiture; 2015 also included a $229 million SPLENDA gain, a $0.3 billion Acclarent intangible-asset write-down, and litigation expense.
- Nine-month earnings before tax declined 13.6%, reflecting lower asset-sale gains, reduced Hepatitis C sales and currency effects, partly offset by lower net litigation expense, lower Synthes integration costs and other favorable items.
Outlook, risks and unusual items
- The filing provides no numerical full-year earnings or sales guidance. Management stated that operating cash flows, existing credit facilities and commercial-paper access are expected to provide sufficient resources for operating needs.
- On October 2, 2015, after quarter-end, the company completed the Cordis divestiture to Cardinal Health for approximately $2.0 billion, subject to customary adjustments; it expected to record the gain in Q4 2015. On October 13, it announced authorization for up to $10.0 billion of share repurchases, with no time limit.
- Key risks include foreign-exchange movements, pricing and reimbursement pressure, competition and patent challenges, product liability and government proceedings, product safety or manufacturing issues, and economic conditions. The company said litigation outcomes could materially affect results or cash flows in an individual period; it could not estimate potential losses beyond amounts accrued for specified matters.
- The filing identifies product-liability cases involving, among others, pelvic mesh, PINNACLE hip systems, RISPERDAL and XARELTO. It also describes patent and biosimilar challenges, including those concerning REMICADE. The company noted that biosimilar competition had already reduced REMICADE sales in some markets.
- Currency translation reduced reported results and contributed to a $2.729 billion nine-month foreign-currency translation loss in other comprehensive income. Management also discussed uncertainty around Venezuela’s foreign-exchange access, though the country represented less than 0.4% of consolidated assets, liabilities, revenues, profits and net equity.
Most important facts for investors to verify
- How much of reported sales weakness reflects currency and divestitures versus underlying demand, particularly in international markets and Medical Devices.
- Whether Hepatitis C competition, REMICADE biosimilar entry and other patent or generic challenges continue to affect product sales and margins.
- The timing and financial impact of the Cordis sale, including the Q4 gain, and the execution of the newly authorized $10.0 billion repurchase program.
- Developments in major product-liability, government and intellectual-property matters, including whether accruals remain adequate as cases progress.
- Cash conversion and capital allocation: operating cash flow, dividends, repurchases, and debt levels relative to the company’s substantial cash and marketable-securities balance.