Johnson & Johnson — Form 10-Q Summary
Reporting period: Fiscal third quarter ended October 2, 2011; nine-month results are compared with the periods ended October 3, 2010. Financial statements are unaudited. Dollar amounts are in millions unless stated otherwise.
Business context and performance
Johnson & Johnson operates in Consumer, Pharmaceutical, and Medical Devices & Diagnostics. Third-quarter worldwide sales rose 6.8%, but growth was concentrated internationally and partly reflected favorable currency movements. U.S. sales declined 3.7%. For the nine months, worldwide sales increased 6.2%, comprising 2.3% operational growth and a 3.9% favorable currency impact.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Sales | $16,005 | $14,982 | $48,775 | $45,943 |
| Gross profit / margin | $10,933 / 68.3% | $10,388 / 69.3% | $33,753 / 69.2% | $32,191 / 70.1% |
| Net earnings / net margin | $3,202 / 20.0% | $3,417 / 22.8% | $9,454 / 19.4% | $11,392 / 24.8% |
| Diluted EPS | $1.15 | $1.23 | $3.40 | $4.08 |
| Operating cash flow | Not separately stated | Not separately stated | $10,847 | $12,561 |
- Third-quarter selling, marketing and administrative expense was 32.7% of sales versus 31.4%; research and development was 11.1% in both periods. Nine-month R&D spending increased 10.9% to $5.4 billion.
- Nine-month cash used in investing was $10,850, including $2,469 for acquisitions, $1,765 for capital spending, and net purchases of investments. Financing used $3,696, including $4,601 of dividends and $1,672 of share repurchases.
- At October 2, cash and cash equivalents were $15,617 and marketable securities were $15,310. Total debt was approximately $18.4 billion; the balance sheet shows $5,326 current debt and $13,031 long-term debt. Shareholders’ equity was $61,527.
- Cash, cash equivalents and marketable securities totaled $30.9 billion. The company reported access to a $10 billion 364-day credit facility expiring September 20, 2012, and anticipated operating cash flow, credit facilities and commercial paper access would provide sufficient resources for operating needs.
Material changes versus comparable periods
- Q3 sales increased 6.8%, while net earnings fell 6.3% and diluted EPS declined from $1.23 to $1.15. Higher cost of sales and selling expenses compressed margins.
- Nine-month net earnings decreased 17.0%. The comparison was affected by 2010 net litigation gains, while 2011 included $589 of restructuring expense in the earnings statement and significant litigation and recall costs.
- International sales grew 16.4% in Q3, including 8.3% operational growth and 8.1% favorable currency impact; U.S. sales fell 3.7%. For the nine months, international sales rose 13.2%, while U.S. sales declined 1.3%.
- Q3 segment sales increased 4.9% in Consumer, 8.9% in Pharmaceuticals and 6.1% in Medical Devices & Diagnostics. Nine-month segment operating profit fell 9.7% in Consumer and 32.1% in Medical Devices & Diagnostics, while Pharmaceutical operating profit rose 6.0%.
- Operating cash flow declined to $10.8 billion from $12.6 billion for the nine months. Cash and cash equivalents declined $3.7 billion from fiscal year-end 2010, while debt was higher than a year earlier, reflecting increased borrowing.
Outlook, commentary, risks and unusual items
- The filing provides no specific consolidated earnings or sales guidance. Management said it expects regular quarterly dividends to continue. The quarterly dividend was $0.57 per share.
- Management expected McNeil Consumer Healthcare product volumes to ramp up through the remainder of 2011 and into 2012. Manufacturing restrictions and remediation following recalls continued to affect output; the Fort Washington facility remained shut under an FDA consent decree.
- The company entered a definitive agreement to acquire Synthes for approximately $21.3 billion, or about $19.3 billion net of cash acquired, with closing expected in the first half of 2012, subject to conditions. A currency option related to the planned transaction generated a $304 million Q3 mark-to-market loss.
- Cordis discontinued the NEVO development program and planned to cease CYPHER stent manufacture and marketing by year-end 2011. The associated $676 million pre-tax restructuring charge included $512 million of asset write-offs; the program was substantially completed by October 2.
- Product liability, patent, government and other proceedings include claims involving DePuy ASR hips, LEVAQUIN, RISPERDAL, McNeil recalls and other products. The company stated that it could not estimate possible losses beyond amounts accrued for certain matters; resolutions in a given period could materially affect results or cash flows, even though management did not expect the matters, net of accruals, to materially affect financial position.
- Key business risks cited include product safety and manufacturing issues, litigation and regulatory scrutiny, generic competition and patent challenges, healthcare reform and pricing pressure, currency and economic conditions, and execution and integration of acquisitions.
Important facts for investors to verify
- Whether McNeil facility remediation, FDA requirements and product reintroductions proceed on schedule, and how they affect sales and costs.
- Developments in DePuy ASR recall claims and other significant litigation, including whether accruals or estimated exposures change.
- Whether the Synthes acquisition closes on the anticipated terms and timing, and its financing, integration and currency effects.
- Durability of operational growth given the gap between international and U.S. performance, currency’s contribution, and generic erosion including LEVAQUIN.
- Whether cash generation, debt levels and liquidity remain adequate alongside dividends, acquisitions and capital spending.