Johnson & Johnson — Form 10-Q Summary
Business context and reporting period
Johnson & Johnson reported for the fiscal quarter and nine months ended September 30, 2018. Its businesses span Consumer, Pharmaceutical, and Medical Devices. Unless noted otherwise, financial amounts below are in U.S. dollars.
Key financial metrics
| Metric | Third quarter 2018 | Third quarter 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $20.35 billion | $19.65 billion | $61.19 billion | $56.26 billion |
| Net earnings | $3.93 billion | $3.76 billion | $12.26 billion | $12.01 billion |
| Diluted EPS | $1.44 | $1.37 | $4.49 | $4.37 |
| Gross margin | 67.6% | 64.8% | 67.1% | 67.7% |
| Net margin | 19.3% | 19.2% | 20.0% | 21.4% |
- Sales growth: Third-quarter sales rose 3.6% reported, with 5.5% operational growth offset by a 1.9% adverse currency impact. Nine-month sales rose 8.8% reported, including 7.5% operational growth and a 1.3% favorable currency impact.
- Segment sales, third quarter: Consumer $3.42 billion, up 1.8%; Pharmaceutical $10.35 billion, up 6.7%; Medical Devices $6.59 billion, down 0.2%. Nine-month sales increased 2.5%, 14.9%, and 3.6%, respectively.
- Profitability: Third-quarter pretax earnings fell 7.7% to $4.42 billion, despite higher sales; the $1.1 billion in-process research and development charge was a major unusual item. Nine-month pretax earnings declined 1.6% to $14.88 billion. The nine-month effective tax rate was 17.6%, versus 20.5% in 2017, reflecting tax-law changes and other factors.
- Cash flow: Nine-month operating cash flow was $15.96 billion, versus $14.95 billion. Investing used $5.40 billion and financing used $12.12 billion.
- Liquidity and debt: At September 30, cash and cash equivalents were $16.06 billion and current marketable securities were $3.31 billion. Current assets were $47.19 billion and current liabilities $27.44 billion. Total current and long-term debt was approximately $31.25 billion, down from $34.58 billion at December 31, 2017. The company reported a $10 billion 364-day credit facility expiring September 2019.
- Shareholder returns: Nine-month dividends were $7.08 billion and share repurchases were $2.06 billion. The board declared a $0.90-per-share dividend payable in December 2018.
Material changes versus the prior comparable period
- Pharmaceutical growth was led by oncology, up 36.4% in the quarter, including strong growth in DARZALEX, IMBRUVICA, and ZYTIGA. REMICADE sales declined 16.3% in the quarter amid biosimilar competition; INVOKANA/INVOKAMET declined 28.3%.
- Medical Devices’ quarterly sales were nearly flat. Diabetes Care declined 22.2% in the quarter, and Orthopaedics declined 4.2%; Vision and Interventional Solutions grew.
- Quarterly gross margin improved, but nine-month gross margin and net margin declined. Nine-month cost of products sold included higher amortization, primarily related to the Actelion acquisition.
- Cash and cash equivalents declined $1.77 billion from year-end, while marketable securities increased from $0.47 billion to $3.31 billion. Debt declined by approximately $3.33 billion.
Outlook, commentary, risks, contingencies, and unusual items
- No specific consolidated sales or earnings forecast is stated in the supplied filing text. Management expects existing operating cash flow, borrowing capacity, and market access to provide resources for operating needs.
- Medical Devices restructuring actions are expected to produce $0.8–$1.0 billion in annual pretax savings, with most expected by the end of 2018; approximately $2.4 billion of charges had been recorded since announcement. A separate global supply-chain program is expected to yield $0.6–$0.8 billion in annual savings, substantially by 2022, with estimated pretax charges of $1.9–$2.3 billion over four to five years. Management cautioned that supply-chain changes may disrupt sourcing or supply.
- The $1.1 billion research and development charge included a $0.8 billion impairment of the AL-8176 program following suspension of Phase 2b trials and a $0.3 billion charge for discontinuing an XO1 anti-thrombin antibody program. The remaining AL-8176 asset may be subject to further impairment.
- After quarter-end, the company completed the LifeScan divestiture for approximately $2.1 billion; it had accepted a binding offer to sell Advanced Sterilization Products for approximately $2.7 billion, subject to adjustments and expected to close in 2019. It also announced a roughly $2 billion tender offer for Ci:z Holdings. The Jabil supply-chain collaboration was pending applicable processes.
- Significant litigation includes product-liability claims involving talc products, pelvic mesh, medicines, and medical devices, as well as opioid-related government and private actions. The filing notes a $4.7 billion jury verdict in talc litigation; the company said it planned to appeal and believed it had strong grounds. Management said the ultimate outcome of litigation, net of accruals, was not expected to materially affect financial position, but one or more matters could materially affect period results or cash flows; possible losses beyond recorded accruals generally could not be estimated.
- In October 2018, a court invalidated asserted ZYTIGA patent claims. The company planned to appeal; if the injunction against generic launch was not extended, management expected generic entry to cause a significant sales decline. This post-quarter development is particularly relevant given nine-month ZYTIGA sales of $2.71 billion.
- Tax estimates related to the 2017 U.S. Tax Cuts and Jobs Act remained provisional and could require further adjustment. Unrecognized tax-benefit liabilities were approximately $3.2 billion; the IRS audit of 2010–2012 tax years was expected to conclude in 2019.
Most important facts for investors to verify
- Whether generic competition for ZYTIGA began and the status and financial effects of the company’s appeal.
- Subsequent developments, accruals, and potential cash exposure in talc, opioid, pelvic-mesh, and other major litigation.
- Whether the AL-8176 development program proceeds and whether additional impairment is recorded.
- Progress, realized savings, charges, and any supply or execution impacts from the Medical Devices and global supply-chain restructuring programs.
- Final Tax Cuts and Jobs Act measurement-period adjustments, uncertain tax positions, and IRS audit outcomes.
- Completion and final proceeds or retained liabilities for the LifeScan and Advanced Sterilization Products transactions, and the status and terms of the Ci:z Holdings offer.