A Talc Charge Nearly Erases Johnson & Johnson's Quarterly Profit

Johnson & Johnson beat the profit number Wall Street watches and raised its outlook for the year. The stock fell anyway. Shares closed Tuesday at $248.61, down 5.7%, after a one-time charge tied to a proposed talc settlement all but erased the company’s reported earnings for the quarter.

Nine cents on paper, $2.59 adjusted

On an adjusted basis, Johnson & Johnson earned $2.59 a share in the third quarter, ahead of the $2.53 analysts had expected. Sales rose 5.9% to $25.4 billion, a touch above forecasts. Management nudged its full-year adjusted profit target up to a range of $11.05 to $11.15 a share, an increase of six cents at the midpoint, and lifted the low end of its sales outlook; the midpoint of that guidance now sits at $101.2 billion.

The reported line told another story. Under standard accounting rules, the company earned just $210 million, or nine cents a share, down almost 96% from a year earlier. One item explains the gap. Johnson & Johnson booked a charge for what it called a proposed resolution of the talc litigation it has faced for years, together with costs from two recent deals. Adjusted earnings strip those out. The reported number carries them in full, and the size of the swing is what caught the market’s eye.

Even the adjusted figure was no gusher. At $2.59, it slipped 7.5% from the $2.80 the company earned a year earlier, though it cleared the bar analysts had set going in.

MedTech was the soft spot

The device business came up short. MedTech, the division that makes surgical tools and heart-repair equipment, posted sales of $8.6 billion, up 2.5%, below what analysts had modeled. The growth was lopsided. U.S. sales rose 4.8%, while sales abroad barely moved. Innovative Medicine, the drug unit and the larger of the two, carried the quarter with $16.8 billion in sales, up 7.7%. Free cash flow for the year so far ran above $15 billion, higher than the same stretch of last year.

A stock already sliding

The reaction landed on a name that had been drifting lower for weeks. Before Tuesday, the stock was down 6.6% over the prior 30 days. The close left it 10.7% below its high of the last 90 trading days and 9% above the low of that span. Volume ran heavy. Some 16.7 million shares traded, 2.4 times the stock’s 20-day average, the kind of turnover that marks a session when investors reset their read on a company.

The settlement is only proposed

The charge that gutted the reported figure reflects a settlement the company described as proposed, not yet final. Johnson & Johnson has spent years trying to close out the talc claims against it, and earlier attempts have met resistance in court. Two questions remain. Whether the raised full-year targets hold through the fourth quarter is the first. Whether MedTech’s overseas sales recover after a near-standstill quarter is the second. The adjusted forecast now centers on $11.10 a share for the full year, and the distance between that figure and the nine cents the company reported this quarter shows how much of the story sits in a single legal charge.

This is a general-market summary for information only — not investment advice, and not a recommendation regarding any security.