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The Oldest Trick In The Book: Here Is How Johnson & Johnson's "Beat Earnings" Despite Sliding Revenues
Earlier today, one hour before consumer and medical products conglomerate Johnson & Johnson was set to report Q3 earnings, it unexpectedly announced that it would launch a $10 billion buyback, a move which we said would presage earnings that are "almost certain to be very bad."
A few minutes later this skepticism was confirmed when JNJ announced a huge miss in Q3 revenues of $17.1 billion, far below the $17.45 billion consensus estimate, and a whopping 7.4% down compared to the year earlier.
Of course, seen in this light the buyback announcement was merely there to cushion the blow from the weak Q3 earnings.
And yet, when looking at JNJ's EPS line, things were not nearly as bad, because despite a 7% slide in revenues and a whopping 40% collapse in pretax net income, somehow JNJ reported Q3 non-GAAP EPS of a solid $1.49, actually beating consensus of $1.45, and only 7% lower than a year ago.
Hardly terrible... until one looks at the detail and finds the same "oldest accounting gimmick in the book" which as we showed was used by both Coke and Intel last quarter: namely "adjusting" tax rates.
Here is what happened: a year ago, JNJ had a GAAP effective tax rate of 30.3%. This year? The number tumbled 38.9% to just 18.5%. Obviously applying a 40% lower tax rate to a 40% lower pretax number will result in almost a wash, and that is precisely what happened, because JNJ's non-GAAP, adjusted EPS dropped a very modest 7.5% from $1.61 to $1.49.
What happens if one appies the same tax rate to Q3 2015 as the company used a year ago?
This.
Then again, to "offset" the bitter taste in the public's mouth from a 38% plunge in earnings, JNJ would have to buyback so much stock it would be downgraded to Junk overnight. Which will still happen, but not quite yet: for now investors in the S&P continue to willingly play along with these non-GAAP, charge addback, tax rate games played by company management teams. It is only after the money runs out that everyone will finally wake up to what has been going on before everyone's eye but it will be too late.
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If only everyone could use "mark to fantasy" accounting.
Everytime I hear about "Johnson and Johnson's" I think about this article from the early internet.
BLAST FROM THE PAST: http://www.thebestpageintheuniverse.net/c.cgi?u=bill_oreilly
"Since Bill O'Reilly is such a cry-baby bitch, I have decided to send him a bottle of Johnson & Johnson "no more tears" shampoo, along with a box of tampons to help with his constant PMS."
So HOW could they reduce their tax rate so dramatically? Tax credits for some one-off reason or have they just shifted all their IP revenues to Ireland to use a "Double Irish with a Dutch sandwich"? If so, why did they not have that before like all other Pharma Companies? That's a BIG adjustment in tax rate which needs further explanation?
I did time in their Federal Prison, and only the peasants are held accountable for their actions these days.. The BOP, FBI, ATF, DHS, DEA, etc., etc. their only purpose is to prey on Americans to keep their 100k jobs, and steal freely with Asset forfeiture(with a large percent straight into their dirty little hands off the books)..
I use the same accounting techniques at home and my net worth is now 1.2 billion dollars.
(it works)
Finally, the mystery treasury buyer has been identified!
I have skilz.
Soothing, cooling medicated Tucks Pads all around for everyone's aching heorrhoids.
I wish I could "adjust" my own tax rates.
That's White people for you -- more specifically--the white middle class. And they wonder why it's disappearing! You know these people go to college and get degrees in Accounting!
The white middle class is very banal. They enable elites to loot with impunity because they themselves think that they can also beneift from it somehow and they're smarter than anybody else---they'll get out in time.
The elites need some accomplices in their crime of stealing from everyone else. The four main accomplices are CEO slavedrivers (and mangement in genral), bankers, law makers, and law enforcers. With those overcompenstaed accomplices on your side you can loot to your hearts content.
could someone who knows please comment on how a corporation gets to decide its tax rate? is it something to do with the 'non'-gaapness...as in we actually paid 38% tax rate, but if we pretend to only pay 18%, we have to call it non-gaap, but look how much better the numbers are had we only needed to pay lower taxes...damn taxes!.....something like that?
Something like that. There's taxes paid as part of their income tax filings, and then there's the tax they would have otherwise paid according to the accounting rules, which can (and often are) different. As such, they don't decide to pay anything (other than having some sort of tax asset on their books to offset a liability). It's a computed number. That's why articles like this piss me off to no end, since they're completely devoid of any logic/depth and fall into the Buzzfeed-style of headline grabbers. "FIND OUT WHAT THIS COMPANY DID TO PISS OFF THE FEDS! AND IT'S COMPLETELY LEGAL!" Really guys? Really? We're really debating GAAP in 2015? Talk about scraping bottom. That's some crack reporting there, Tyler...
Big pharma - the tobacco companies of tomorrow.
They're a harbinger for Wal-Mart too. A quarter of the products on WMT shelves are JNJ garbage.
Johnson and Johnson... I guess one of those Johnsons is being used to jerk off with and the other is shafting stock holders up the ass.
Oh, that Johnson...
If you believe it...it isn't a lie
FUCK YOU, JNJ!!!!! BASTARDS!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
C'mon people, they're only playing by existing accounting regulations they paid politicians to create and pass.
"The oldest trick in the book". The oldest profession. Hmmmm
I thought adjusted EPS didn't include bullshit like taxes?
I don't see 'the problem'.
wwxx
Should have known they'd stick a Band-Aid on it.
The oldest trick in the book: "Look, there!"
Girl: "I'm smiling because I have a John(son) in my life."
So next quarter the CEO is moving to another dung heap when the debt goes to junk.
I love it when the bond market tips over, interest rates jump and these companies will go for cents in the dollar.
$17.1 billion is still solid sales even if the numbers are less than the year before. Is the company profitable, do they have adequate cash flow, do they own valuable assets, are there realistic plans to increase profits through innovation or reduced expenses? If the answers are yes I don't see the problem and I don't understand why anyone would consider their stock junk. Judgement of a corporation by share price and EPS alone are reasons why the stock market is so out of whack with reality.
Johnson & Johnson ...Tale of Two Cities...
Actually there exist two J&J. One model is a corporation, structures,people,products, etc. That is the real world.
On Wall Street we have the other model..it is called the J&J spreadsheet model. The real world model and the spreadsheet model do not always match.
On Wall Street...the spreadsheet model is king! You lay out your spreadsheet on a table with your accountants, financial engineering specialist, tax experts and lawyers. You then tweak the cells in the spreadsheet to get to a predetermined bottom line. If the cell.. which is called labor expenses needs tweaking..you call in Human Resources and tell them to come up with a plan to meet the number needed in the spreadsheet cell.
You go thru each cell..until the J&J spreadsheet model meets Wall Street expectations. It may not represent your real world model..but what the hell..it is Wall Street wants.
If your spreadsheet model does not meet Wall Street expectations...they get pissed. Remember..they are paying big bucks to analyst to figure out the future...you surprise them with a different future...you pay the price. So it is best to just get along...