Perrigo Company plc — Q2 2023 Form 10-Q
Reporting period: Three and six months ended July 1, 2023; comparisons are with the periods ended July 2, 2022. Perrigo is an OTC health and wellness company operating through Consumer Self-Care Americas (CSCA) and Consumer Self-Care International (CSCI). The former Rx business is reported as discontinued operations.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $1,193.1 million | $1,121.7 million | $2,374.8 million | $2,196.2 million |
| Gross profit | $428.0 million | $372.1 million | $841.9 million | $709.9 million |
| Gross margin | 35.9% | 33.2% | 35.5% | 32.3% |
| Operating income (loss) | $56.8 million | $(6.9) million | $105.4 million | $14.8 million |
| Net income (loss) | $8.4 million | $(65.1) million | $5.4 million | $(67.6) million |
| Diluted EPS | $0.06 | $(0.48) | $0.04 | $(0.50) |
- Q2 sales rose 6.4%; first-half sales rose 8.1%. Growth reflected pricing, product and volume gains, and acquired HRA Pharma and Gateway sales. First-half results also faced unfavorable currency translation and divestiture impacts.
- Q2 operating income improved by $63.7 million year over year, supported by higher gross profit and lower unallocated expenses, including reduced HRA Pharma acquisition-related costs. First-half operating income increased by $90.6 million.
- Interest expense was $44.0 million in Q2 and $87.6 million in the first half, up from $38.3 million and $74.1 million, respectively, primarily due to borrowings. The effective tax rates were 60.5% for Q2 and 70.8% for the first half; audit settlements and nondeductible expenses contributed to the elevated rates.
Cash flow, liquidity, and debt
- First-half operating cash flow was $72.3 million, compared with $62.2 million a year earlier. Capital expenditures were $43.2 million; investing cash outflow was $24.0 million.
- Cash declined to $555.2 million from $600.7 million at year-end 2022. Working capital, as defined by the company, was $1,199.3 million.
- Total borrowings were $4,094.3 million, including $38.4 million classified as current; long-term debt, less current portion, was $4,055.9 million. The $1.0 billion revolving credit facility had no borrowings outstanding. Perrigo reported compliance with debt covenants.
- Moody’s downgraded Perrigo in March 2023; the coupon on the 2030 notes increased to 4.650% from 4.400% for payments after June 15, 2023. The company reports that swaps fix the rate on more than 90% of outstanding debt.
Material developments, outlook, and risks
- CSCA Q2 sales were $750.8 million, up 3.1%; CSCI sales were $442.4 million, up 12.4%. Segment operating income was $97.7 million for CSCA and $8.8 million for CSCI.
- Pricing actions supported results, but inflation, capacity constraints, purposeful SKU prioritization, weaker allergy demand, and infant-formula manufacturing productivity pressures were headwinds. A voluntary recall of a specific infant formula brand, initiated in March, affected operations; Perrigo expects additional compliance costs and lower production volumes as regulatory expectations evolve.
- The FDA approved Opill for OTC use on July 13, 2023, after quarter-end. The company expects to reclassify the related in-process research and development asset as finite-lived in Q3.
- Perrigo’s Supply Chain Reinvention Program targets estimated annual run-rate savings of $200 million to $300 million by year-end 2028, with expected program costs of $350 million to $570 million. It anticipates $150 million to $200 million of annual savings by year-end 2025, alongside $300 million to $450 million of associated spend. These are estimates dependent on successful execution. The filing provides no specific consolidated earnings or sales guidance.
- Material uncertainties include price-fixing litigation involving the former Rx business, securities litigation, talc and ranitidine product-liability claims, and tax disputes. Litigation accruals were $67.6 million, with a $35.2 million insurance recovery receivable; the company cannot estimate a maximum possible loss range for the matters discussed. A long-running IRS refund case includes potential additional tax exposure of $24 million to $112 million, excluding interest and penalties, if the company does not prevail on the omeprazole issue. The IRS fully resolved the Tysabri royalty adjustment in April 2023.
- Other risks include inflation and interest rates, foreign exchange, the war in Ukraine, regulatory and product-recall exposure, and realizing HRA Pharma and Gateway integration benefits. Management stated that liquidity resources should meet short- and long-term needs, while noting that adverse litigation or tax outcomes could impair liquidity.
Key facts for investors to verify
- Whether pricing, mix, acquired sales, and margin improvement persist after accounting for inflation, capacity limits, and product recalls.
- Progress and realized costs and savings from the Supply Chain Reinvention Program, and integration performance for HRA Pharma and Gateway.
- Infant-formula production, regulatory compliance, recall-related costs, and the commercial launch and uptake of Opill.
- Debt reduction, interest costs, rating developments, and covenant headroom.
- Developments in IRS disputes and litigation, including the adequacy of recorded accruals and insurance recoveries.