Perrigo Company plc — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 29, 2019. Unaudited results are compared with the periods ended June 30, 2018. Perrigo sells OTC self-care products and generic prescription pharmaceuticals. The company changed its reporting segments in 2019; prior-period segment results were recast for comparability.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,149.0 million | $1,186.4 million | $2,323.5 million | $2,403.4 million |
| Gross profit | $430.8 million | $471.0 million | $879.6 million | $963.7 million |
| Gross margin | 37.5% | 39.7% | 37.9% | 40.1% |
| Operating income | $55.0 million | $94.7 million | $157.3 million | $250.9 million |
| Operating margin | 4.8% | 8.0% | 6.8% | 10.4% |
| Net income | $9.0 million | $36.2 million | $72.9 million | $117.0 million |
| Diluted EPS | $0.07 | $0.26 | $0.54 | $0.84 |
- Cash flow: Six-month operating cash flow was $158.3 million, down from $254.7 million. Investing activities provided $162.0 million, including receipt of a $250.0 million Royalty Pharma milestone payment; financing activities provided $178.2 million. Cash increased $504.6 million to $1,055.7 million.
- Liquidity and debt: Current assets were $3,435.4 million and current liabilities $1,790.8 million. Total borrowings were $3,483.2 million, including $325.0 million drawn on the $1.0 billion revolver; cash was $1,055.7 million. The company reported compliance with debt covenants. Credit ratings were Baa3 and BBB-, both stable.
- Other: Net interest expense for the first half was $59.8 million, versus $63.5 million. The six-month effective tax rate was 32.5%, versus 29.4%; Q2’s rate rose to 66.6% from 34.5%.
Changes and operating drivers
- First-half sales declined 3%; operating income fell 37%. Management attributed lower sales principally to pricing pressure on existing products, discontinued products, and unfavorable euro translation. New-product sales partly offset these declines.
- First-half gross margin contracted 220 basis points, reflecting sales declines, higher commodity costs in some products, and CSCA operating inefficiencies. Higher legal and consulting costs, impairment charges, and restructuring costs also weighed on results. Lower R&D expense versus 2018 partly offset these factors, as the prior-year period included a $50.0 million Merck license fee.
- CSCA first-half operating income increased to $202.0 million from $183.2 million, despite lower sales, mainly because the prior-year Merck fee did not recur. CSCI operating income declined to $5.1 million from $16.3 million, with weaker sales, currency effects, and France sales-force reorganization contributing. RX operating income fell to $75.3 million from $114.8 million, primarily due to pricing pressure, product mix, and impairment.
- Q2 included a $27.8 million impairment charge in RX for a definite-lived intangible asset amid pricing and competition pressures. First-half impairment charges totaled $31.9 million. The RX U.S. reporting unit’s estimated fair value exceeded carrying value by approximately 10%, narrower than at the prior annual test; no goodwill impairment was recorded.
Outlook, transactions, risks, and contingencies
- RX separation: Perrigo continued preparations to separate RX through a possible sale, spin-off, merger, or other structure, but gave no committed completion date. It estimated $45–$80 million of preparation costs, excluding restructuring and transaction costs. The company said tax-dispute uncertainty could affect this plan.
- Subsequent transactions: On July 1, 2019, Perrigo acquired oral-care company Ranir for $750 million, funded with cash and revolver borrowings. On July 8, it completed the sale of animal health for base consideration of $185 million and estimated a pretax gain of $80–$90 million, subject to closing adjustments. Neither transaction was reflected as completed in the June 29 balance sheet.
- Tax disputes: Irish Revenue assessed €1.636 billion, excluding interest and penalties, relating to the 2013 Tysabri asset sale. Separately, an IRS revised NOPA proposed $843.0 million of additional tax and a 40% penalty, excluding potential interest and offsetting tax attributes. Perrigo disputes both matters; payment is not currently required. The company warned an adverse outcome could materially affect liquidity and capital resources.
- Litigation: Perrigo faces generic-drug price-fixing claims and numerous securities lawsuits, among other matters. The filing says outcomes are uncertain and that some adverse outcomes could materially affect financial condition, results, or cash flows. A securities class action in Israel cites a preliminary damages estimate of approximately $760 million; the case is stayed. The filing does not provide a clear estimate of damages for most other cases.
- Other uncertainty: Pricing pressure and competition may continue to affect RX and could lead to further impairment. A potential 2020 Tysabri-related milestone is recorded at $89.1 million; if the contractual sales threshold is not met, Perrigo expects to write off that asset. Management cited sufficient cash, operating cash flow, and borrowing resources for expected requirements, while noting that liquidity needs could change.
Important facts for investors to verify
- Progress and costs, timing, structure, and financing implications of the proposed RX separation.
- Updates on the Irish tax assessment and IRS NOPA, including possible interest, offsets, and any change in payment exposure.
- Whether margins and operating cash flow stabilize amid pricing pressure, currency movements, higher costs, and legal expenses.
- Final purchase-price adjustments and gain on the animal-health sale, and Ranir’s integration, funding, and operating contribution.
- RX goodwill headroom, future impairment risk, and the outcome of the 2020 Royalty Pharma milestone test.
- Developments in price-fixing, securities, and other litigation, including any change to estimated exposure or reserves.