Perrigo Company plc — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports fourth-quarter results. Perrigo sells OTC and consumer self-care products and generic prescription drugs, primarily in North America and Europe. Its segments are Consumer Self-Care Americas (CSCA), Consumer Self-Care International (CSCI), and Prescription Pharmaceuticals (RX). Management began a three-year strategy to shift the company toward consumer self-care.
Financial results
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $4,837.4 million | $4,731.7 million |
| Gross profit / margin | $1,773.3 million / 36.7% | $1,831.5 million / 38.7% |
| Operating income / margin | $204.8 million / 4.2% | $236.5 million / 5.0% |
| Net income | $146.1 million | $131.0 million |
| Diluted EPS | $1.07 | $0.95 |
| Cash from operating activities | $387.8 million | $593.0 million |
| Capital expenditures | $137.7 million | $102.6 million |
At December 31, 2019, cash and cash equivalents were $354.3 million, total assets $11.30 billion, total borrowings outstanding $3.37 billion, and shareholders’ equity $5.80 billion. The $1.0 billion revolving credit facility was undrawn, and the company reported compliance with debt covenants. The effective tax rate was 14.6%, versus 54.9% in 2018.
Fourth-quarter 2019 sales were $1,322.8 million, gross profit was $480.9 million, and net loss was $19.0 million, or diluted loss per share of $0.14. The quarter included $141.6 million of impairment charges.
Segments and changes versus prior period
- CSCA: Sales of $2,487.7 million, up 3%; operating income of $414.0 million versus $174.4 million in 2018. The increase in operating income largely reflected the absence of prior-year animal-health impairments and lower R&D expense; gross margin edged down to 32.1% from 32.7%.
- CSCI: Sales of $1,382.2 million, down 1%; operating income of $19.6 million versus $6.8 million. Unfavorable euro translation weighed on sales and gross profit; operating expenses declined.
- RX: Sales of $967.5 million, up 5%, but operating income fell to $2.6 million from $214.6 million. Competitive pricing pressure and unfavorable mix reduced gross margin to 34.6% from 40.6%; $170.6 million of segment impairment charges also affected results.
Consolidated sales rose 2%, supported by new products, Ranir acquisition sales, and demand for existing products, but operating income fell 13% and gross margin declined 200 basis points. The company attributed the margin pressure primarily to RX pricing competition, the ranitidine withdrawal, and product mix. Operating cash flow fell $205.2 million, mainly due to working-capital movements and tax payments.
Outlook, material events, and risks
- Management gave no specific consolidated earnings or sales guidance in the supplied filing text. It expects operating cash flow, cash, and available borrowing capacity to cover short- and long-term needs. Planned capital expenditures for the next 12 months are $175 million–$225 million.
- Perrigo acquired Ranir for $747.7 million net of acquired cash, contributing $151.4 million in sales from July through December. It sold its animal-health business for $182.5 million, recording a $71.7 million pretax gain. It received a $250 million Tysabri-related milestone payment; a further $400 million payment depends on 2020 royalty thresholds.
- The planned RX separation remained under preparation, with no committed timing or transaction form. Estimated preparation costs are $45 million–$80 million, excluding restructuring and transaction costs.
- Ranitidine market withdrawals reduced 2019 net sales by $9.2 million and gross profit by $18.4 million across CSCA and CSCI. RX pricing pressure was expected to persist. A generic albuterol inhaler received FDA approval in February 2020; Perrigo anticipated steady supply by fourth-quarter 2020.
- Significant tax disputes remain unresolved. Irish Revenue assessed €1.636 billion, excluding interest and penalties, concerning the Tysabri asset sale. An IRS transfer-pricing notice proposes $843 million, including a 40% penalty, before potentially material interest and tax attributes. A separate IRS interest-deduction adjustment could increase tax expense by an estimated $170 million for 2014–2015, plus up to $200 million for 2015–2019, excluding interest and penalties. The company disputes these positions; payment is not currently due pending proceedings. It reported $448.6 million of uncertain-tax-position liabilities including interest and penalties.
- Other notable risks include generic-drug pricing and antitrust litigation, securities litigation, foreign exchange exposure, customer concentration (Walmart represented 13.0% of sales), and potential further impairments. Goodwill totaled $4.12 billion; the RX U.S. unit had a $109.2 million goodwill impairment in 2019. Certain CSCI reporting units had limited valuation headroom.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management’s control assessment excluded Ranir, whose integration and control testing were ongoing.
Most important facts for investors to verify
- Whether RX pricing and profitability stabilize, and whether the albuterol launch meets its expected supply timeline.
- Cash conversion and working-capital trends, given the decline in operating cash flow and the Ranir-related investment.
- Progress, final cost, and potential financial and operational effects of the proposed RX separation.
- Developments in the Irish and U.S. tax disputes, including potential assessments, interest, penalties, and liquidity impact.
- Whether goodwill and intangible-asset valuations, especially in RX and CSCI, withstand further market or forecast deterioration.
- Integration of Ranir, realization of expected benefits, and completion of controls testing for the acquired business.