Perrigo Company plc — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; comparisons are to the three and six months ended July 1, 2017. Perrigo is a global healthcare company operating in Consumer Healthcare Americas (CHCA), Consumer Healthcare International (CHCI), and Prescription Pharmaceuticals (RX). Figures are in U.S. dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $1,186.4 million | $1,237.9 million | $2,403.4 million | $2,431.9 million |
| Gross profit / margin | $471.0 million / 39.7% | $504.6 million / 40.8% | $963.7 million / 40.1% | $968.9 million / 39.8% |
| Operating income / margin | $94.7 million / 8.0% | $148.8 million / 12.0% | $250.9 million / 10.4% | $277.3 million / 11.4% |
| Net income (loss) | $36.2 million | $(69.6) million | $117.0 million | $2.0 million |
| Diluted EPS | $0.26 | $(0.49) | $0.84 | $0.01 |
| Operating cash flow | Not separately reported for the quarter | $254.7 million | $285.3 million |
- Q2 sales fell 4% and operating income fell 36% year over year. Six-month sales declined 1% and operating income declined 10%.
- The Q2 2017 net loss included a $135.2 million loss on early debt extinguishment. Thus, the year-over-year improvement in net income does not reflect a comparable improvement in operating performance.
- Cash and equivalents were $526.5 million at June 30, 2018, down from $678.7 million at December 31, 2017. Total debt was $3.283 billion, including $197.7 million current and $3.085 billion long-term; cash less debt was approximately $2.76 billion net debt.
- Liquidity included an undrawn $1.0 billion revolving credit facility maturing in 2023. Perrigo reported compliance with debt covenants and stated that cash, operating cash flow, and available borrowings were expected to cover foreseeable liquidity and capital expenditure needs.
- Six-month investing cash outflow was $29.2 million; capital expenditures were $33.3 million. Financing cash outflow was $362.2 million, including $265.0 million in share repurchases and $52.8 million in dividends.
Material changes and segment performance
- Consolidated sales declines reflected lower existing-product sales, discontinued products, and the absence of divested API business sales; new products and favorable currency partially offset these effects.
- CHCA Q2 sales decreased 1% to $596.8 million and operating income decreased 45% to $57.4 million. The principal unusual expense was a $50.0 million upfront Nasonex license fee recorded in R&D. Six-month CHCA sales rose 1%, while operating income fell 5%.
- CHCI Q2 sales increased 1% to $381.0 million and operating income increased to $5.6 million from $3.9 million. For six months, sales rose 4% to $782.4 million and operating income rose to $20.4 million from $4.2 million, supported by currency, new products, and insourcing benefits.
- RX Q2 sales declined 13% to $208.6 million and operating income declined 18% to $56.9 million. For six months, sales fell 8% to $422.6 million and operating income fell 25% to $118.7 million, principally due to price pressure and lower sales volumes.
- Six-month operating cash flow was down $30.6 million year over year. Inventory-related cash use increased, partly reflecting strategic inventory build-up in CHCA and insourcing initiatives in CHCI.
- ASC 606 was adopted on January 1, 2018. For Q2, the company reported revenue $6.9 million lower than it would have under the previous accounting method; the six-month difference was $1.3 million lower. This accounting change also affects comparability with 2017.
Outlook, risks, and unusual items
- Management forecast a 10%–12% pricing decline in RX for full-year 2018 and expected pricing softness to persist for the foreseeable future. The filing does not provide consolidated earnings or revenue guidance.
- On August 9, 2018, Perrigo announced plans to separate RX, currently targeting completion in the second half of 2019. A spin-off is contemplated, but a sale, merger, or other option remains possible. The plan is conditional, may change or not occur, and is expected to involve significant unquantified costs and management demands.
- The animal health reporting unit passed its June 30 impairment test, but fair value exceeded carrying value by less than 5%. Management said further adverse operating or valuation changes could trigger impairment analysis and potentially an impairment charge.
- Disclosure controls and internal control over financial reporting were reported ineffective at June 30 because a material weakness in the income-tax accounting process had not been remediated. Remediation work was underway; effectiveness had not yet been demonstrated over sufficient quarterly periods.
- Contingencies include generic-drug price-fixing litigation, multiple U.S. and Israeli securities matters, an Omega acquisition arbitration, and tax disputes and audits. The company is seeking $163.6 million in federal tax refunds for 2009–2012; a separate IRS transfer-pricing adjustment could be material but was not quantifiable. The filing states loss outcomes are uncertain and reserves are recorded when losses are probable and reasonably estimable.
- Potential Royalty Pharma milestone receipts tied to Tysabri sales had a fair value of $125.5 million at June 30. The 2018 and 2020 milestones depend on global sales exceeding specified thresholds; failure to meet a threshold could require a write-off of the corresponding recorded asset.
Important facts for investors to verify
- Whether RX pricing declines meet or exceed management’s 10%–12% 2018 forecast, and how that affects segment margins and cash generation.
- Progress, costs, structure, timing, and tax implications of the proposed RX separation, including any effect on debt, credit ratings, employees, and shared operations.
- Remediation and independent testing of the income-tax control material weakness, and any subsequent changes to tax estimates or reported results.
- Developments in generic-drug pricing, securities, Omega arbitration, and IRS matters, including any material reserve or cash-flow effects.
- Animal health performance and impairment-test assumptions, and whether Tysabri sales meet the 2018 and 2020 milestone thresholds.
- Working-capital trends—particularly inventory—and the sustainability of operating cash flow alongside substantial repurchases, dividends, and debt obligations.