Perrigo Company plc — Q1 2016 Form 10-Q
Reporting period: Three months ended April 2, 2016, compared with the three months ended March 28, 2015. Perrigo changed its fiscal year to the calendar year beginning January 1, 2016. The interim financial statements are unaudited.
Financial results and position
| Metric | Q1 2016 | Prior comparable quarter |
|---|---|---|
| Net sales | $1,383.2 million | $1,049.1 million |
| Gross profit / margin | $522.9 million / 37.8% | $378.8 million / 36.1% |
| Operating income (loss) / margin | $(303.8) million / (22.0)% | $199.2 million / 19.0% |
| Net loss | $(334.6) million | $(94.9) million |
| Diluted loss per share | $(2.34) | $(0.67) |
| Operating cash flow | $170.3 million | $268.0 million |
| Cash and cash equivalents at period end | $588.9 million | $417.8 million at Dec. 31, 2015 |
- Operating expenses were $826.7 million, including $467.0 million of impairment charges: $273.4 million for certain BCH indefinite-lived intangible assets and an estimated $193.6 million goodwill impairment. The goodwill valuation was preliminary and subject to adjustment.
- Interest expense, net, was $51.2 million versus $43.3 million. Total borrowings were $6.52 billion; current indebtedness was $619.2 million and long-term debt, less current portion, was $5.90 billion. Perrigo reported compliance with debt covenants.
- Current assets were $2.97 billion and current liabilities $2.09 billion. Net cash used in investing activities was $452.1 million, principally reflecting the $416.4 million Tretinoin portfolio acquisition. Financing activities generated $449.0 million, including $1.2 billion of senior-note proceeds, partly offset by debt repayments.
- Quarterly dividend declared was $0.145 per share. No shares were repurchased during the quarter; $1.5 billion remained available under the repurchase authorization.
Material changes and segment performance
- Sales increased 32% year over year, primarily because the comparison includes Omega operations for the full current quarter but only from March 30, 2015 in the prior period, as well as other acquisitions. Sales growth did not translate into operating profit because of the impairments and higher acquired-intangible amortization.
- CHC sales were $700.3 million, up 2%; operating income was $102.5 million versus $104.3 million. Management cited new products and infant formula strength, partly offset by discontinued products, foreign exchange, pricing pressure, and weaker cough/cold and analgesics sales.
- BCH reported sales of $317.6 million and an operating loss of $482.7 million, including the $467.0 million impairment charges. No comparable prior-quarter segment results were presented because BCH was formed with the Omega acquisition.
- Rx sales were $256.7 million, up 2%, while operating income declined to $87.4 million from $100.0 million. Acquisitions and new products were offset by lower existing-product sales, pricing pressure, and higher amortization.
- Specialty Sciences sales rose to $88.0 million from $81.9 million, primarily due to higher Tysabri royalties; operating income was $12.9 million versus $5.5 million.
- The prior-year quarter included $258.6 million of other expense, largely a $259.8 million loss on derivatives economically hedging the Omega purchase price. Current-quarter other expense was $3.8 million.
Outlook, risks, contingencies and unusual items
- Management said U.S. pricing softness, particularly in Rx, was expected to continue through the remainder of 2016. It also expected lower new-product sales than previously anticipated due to regulatory approval expectations and revised European market-share and launch assumptions. BCH outlook was affected by lifestyle and natural health/VMS market conditions.
- The filing refers to updated 2016 guidance announced April 25, 2016, but the filing text does not provide a clear numerical guidance value.
- Perrigo expected to sell its U.S. VMS business in Q2 2016 and its India API business during 2016. Both were classified as held for sale.
- Management identified a material weakness in controls over review of interim income taxes associated with impairment accounting. The related tax misstatement was corrected before filing; remediation was planned for Q2 2016. Disclosure controls were deemed ineffective as of April 2 until remediation is completed and tested.
- Leadership changes after quarter-end included John T. Hendrickson becoming CEO and Laurie Brlas becoming Chair; BCH leadership responsibilities also changed. The filing identifies executive-transition and key-employee retention as risks.
- Further impairment is possible if forecast performance or other valuation assumptions deteriorate. Specialty Sciences goodwill had less than 10% valuation headroom at the prior test; Roche’s Ocrelizumab could compete with Tysabri if approved, potentially affecting royalties.
- Tax contingencies include a disputed IRS assessment of approximately $68.9 million, already paid and subject to a planned federal refund claim in Q1 2017, and ongoing U.S. and Belgian tax audits. The filing also describes Eltroxin class-action proceedings and Tysabri product-liability lawsuits; outcomes could not be predicted.
- Other unusual items include correction of prior-period errors related mainly to product-return accrual estimates and BCH tax items. The correction increased transition-period operating loss by $14.5 million and net loss by $13.7 million; management said the errors were not material to that period.
Important facts for investors to verify
- Final valuation and any adjustment to the estimated $193.6 million goodwill impairment, and the sensitivity of BCH goodwill and brand values to sales and growth assumptions.
- Updated 2016 earnings guidance and whether pricing pressure, new-product timing and BCH category trends match management’s assumptions.
- Progress and independent validation of remediation for the income-tax control material weakness.
- Debt repayment and refinancing plans, including the $500 million note due November 2016, liquidity access, and credit-rating developments; S&P lowered Perrigo to BBB- on April 26, 2016.
- Execution and proceeds from planned VMS and India API disposals, and developments in the IRS dispute, other tax audits and disclosed litigation.