Perrigo Company plc — Q1 2021 Form 10-Q
Reporting period: Three months ended April 3, 2021; comparable period ended March 28, 2020. Perrigo is transitioning toward a consumer self-care-focused business. Its generic prescription pharmaceuticals (RX) business was classified as discontinued operations following the March 1, 2021 agreement to sell it.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales, continuing operations | $1,010.0 million | $1,083.3 million |
| Gross profit / margin | $368.4 million / 36.5% | $393.7 million / 36.3% |
| Operating income / margin | $51.4 million / 5.1% | $86.4 million / 8.0% |
| Continuing-operations income | $2.8 million | $57.6 million |
| Discontinued-operations income, net of tax | $35.3 million | $48.8 million |
| Net income / diluted EPS | $38.1 million / $0.28 | $106.4 million / $0.77 |
| Operating cash flow | $0.2 million | $171.8 million |
Sales fell 7% year over year. Operating income declined 41%, despite a 20-basis-point increase in gross margin, as lower sales and higher operating expenses weighed on results. Continuing-operations diluted EPS was $0.02, versus $0.42. The effective tax rate was 84.0%, compared with negative 0.4%, reflecting prior-year U.S. tax benefits and current-period tax expense on intra-entity intellectual-property transfers.
Cash and cash equivalents were $470.9 million at April 3, down from $631.5 million at year-end 2020. Inventory was $1,136.1 million, up from $1,059.4 million. The quarter used $114.0 million in investing activities, principally including $70.3 million of asset acquisitions and $45.4 million of capital expenditures. Dividends paid were $32.6 million.
Total borrowings were $3,561.1 million, including $3,525.3 million of long-term debt less current maturities. The $1.0 billion revolving credit facility had no borrowings outstanding. Perrigo reported compliance with debt covenants; its three disclosed credit ratings were Baa3/BBB-/BBB-, each with a negative outlook.
Changes and business drivers
- Continuing-operations sales declined $73.3 million. The company cited the prior-year pandemic pantry-loading benefit and unusually low cough and cold illness, partly offset by acquisitions, new products, pricing and favorable foreign exchange.
- Consumer Self-Care Americas sales fell 9% to $640.5 million; operating income fell 22% to $95.6 million. Consumer Self-Care International sales fell 3% to $369.5 million; operating income fell 30% to $17.4 million.
- Operating cash flow fell sharply from the prior-year quarter, with inventory changes a major headwind. Management also cited inventory builds to support customer demand and timing effects in working capital.
- Comprehensive loss was $80.2 million, including $111.6 million of foreign-currency translation losses.
Outlook, transactions and risks
- RX sale: Perrigo agreed to sell the business to Altaris for stated total consideration of $1.55 billion, including $1.5 billion in cash and assumption of more than $50 million in potential milestones and contingent obligations. The filing says the transaction was expected to close in Q3 2021, subject to antitrust and customary conditions. Perrigo was evaluating uses for the anticipated cash proceeds. The company expects to provide transition services for up to 24 months and enter into reciprocal supply arrangements.
- Demand and costs: Management expected lower cough and cold demand through the first half of 2021; it noted that retail foot traffic suggested purchasing routines might normalize in the second half. COVID-related material and supply-chain costs were expected to continue through 2021. The filing provides no formal consolidated financial guidance.
- Tax disputes: Irish Revenue’s assessment claims €1.636 billion in tax, excluding interest and penalties, concerning the Tysabri intellectual-property transaction. Perrigo disputes the assessment; an appeal hearing was scheduled for November 2021, and settlement discussions were ongoing. The filing states no additional payment is due unless a settlement or final determination requires it. Other unresolved matters include U.S. IRS disputes and an Israeli tax assessment of $63.8 million.
- Contingencies: Perrigo disclosed generic-drug price-fixing litigation, securities cases, and product-liability matters involving talc, ranitidine and acetaminophen. It reported a $65 million litigation accrual and a $65 million insurance recovery receivable, while noting final costs could exceed estimates or insurance coverage. The company stated it could not reasonably estimate the outcome of the price-fixing claims.
- COVID-19 and execution: The company described potential impacts from supply interruptions, absenteeism, changing consumer demand, new virus strains and capital-market volatility. The RX sale also remained subject to closing conditions and execution risks.
Important facts for investors to verify
- Whether and when the RX sale closed, the cash proceeds actually received, and the resulting allocation of proceeds and debt.
- Whether sales, margins and operating cash generation recovered after the pantry-loading comparison and seasonal respiratory-demand weakness; monitor inventory and working-capital movements.
- Developments and potential cash consequences in the Irish, U.S. and Israeli tax disputes, including the status of appeals and any revised IRS proposals.
- Progress, reserves and insurance recoverability for price-fixing, securities and product-liability litigation.
- Effects of ongoing COVID-related supply-chain costs, foreign exchange and negative credit-rating outlooks on liquidity and financing costs.