Perrigo Company plc — Q3 2020 Form 10-Q
Business context and period. Perrigo sells over-the-counter and other consumer self-care products through Consumer Self-Care Americas (CSCA) and Consumer Self-Care International (CSCI), and generic prescription medicines through Prescription Pharmaceuticals (RX). This unaudited report covers the three and nine months ended September 26, 2020; comparisons are with the periods ended September 28, 2019.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,213.7m | $1,191.1m | $3,773.8m | $3,514.6m |
| Gross profit / margin | $428.1m / 35.3% | $412.8m / 34.7% | $1,346.0m / 35.7% | $1,292.5m / 36.8% |
| Operating income (loss) / margin | $(95.5)m / (7.9)% | $54.4m / 4.6% | $167.6m / 4.4% | $211.7m / 6.0% |
| Net income (loss) | $(154.6)m | $92.2m | $12.4m | $165.1m |
| Diluted EPS | $(1.13) | $0.67 | $0.09 | $1.21 |
Cash flow and liquidity. Nine-month operating cash flow was $525.8m, versus $298.3m; investing cash flow was $(60.3)m, versus $(489.8)m; and financing cash flow was $20.3m, versus $33.3m. Cash increased to $849.4m from $354.3m at year-end 2019. Current assets were $3.398bn and current liabilities $1.336bn at quarter-end.
Debt. Total borrowings were $3.560bn, including $3.544bn long-term debt and $16.5m current indebtedness. Perrigo issued $750m of 3.15% senior notes due 2030 and redeemed $590m of notes due 2021, recognizing a $20m extinguishment loss. No borrowings were outstanding under its $1bn revolving credit facility, and the company reported compliance with debt covenants. Credit ratings were Baa3 and BBB-, both stable.
Material changes and segment results
- Q3 sales rose 2%; nine-month sales rose 7%. CSCA sales increased 8% in Q3 and 12% year to date, supported by oral-care acquisitions, new products, e-commerce and pandemic-related demand. CSCI sales fell 2% in Q3 but grew 2% year to date, with varied demand by category and effects from acquisitions, divestitures and currency. RX sales declined 9% in Q3 and increased 4% year to date, with pre-recall albuterol sales and new products offset by the recall reserve, pricing pressure and lower prescription volumes.
- Q3 operating results turned to a loss, principally because of a $202.4m RX goodwill impairment and the albuterol recall. Nine-month operating income fell 21%, despite higher sales; the goodwill impairment, lower gross margin, recall costs and product mix weighed on results.
- Q3 gross margin increased 60 basis points year over year, but nine-month gross margin declined 110 basis points. Nine-month net income also reflected a $20m debt extinguishment loss and the absence of the prior-year $71.7m gain on the animal-health divestiture; the Rosemont sale generated a $18.7m pretax loss.
- Acquisitions included Dr. Fresh oral-care assets, which contributed $44.4m in sales and $0.7m net income from acquisition through September 26. Perrigo sold Rosemont in June for approximately $195m. The Sanofi brand acquisition closed on October 30, after quarter-end, for approximately $62m.
Outlook, risks and unusual items
- COVID-19: Management reported demand surges in March and April, subsequent pantry de-loading, and uneven recovery across categories. It estimated full-year incremental pandemic operating costs of $15m–$20m; $11m had been incurred through nine months. Supply, workforce, consumer-demand and capital-market effects remain uncertain.
- Albuterol recall: Perrigo voluntarily recalled the product nationwide in September after reports that some units might clog and fail to dispense. Production and distribution were halted; the reintroduction timetable was undetermined. The company recorded a $31.2m sales reserve and a $22.5m net charge, and the recall contributed to the RX goodwill impairment.
- Goodwill and separation: RX U.S. goodwill was impaired by $202.4m, leaving $811.1m. CSCI’s branded self-care reporting unit had less than 10% fair-value headroom at its June test and could face impairment if performance, market multiples or discount rates worsen. Perrigo continues to consider separating RX by sale, spin-off, merger or other means, but has set no timetable; estimated preparation costs are $45m–$80m, excluding restructuring and transaction costs.
- Contingencies: Significant tax disputes remain unresolved. The Irish assessment concerning the Tysabri asset sale is €1.636bn, excluding interest and penalties; the Irish High Court ruled against Perrigo on its procedural judicial-review claim on November 4, 2020, while the merits appeal remained available. IRS matters include a proposed $843m assessment related to Athena and a separate interest-deduction adjustment with estimated potential tax exposure of about $170m for 2014–2015, plus possible later-period exposure. Perrigo disputes these positions; no payment is currently required unless matters are finally resolved adversely. The filing also describes generic-drug price-fixing, securities, product-liability and other litigation, whose outcomes and potential losses are not clearly quantifiable.
- Other items: A $121.2m Tysabri-related contingent milestone asset depends on 2020 Royalty Pharma payments exceeding a specified $351m threshold; failure would result in a write-off, while success could produce a further $278.8m gain. Management expects liquidity to be sufficient, but notes that COVID-19, litigation and tax outcomes could affect capital needs. No specific earnings or revenue guidance is provided.
Key investor verification points
- Track albuterol recall remediation, potential product relaunch, reserve adequacy and further effects on RX operations and goodwill.
- Review the assumptions behind the RX impairment and the limited valuation cushion in CSCI branded self-care.
- Confirm the outcome of the 2020 Tysabri milestone threshold and the resulting cash or earnings impact.
- Monitor developments, potential cash exposure and timing in the Irish and U.S. tax disputes and major litigation.
- Assess the timing, structure, costs and execution risks of any RX separation, alongside COVID-19 demand, supply and cost trends.