Perrigo Company plc — Q2 2017 Form 10-Q
Reporting period: Three and six months ended July 1, 2017; comparisons are with periods ended July 2, 2016. Amounts are U.S. dollars unless noted. Perrigo is a global healthcare company focused on OTC products, store-brand infant formula, branded consumer healthcare, and generic prescription pharmaceuticals.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,237.9 million | $1,340.5 million | $2,431.9 million | $2,687.8 million |
| Gross profit / margin | $504.6 million / 40.8% | $546.5 million / 40.8% | $968.9 million / 39.8% | $1,079.6 million / 40.2% |
| Operating income (loss) / margin | $148.8 million / 12.0% | $184.8 million / 13.8% | $277.3 million / 11.4% | ($46.8) million / (1.7)% |
| Net income (loss) / diluted EPS | ($69.6) million / ($0.49) | ($534.3) million / ($3.73) | $2.0 million / $0.01 | ($1,063.5) million / ($7.43) |
| Cash from operating activities | Not separately presented for the quarter | $285.3 million | $229.7 million |
- Q2 sales fell 7.7%; six-month sales fell 9.5%. Q2 operating income declined 19.5%, while first-half operating income improved substantially from the prior-year loss, which included major impairment charges.
- Q2 results included a $135.2 million debt-extinguishment loss and a $38.7 million charge in change in financial assets. First-half results included $50.8 million of restructuring charges and $39.6 million of impairment charges. The prior-year periods included much larger financial-asset fair-value reductions and impairment charges.
- Cash and equivalents were $760.8 million at July 1, up from $622.3 million at year-end 2016. Current assets were $2.82 billion and current liabilities $1.63 billion.
- Six-month investing cash inflow was $2.282 billion, chiefly the $2.2 billion cash proceeds from the Tysabri royalty-stream sale. Financing cash outflow was $2.449 billion, including $2.229 billion of long-term debt payments. Capital spending was $37.2 million.
- Total borrowings were $3.675 billion, down from $5.797 billion at December 31, 2016. No borrowings were outstanding under the $1.0 billion revolver; Perrigo reported compliance with debt covenants. Net debt, using reported cash, was approximately $2.914 billion.
Material changes and business drivers
- Consumer Healthcare Americas (CHCA): Q2 sales declined 4% to $604.9 million and operating income declined 11% to $104.2 million. The absence of the divested U.S. vitamins business, pricing pressure, lower cough/cold and analgesics volumes, and competition in Animal Health were offset partly by new products and manufacturing efficiencies. Six-month sales fell 6% and operating income fell 18%.
- Consumer Healthcare International (CHCI): Q2 sales declined 9% to $376.5 million, while operating income rose to $3.9 million from $0.6 million, reflecting lower selling and administrative costs and exits from unprofitable distribution contracts. First-half sales declined 12%; operating income was $4.2 million versus a prior-year loss that included $403.9 million of goodwill and intangible impairments.
- Prescription Pharmaceuticals (RX): Q2 sales declined 13% to $240.4 million and operating income declined 25% to $69.3 million. Lower Entocort sales and portfolio pricing pressure were key factors; a $18.5 million intangible impairment also weighed on operating income. First-half sales declined 13% and operating income declined 14%.
- The Tysabri royalty stream sale closed March 27 for $2.2 billion cash plus potential milestone payments of up to $650 million. The contingent milestones were valued at $145.8 million at quarter-end; their fair value declined $39.2 million in Q2, reflecting lower projected Tysabri revenues after Ocrevus entered the market.
- Other portfolio actions included the completed sale of the India API business for $22.2 million and, after quarter-end, an agreement to sell the Israel API business for $110 million. A Russian business sale plan was initiated and related assets classified as held for sale.
Outlook, risks, contingencies, and unusual items
- Management expects the February 2017 workforce and cost-optimization plan to reduce the global workforce by approximately 750 employees, about 14% of non-production staff. Estimated total pre-tax restructuring charges are $55–$65 million; annual savings of approximately $130 million are expected by mid-2018.
- Management forecast RX pricing declines of 9%–11% for 2017 and expected increased competition for Entocort to reduce 2017 RX sales by approximately $72 million. CHCA pricing pressure was also expected to continue. No consolidated earnings guidance is provided in the supplied filing text.
- Disclosure controls were deemed ineffective at July 1, 2017 because of material weaknesses in financial reporting controls. The Tysabri financial-asset control weakness was considered remediated; weaknesses relating to income taxes and impairment asset-group identification remained under remediation.
- Leadership transition is ongoing: the CEO is expected to retire after a successor is appointed, and the CFO search was paused pending the CEO search. The filing identifies transition execution as a risk.
- Uncertain tax positions totaled $427.4 million, including $71.8 million accrued for interest and penalties. IRS disputes include asserted obligations of approximately $68.9 million for 2009–2010 and $74.2 million for 2011–2012; the company disputes the positions and is pursuing or expects to pursue refunds. A further IRS draft adjustment concerning Athena transfer pricing could be material but was not quantifiable.
- Notable litigation includes U.S. and Israeli securities actions, generic-drug price-fixing claims, an antitrust counterclaim, Tysabri product-liability cases, and confidential arbitration related to the Omega acquisition. Outcomes and potential losses are uncertain; several claims have no estimable loss amount in the filing.
Important facts for investors to verify
- Whether sales and operating performance stabilize amid persistent pricing pressure, lower Entocort sales, and CHCI contract exits.
- Realization and timing of the expected $130 million annual cost savings, alongside remaining restructuring costs.
- Debt reduction, cash generation, and liquidity after the Tysabri proceeds and substantial debt repayments; also monitor credit ratings, reported as Baa3 and BBB−, both stable.
- Progress in remediating the remaining internal-control weaknesses and any further accounting or tax restatements.
- Developments in IRS disputes and litigation, and whether the contingent Tysabri milestone payments are achieved despite competitive pressure from Ocrevus.