Perrigo Company plc — Form 10-Q Summary
Period: Third quarter and nine months of fiscal 2015 ended March 28, 2015. The request metadata labels this “2014 Q3,” but the filing covers fiscal 2015 Q3. Figures are unaudited and in U.S. dollars.
Business context and results
Perrigo sells store-brand and branded OTC healthcare products, nutritionals, prescription pharmaceuticals and APIs, and receives royalties from Tysabri. The quarter’s results exclude Omega Pharma: Perrigo completed the Omega acquisition on March 30, two days after quarter-end.
| Metric | Three months ended March 28, 2015 | Prior-year quarter | Nine months ended March 28, 2015 | Prior-year period |
|---|---|---|---|---|
| Net sales | $1,049.1 million | $1,004.2 million | $3,072.3 million | $2,916.6 million |
| Gross profit / margin | $378.8 million / 36.1% | $315.0 million / 31.4% | $1,084.3 million / 35.3% | $1,031.9 million / 35.4% |
| Operating income / margin | $199.2 million / 19.0% | $103.3 million / 10.3% | $520.7 million / 16.9% | $369.5 million / 12.7% |
| Net income (loss) | $(94.9) million | $48.1 million | $71.5 million | $73.4 million |
| Diluted EPS | $(0.67) | $0.36 | $0.52 | $0.67 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $735.6 million | $400.8 million |
Quarterly sales rose 4% and operating income 93%; nine-month sales rose 5% and operating income 41%. Quarterly gross margin improved, while the nine-month margin was slightly lower. Nine-month net income edged down despite higher operating income, principally reflecting higher interest and other expense.
Cash, debt and liquidity
- At March 28, cash and cash equivalents were $3.430 billion, total current assets $5.130 billion and current liabilities $1.284 billion.
- Total borrowings were $4.727 billion, including $3.890 billion of senior notes and $830.9 million of term loans. The company reported compliance with debt covenants. Its $600 million revolver and $200 million receivables securitization program had no borrowings outstanding.
- Nine-month investing cash outflow was $490.5 million and financing cash inflow was $2.478 billion. Financing included $2.504 billion of debt issuance and $1.041 billion of share issuance; debt repayments were $948.2 million.
- Management said cash, operating cash flows and available borrowing capacity were sufficient for current and foreseeable capital needs. Fiscal 2015 capital expenditures were expected to be $125–$150 million.
Material changes and unusual items
- Other expense was $258.6 million for the quarter and $320.5 million year to date, largely from losses on currency derivatives used to hedge the euro-denominated Omega purchase price. Management said these losses were economically offset by the final purchase-price settlement. The nine-month cash flow statement shows a $324.5 million derivative-related investing outflow.
- Quarterly net loss therefore contrasts with stronger operating performance. For the nine months, operating cash flow increased $334.8 million year over year, with management citing working-capital changes and higher earnings adjusted for non-cash items.
- Amortization expense rose to $321.9 million for the nine months from $181.1 million, principally because of intangible assets acquired with Elan.
- The company recorded $9.6 million of debt-extinguishment loss year to date, versus $165.8 million in the prior-year period.
- Foreign currency translation reduced nine-month other comprehensive income by $152.1 million.
Outlook, commentary and risks
- Management expected stronger fiscal fourth-quarter results than historical comparisons, citing expected higher new-product sales and the anticipated absence of certain first-half sales trends. It also noted continuing competitive pressure in VMS and infant foods. This is commentary, not quantified earnings guidance.
- Omega’s $4.4 billion acquisition closed March 30; consideration included $2.1 billion cash, assumed debt and 5,397,711 Perrigo shares. Purchase accounting was incomplete, so acquired asset and liability values were not yet available. Perrigo repaid approximately $539.1 million drawn on Omega’s revolving facility on April 8.
- Perrigo’s board rejected Mylan’s unsolicited proposal, firm offer and revised offer, stating each undervalued the company. Management warned that responding could distract staff and increase costs, affecting fourth-quarter results.
- Key risks include Omega integration and realization of expected benefits, higher leverage and debt service, foreign-exchange exposure (particularly euro/dollar), European regulatory and compliance requirements, and potential disruption from the Mylan approaches. Ratings at quarter-end were Moody’s Baa3 (stable) and S&P BBB (negative); S&P placed its rating on CreditWatch with negative implications after the Mylan proposal.
- Tax authorities were auditing fiscal 2011 and 2012. Perrigo paid $69.2 million asserted by the IRS for fiscal 2009–2010 and said it intended to contest the assessment in court; an unfavorable outcome could materially affect future results. The company also added $9 million to its Texas Medicaid contingency accrual, bringing the previously established accrual to $24 million, and recorded a $7 million receivable from former owners of Paddock.
- A court denied Perrigo’s preliminary injunction in an animal-health contract dispute. The company tested related goodwill and intangible assets with a $434.4 million net book value and reported no impairment at March 28.
- The fiscal year-end is scheduled to shift to December 31 starting in 2016, with a transition period from June 28 through December 31, 2015. The company cited potential transition costs.
Important facts for investors to verify
- How Omega’s purchase accounting, integration costs, assumed debt and operating results affect subsequent filings and leverage.
- Whether currency effects and acquisition-related hedging are fully reflected as described, and how the larger euro exposure affects future reported results and cash flows.
- Progress and outcomes in the IRS tax dispute, Texas Medicaid matter, and animal-health litigation and impairment monitoring.
- Whether management’s expected fourth-quarter improvement materialized, particularly given seasonality and competition in Consumer Healthcare and Nutritionals.
- Any further Mylan actions, resulting expenses, management distraction, or changes in credit ratings and financing costs.