Perrigo Company plc — Q1 2023 Form 10-Q
Business context and period: The quarter ended April 1, 2023. Perrigo is an OTC health and wellness company reporting through Consumer Self-Care Americas (CSCA) and Consumer Self-Care International (CSCI). Results include HRA Pharma, acquired in April 2022, and Gateway, acquired in November 2022; the former Rx business is reported as discontinued operations.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $1,181.7 million | $1,074.5 million |
| Gross profit / margin | $413.8 million / 35.0% | $337.8 million / 31.4% |
| Operating income / margin | $48.5 million / 4.1% | $21.7 million / 2.0% |
| Interest expense, net | $43.7 million | $35.8 million |
| Continuing-operations net loss | $1.1 million | $1.3 million |
| Net loss | $3.0 million | $2.4 million |
| Operating cash flow | $19.4 million | $79.1 million |
- Sales increased 10.0%; management attributed growth to pricing, higher volume and mix, and acquisitions, partly offset by foreign-exchange headwinds and divestitures. Strategic pricing contributed approximately $58 million.
- Gross margin improved 360 basis points. Management cited pricing, volume and mix, partly offset by $30.3 million of cost-of-goods-sold inflation and higher labor costs.
- CSCA sales were $763.7 million, up 7.6%; CSCI sales were $418.1 million, up 14.7%. Segment operating income was $83.2 million for CSCA and $21.3 million for CSCI.
- Cash and cash equivalents were $553.0 million at quarter-end, down from $600.7 million at year-end 2022. Working capital was $1,139.7 million. Investing cash outflow was $19.6 million; financing cash outflow was $50.7 million, including $36.2 million of dividends. Capital expenditures were $23.2 million.
- Total borrowings were $4,101.6 million, including $38.8 million of current indebtedness; long-term debt, less current portion, was $4,062.8 million. No revolving-credit borrowings were outstanding. The company reported compliance with debt covenants.
Changes, outlook and management commentary
- Operating income more than doubled year over year, while net loss widened modestly. Higher interest expense and a 123.8% effective tax rate contributed to the continuing-operations loss despite improved operating income.
- Operating cash flow fell by $59.7 million, primarily from working-capital needs, including higher inventory and timing of customer receipts and payments. Cash declined by $47.7 million during the quarter.
- Acquisitions contributed to sales and costs. HRA Pharma distributor-transition sales returns reduced sales by $11.6 million. A voluntary infant-formula recall and an Upper Respiratory product recall also affected results; management cited approximately $8 million of expense and lost gross-profit flow-through for the latter.
- No specific near-term earnings or revenue guidance is provided in the supplied filing text. The Supply Chain Reinvention Program targets estimated annual run-rate savings of $200–$300 million by the end of fiscal 2028, with $150–$200 million anticipated by the end of 2025. Estimated implementation costs, including capital investment, restructuring and other costs, are $350–$570 million through 2028.
- Management said inflation and supply-chain pressures remained uncertain, though pricing actions and the reinvention program had begun to offset them. The company cited continuing exposure to interest rates, foreign exchange, geopolitical conditions and evolving infant-formula regulation.
- Moody’s downgraded Perrigo in March 2023; the 2030 notes’ coupon was scheduled to increase from 4.40% to 4.65% on payments after June 15, 2023. More than 90% of outstanding debt was described as fixed-rate after derivatives.
Risks, contingencies and unusual items
- The March 2023 voluntary recall covered a specific infant-formula brand manufactured at a U.S. facility from January 2–18, 2023. Perrigo anticipated additional compliance costs and lower production volumes as regulatory expectations evolve.
- Litigation includes generic-drug price-fixing cases, securities actions, talc-related product-liability suits and ranitidine-related claims. At April 1, 2023, the company had approximately $67.6 million accrued for litigation contingencies and a $37.2 million insurance-recovery receivable; ultimate exposure may exceed accruals or insurance coverage.
- The IRS tax matters remain relevant. After quarter-end, the IRS concluded the competent-authority process that resolved the Tysabri royalty NOPA. Also after quarter-end, Perrigo reached an IRS Appeals settlement involving $153.4 million of gross interest-expense adjustments for 2013–2015, with similar adjustments to be applied through 2018. The company expected to adjust previously established reserves in Q2; the filing does not provide a clear value for the resulting earnings impact.
- The FDA advisory committee meeting concerning Perrigo’s application for OTC sale of Opill was scheduled for May 9–10, 2023. Approval was not assured.
Important facts for investors to verify
- Whether acquisition-related growth, pricing and favorable mix persist, and how much is offset by currency movements, distributor transitions and divestitures.
- The financial and production impact of the infant-formula recall and evolving FDA requirements, including whether further costs or sales disruptions arise.
- Progress, actual costs and realized savings from the Supply Chain Reinvention Program compared with management’s estimates.
- Debt-service capacity and the effect of the rating downgrade and higher 2030-note coupon, alongside cash generation and working-capital needs.
- Developments in litigation, insurance recovery and tax matters, including the Q2 accounting impact of the post-quarter IRS resolutions.
- The outcome and timing of FDA review of Opill and any resulting commercial opportunity.