Perrigo Company plc — Q1 2022 Form 10-Q
Reporting period: Three months ended April 2, 2022; unaudited. Perrigo is a consumer self-care and OTC health and wellness products company, reporting Consumer Self-Care Americas (CSCA) and Consumer Self-Care International (CSCI). The RX business is presented as discontinued operations.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $1,074.5 million | $1,010.0 million | +6.4% |
| Gross profit / margin | $337.8 million / 31.4% | $368.4 million / 36.5% | Margin down 510 bps |
| Operating income / margin | $21.7 million / 2.0% | $51.4 million / 5.1% | Down 57.8% |
| Continuing operations income (loss) | $(1.3) million | $2.8 million | — |
| Net income (loss) | $(2.4) million | $38.1 million | — |
| Diluted EPS | $(0.02) | $0.28 | — |
| Operating cash flow | $79.1 million | $0.2 million | Up $78.9 million |
Sales growth reflected higher cough/cold demand as activity resumed, U.S. infant formula share gains amid a competitor recall, contract manufacturing sales to the divested RX business, and pricing. Unfavorable currency translation reduced sales by $33.6 million. Higher input and freight costs, foreign exchange, customer service penalties, and lower-margin mix weighed on profit; management cited $27.9 million of cost-of-goods inflation and freight pressure in the consolidated discussion.
- CSCA: Sales rose 10.9% to $710.0 million; operating income fell 17.9% to $78.5 million. Gross margin declined to 24.3% from 30.4%.
- CSCI: Sales fell 1.4% to $364.5 million, including a $33.6 million adverse currency impact; operating income declined 6.9% to $16.2 million. Gross margin was 45.3%, versus 47.1%.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $1,965.5 million at April 2, 2022, versus $1,864.9 million at year-end 2021. Total assets were $10.39 billion and shareholders’ equity was $5.10 billion.
- Total borrowings were $3,515.2 million. The $600 million 2019 term loan was outstanding and scheduled to mature in August 2022; no borrowings were outstanding on the then-existing $1.0 billion revolver. Perrigo reported compliance with its debt covenants at quarter-end.
- The maximum leverage covenant had temporarily increased to 5.75:1 for Q4 2021 and Q1 2022; it returned to 3.75:1 beginning Q2 2022, with a 4.00:1 provision for certain qualifying acquisitions.
- Operating cash flow was $79.1 million; investing activities provided $62.7 million, principally reflecting business and asset sale proceeds; financing activities used $51.9 million, including $34.2 million of dividends. Cash increased $86.2 million during the quarter.
Material changes, outlook and management commentary
- On March 9, Perrigo sold its Latin America businesses for stated consideration of $23.9 million and recorded a $1.4 million pretax loss. It sold the ScarAway brand on March 24 for $20.7 million cash and recorded a $3.6 million pretax gain.
- On April 29, after quarter-end, Perrigo completed its €1.8 billion (approximately $1.9 billion) HRA Pharma acquisition. It was funded with cash and borrowings. On April 20, the company entered new facilities: a $1.0 billion revolver, $500 million Term Loan A and $1.1 billion Term Loan B; proceeds helped fund HRA Pharma and repay the existing term loan. The initial acquisition accounting was incomplete at filing.
- Management expected pricing actions and productivity improvements to substantially offset inflationary and supply-chain pressures in the second half of 2022, while cautioning that inflation duration, pricing acceptance and supply constraints remained uncertain. The filing provides no specific full-year revenue or earnings guidance.
- COVID-related normalization supported cough/cold demand compared with the unusually low prior-year incidence. Management also cited continuing supply-chain, labor, freight and input-cost pressures. Perrigo halted sales to Russian distributors in March; Ukraine sales were severely depressed. The company disclosed 97 employees in Ukraine and no employees or manufacturing facilities in Russia or Ukraine.
- The FDA approved OTC Nasonex 24HR Allergy in March, with launch expected later in 2022. A $10 million milestone was accrued and capitalized.
- Interest expense rose to $35.8 million from $32.0 million, partly reflecting a coupon step-up on notes and cross-currency swap termination costs. A credit-rating downgrade triggered a further increase in the 2030 notes’ rate to 4.4% after June 15, 2022.
Risks, contingencies and unusual items
- Tax disputes: The company is litigating IRS transfer-pricing and other adjustments. The filing describes potential additional tax exposure, including $24 million to $112 million for the omeprazole issue, excluding interest and penalties; other disputed matters include interest deductions and chargebacks. A separate Athena IRS notice proposed $843 million, with no payment due until the matter is resolved through treaty or other proceedings. Outcomes and potential aggregate exposure are uncertain.
- Litigation: Perrigo faces generic-drug pricing antitrust cases, securities litigation, and product-liability matters, including talc and ranitidine claims. It recorded approximately $65 million in litigation accruals and a $45.9 million insurance recovery receivable; final costs may exceed accruals or insurance coverage.
- Acquisition and financing: HRA integration, achievement of expected growth and synergies, additional costs, and higher debt are key execution and financial risks. The company also expected to recognize $12.5 million of currency-option loss in Q2 2022.
- Prior-period comparability: Q1 2021 included $35.3 million of after-tax income from discontinued operations; Q1 2022 recorded a $1.1 million discontinued-operations loss. Current-quarter results also include sales under RX-related supply and distribution agreements.
Important facts for investors to verify
- Whether second-half pricing and productivity gains offset inflation, freight and supply-chain costs, and whether gross margins recover.
- Post-acquisition HRA Pharma results, purchase-price allocation, integration costs, synergies and impact on leverage and interest expense.
- Current debt balances, refinancing terms, covenant headroom and the effect of credit ratings on borrowing costs.
- Developments and potential cash consequences of IRS disputes and antitrust, securities, talc and ranitidine litigation; adequacy of reserves and insurance recoveries.
- Whether demand trends in cough/cold and infant formula persist, and whether product supply constraints, the Ukraine war and foreign exchange affect sales and cash flows.