Perrigo Company plc — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended October 2, 2021; comparisons are to periods ended September 26, 2020. Unless noted, amounts are in U.S. dollars and millions. Results reflect continuing operations unless identified as discontinued.
Business context
Perrigo is a consumer self-care and over-the-counter health and wellness company, reporting Consumer Self-Care Americas (CSCA) and Consumer Self-Care International (CSCI). The July 6, 2021 sale of its generic prescription pharmaceuticals business (RX) for $1.55 billion made the company a consumer self-care-focused business; RX results are presented as discontinued operations.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,042.7 | $1,003.0 | $3,033.8 | $3,035.0 |
| Gross profit / margin | $336.4 / 32.3% | $369.7 / 36.9% | $1,053.8 / 34.7% | $1,110.5 / 36.6% |
| Operating income | $438.3 | $78.5 | $363.7 | $227.6 |
| Continuing operations income (loss) | $(53.9) | $26.4 | $(163.0) | $96.4 |
| Net income (loss), including discontinued operations | $(58.9) | $(154.6) | $(78.5) | $12.4 |
| Operating cash flow | Not separately provided | Not separately provided | $261.7 | $525.8 |
Q3 diluted loss per share was $0.44; nine-month diluted loss per share was $0.59. Income tax expense was $442.8 in Q3 and $411.8 for the nine months, substantially contributing to continuing-operations losses. The effective tax rates were 113.9% and 165.5%, respectively.
- Sales and margins: Q3 sales rose 4.0%, while nine-month sales were essentially flat. Gross margin contracted by 4.6 percentage points in Q3 and 1.9 points year to date, reflecting higher input and freight costs, lower production and unfavorable product mix, with recalls also affecting results.
- Operating income is not representative of underlying trading: Q3 and nine-month operating income included a $417.6 million Omega acquisition arbitration award. Excluding this unusual gain, reported operating income would have been materially lower; the filing does not provide an adjusted operating-income measure.
- Segment results: Q3 CSCA sales were $694.2 and operating income $90.4, versus $664.0 and $121.7 a year earlier. CSCI sales were $348.5 and operating income $4.3, versus $339.0 and $10.1. Lower margins and recalls weighed on both segments.
Liquidity, debt and cash flow
- Cash and cash equivalents were $2,078.1 at October 2, 2021, up from $631.5 at December 31, 2020, mainly reflecting proceeds from the RX sale and Omega award. Nine-month investing cash inflow was $1,317.7, including $1,493.1 of business-sale proceeds.
- Nine-month operating cash flow fell to $261.7 from $525.8. The filing cites weaker cash flow from earnings adjustments and receivables, partly offset by increased accrued income taxes. Capital expenditures were $110.4.
- Total borrowings were $3,550.3, including $629.4 classified as current; the $600.0 term loan is due August 2022. The $1.0 billion revolving facility had no borrowings outstanding. Cash less borrowings was approximately $(1.47) billion, excluding lease liabilities.
- Perrigo obtained a waiver after failing its leverage covenant at July 3, 2021; the maximum ratio was temporarily raised to 5.75:1 for Q3, reverting to 3.75:1 in Q4, with a possible 4.00:1 threshold for qualifying acquisitions. The company reported compliance with all debt covenants at October 2.
- Moody’s and S&P downgraded Perrigo in Q3 to Ba1 (negative) and BB (stable), both below investment grade. Fitch rated it BBB- (negative) at October 2. The downgrade increased the coupon on the 2030 notes from 3.15% to 3.90% beginning after the December 15, 2021 interest payment.
Material developments, outlook and risks
- Supply and demand: Management reported strong Q3 consumer takeaway but lost shipments amid U.S. truck-driver shortages and global port delays, with unfulfilled orders rising. Actions include distribution changes, additional carriers and staffing, and outsourcing certain logistics. Management said it still did not expect to meet demand in Q4 and anticipated gradual improvement toward mid-2022. Higher input and COVID-related operating costs were expected to continue into early 2022; pricing actions and discretionary-cost reductions are being used to mitigate them.
- Acquisitions and divestitures: Perrigo agreed to acquire HRA Pharma for approximately €1.8 billion (about $2.1 billion enterprise value), with closing expected in the first half of 2022 subject to approvals. Funding is expected from cash and potentially existing or new debt. The planned sale of its Latin American OTC businesses is also expected to close in the first half of 2022; related impairments totaled $161.2 million.
- Tax matters: The Irish Tysabri-related assessment was settled for €297.0 million of total tax, with €266.1 million ($307.5 million) cash paid October 5, after quarter-end. The company also faces U.S. IRS disputes, including an Athena transfer-pricing notice proposing $843 million of tax and penalties; the amount is disputed and no payment is currently required while treaty processes proceed. An adverse omeprazole ruling could add $24–$112 million in U.S. tax, plus interest and potential penalties, according to the filing.
- Litigation and insurance: Perrigo disclosed generic-drug price-fixing litigation and product-liability matters, including ranitidine, talc and acetaminophen claims. It reported $96.9 million of accrued litigation losses and an $83.4 million insurance-recovery receivable, while warning final costs may exceed accruals or insurance recoveries. A separate securities-litigation settlement was expected to be insurance-funded, subject to court approval.
- Other unusual items: The Omega arbitration panel found seller fraud and awarded Perrigo approximately €355 million; the sellers paid, but had until late November 2021 to challenge the award. The RX sale generated a $63.9 million pre-tax gain in discontinued operations, subject to final transaction settlements. CSCI recalls of certain vitamin products related to potential 2-CE contamination reduced Q3 sales by $3.9 million and gross profit by $5.5 million.
- The filing gives no quantified forward financial guidance. Management’s outlook is conditional on COVID-19 developments, consumer demand, supply-chain conditions, costs, and the timing and financing of planned transactions.
Important facts for investors to verify
- How much of reported operating income and cash generation is recurring after separating the Omega award, divestiture proceeds, tax settlements and other unusual items.
- Whether supply constraints, higher freight and input costs, and customer order backlogs ease on management’s expected timeline, and whether pricing offsets the cost pressure.
- Funding, regulatory approval, closing timing and integration assumptions for HRA Pharma, alongside the Latin American business sale and final RX sale settlements.
- Near-term refinancing and covenant headroom for the August 2022 term-loan maturity, and the effect of below-investment-grade ratings on financing costs and access.
- Developments in the IRS disputes, Irish tax settlement accounting, generic-drug and product-liability litigation, and insurance coverage—including whether reported reserves and recoveries remain adequate.