Perrigo Company plc — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparative period ended March 30, 2019. Perrigo sells consumer self-care products and generic prescription pharmaceuticals through Consumer Self-Care Americas (CSCA), Consumer Self-Care International (CSCI), and Prescription Pharmaceuticals (RX). Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $1,341.0 million | $1,174.5 million | Up 14% |
| Gross profit / margin | $483.2 million / 36.0% | $448.8 million / 38.2% | Profit up; margin down 2.2 percentage points |
| Operating income / margin | $145.7 million / 10.9% | $102.3 million / 8.7% | Up 42% |
| Net income | $106.4 million | $63.9 million | Up 66% |
| Diluted EPS | $0.77 | $0.47 | Up $0.30 |
| Operating cash flow | $171.8 million | $94.5 million | Up $77.3 million |
Interest expense, net, was $30.2 million versus $28.6 million. The effective tax rate was 7.2%, down from 21.1%; the CARES Act reduced first-quarter tax expense by approximately $20 million. Comprehensive income was $2.9 million, compared with $48.3 million, principally reflecting a $92.2 million foreign-currency translation loss.
Liquidity and debt
At March 28, 2020, cash and cash equivalents were $510.4 million, up from $354.3 million at year-end 2019. Total current assets were $3,046.2 million and current liabilities were $1,635.0 million. Total borrowings were $3,470.7 million, including $100 million drawn on the $1.0 billion revolving facility as a precaution amid the pandemic; long-term debt, less current portion, was $3,182.9 million. Perrigo reported compliance with debt covenants. It said cash, operating cash flow, and available borrowing capacity were expected to meet short- and long-term needs, while noting that worsening conditions could affect access to financing.
Operating cash flow benefited from working-capital movements and higher earnings. Investing activities used $74.8 million, including $33.8 million of capital expenditures and acquisition-related spending; financing activities provided $64.7 million. The company paid $30.9 million in dividends, or $0.23 per share.
Material changes and segment results
- Sales growth included the Ranir acquisition, new products, and heightened demand associated with COVID-19. Management estimated that pandemic-related demand added $90 million to $110 million to consolidated first-quarter sales; the amount attributable to pantry stocking or likely to persist was uncertain.
- CSCA sales rose 20% to $700.6 million and operating income rose to $124.6 million from $94.2 million. CSCI sales rose 9% to $382.7 million and operating income rose to $25.0 million from $8.1 million. RX sales rose 7% to $257.7 million, but operating income fell to $51.7 million from $60.6 million.
- Consolidated gross margin declined 2.2 percentage points, which management attributed mainly to RX pricing pressure, operational inefficiencies, and product mix. RX gross margin fell to 34.1% from 39.9%.
- Cash from operations increased year over year, while investing cash flow was lower than in 2019, which included a $250 million Royalty Pharma milestone receipt.
Outlook, risks, and unusual items
- COVID-19: Perrigo continued operating across its jurisdictions, but reported manufacturing, raw-material, and third-party supply risks. It warned that demand could recede after pantry stocking and that the pandemic’s ultimate effects on operations, demand, and capital access were uncertain. No quantified full-year outlook is provided in the filing text.
- RX separation: Perrigo continued preparing to separate its RX business, potentially through a sale, spin-off, merger, or other structure, but had not committed to a timetable. Estimated costs were $45 million to $80 million, excluding restructuring and transaction costs.
- Tax disputes: The company contests an Irish tax assessment of €1.636 billion, excluding interest and potential penalties. A separate IRS transfer-pricing proposal related to Athena sought $843 million, including a 40% penalty, before offsets and potentially material interest. The IRS also proposed interest deductions adjustments for earlier years; Perrigo estimated potential tax expense of about $170 million for 2014–2015 and up to $200 million for 2015–2019 if further adjustments were sustained. The company said these matters were contested and no payment was currently due pending resolution.
- Other legal matters: Perrigo faces generic-drug price-fixing litigation, securities claims, talcum-powder product-liability suits, and ranitidine litigation following its voluntary market withdrawal of ranitidine products. The company said outcomes and potential losses could not be reasonably predicted for certain matters.
- Contingent Tysabri milestone: A $96.9 million asset was recorded for a possible 2020 Royalty Pharma milestone. If the specified sales threshold is not met, Perrigo expects to write off the asset; if met, it expects to recognize a $303.1 million gain and increase the asset to $400 million.
- Acquisitions: Perrigo acquired the Steripod and Dexsil brands in Q1 and completed the $113 million High Ridge Brands oral-care asset acquisition on April 1, 2020. It also launched generic albuterol following FDA approval in February.
Important facts for investors to verify
- Whether COVID-related sales persist or reverse, and whether supply-chain disruption or operating inefficiencies worsen.
- RX pricing, margins, and the contribution from new product launches, including generic albuterol.
- Cash generation, revolving-credit usage, debt maturities, and continued covenant compliance.
- Developments and potential financial exposure from the Irish and U.S. tax disputes and material litigation.
- Whether the Tysabri milestone threshold is achieved and how the RX separation proceeds, including its timing and costs.