Perrigo Company plc — Form 10-Q summary
Reporting period: Three months ended September 26, 2015, compared with the three months ended September 27, 2014. The company was in a transition period from June 28 through December 31, 2015, following its fiscal year-end change. Results are unaudited and the quarter may not indicate full-period performance.
Financial performance
| Metric | 2015 quarter | 2014 comparable quarter | Change |
|---|---|---|---|
| Net sales | $1,344.7 million | $951.5 million | Up 41% |
| Gross profit / margin | $548.8 million / 40.8% | $321.8 million / 33.8% | Margin up 7.0 percentage points |
| Operating income / margin | $188.6 million / 14.0% | $137.2 million / 14.4% | Income up 37%; margin down 0.4 points |
| Net income | $112.6 million | $96.3 million | Up 17% |
| Diluted EPS | $0.77 | $0.72 | Up 7% |
| Operating cash flow | $136.0 million | $195.1 million | Down $59.1 million |
| Cash and equivalents at period-end | $506.5 million | $785.6 million at June 27, 2015 | Down $279.1 million |
| Total borrowings | $5,375.0 million | $5,311.4 million at June 27, 2015 | Up $63.6 million |
Interest expense was $43.4 million in the financial statements; MD&A reports $43.7 million, so the filing text is inconsistent on this value. Other expense was $13.0 million, versus $2.7 million. The effective tax rate was 14.8%, versus 11.4%. Dividends declared were $0.125 per share, versus $0.105.
Cash used in investing was $448.7 million, including $405.1 million for acquisitions and $38.6 million of capital expenditures. Financing provided $43.7 million, chiefly reflecting $79.0 million of net short-term borrowing. Current assets were $2,880.8 million and current liabilities $1,661.2 million. The company reported compliance with debt covenants and no borrowings on its $1.0 billion revolving facility.
Material changes and business drivers
- Revenue and gross profit growth reflected acquisitions, product launches, stronger volumes and mix. Comparability is substantially affected by the Omega acquisition, completed in March 2015; BCH had no comparable segment results in the prior-year segment table.
- CHC sales rose 5% to $675.2 million, with operating income up 57% to $117.3 million. New infant formula products, higher cough/cold and gastrointestinal volumes, manufacturing efficiencies and favorable commodity prices helped; discontinued products, weaker animal health and other category volumes, and foreign exchange partly offset gains.
- BCH contributed $302.2 million in sales but only $4.4 million in operating income (1.4% margin). Top brands and new products supported sales; low distribution sales and high advertising, promotion and acquired-intangible amortization weighed on profitability.
- Rx sales grew 34% to $260.3 million and operating income increased 40% to $91.0 million, supported by launches and higher existing-product sales. Specialty Sciences operating income fell 39% to $9.0 million, primarily reflecting foreign exchange and one fewer shipping week.
- On August 28 the company acquired ScarAway for $27.0 million and GSK consumer brands for $223.6 million; on September 15 it acquired Naturwohl for $150.4 million. Purchase-price allocations remained preliminary. These acquisitions contributed to a $117.1 million goodwill increase from business acquisitions, partly offset by purchase-accounting adjustments.
Outlook, risks and unusual items
- On October 22, 2015, after quarter-end, Perrigo announced planned operational-efficiency measures: global shared-service arrangements, organizational streamlining and asset disposals. It also announced a $2.0 billion, three-year share-repurchase plan, including $500 million expected in the fourth quarter of calendar 2015. Execution and benefits are not assured; repurchases may reduce liquidity or limit investment capacity.
- Mylan’s unsolicited exchange offer was pending. Perrigo’s board recommended shareholders not tender. The offer period created management distraction and $15.6 million of defense-related consulting and legal fees during the quarter; cumulative fees since the initial proposal were $29.0 million.
- A change of control above 35% could trigger default rights under the $517.7 million term loan and revolving facility. Approximately $3.9 billion of public bonds could become subject to a repurchase offer at 101% of par if a change of control coincided with downgrades below investment grade by both Moody’s and S&P. The filing cautions Perrigo might not have sufficient funds to meet such obligations.
- Liquidity was affected by working-capital outflows, particularly $194.0 million of accounts-payable payments and a $57.0 million inventory increase. Management attributed timing patterns partly to Omega and expected cash-flow seasonality. Factored receivables excluded from accounts receivable totaled $159.3 million.
- Tax uncertainty includes a $399.0 million liability for uncertain tax positions. Perrigo is contesting an IRS deficiency of approximately $68.9 million, already paid and recorded as a deferred charge while the company seeks recovery; an unfavorable outcome could materially affect future results. The Texas Medicaid investigation, Israeli Eltroxin class-action matter and Tysabri product-liability lawsuits also remain potential contingencies.
- Foreign-exchange movements reduced comprehensive income by $39.8 million and contributed to other expense. The filing identifies seasonal demand in several consumer businesses and cautions that the quarter is not necessarily indicative of full-period results.
Important facts for investors to verify
- How much of sales and earnings growth is attributable to acquisitions versus organic performance, especially given the limited prior-period BCH comparability.
- Whether BCH can improve profitability after substantial advertising, promotion and acquired-intangible amortization costs.
- Cash conversion and working-capital trends, including Omega-related payment timing, inventory requirements and use of receivables factoring.
- Debt and liquidity implications of the Mylan offer, potential change-of-control provisions, and the announced repurchases.
- Final acquisition purchase-price allocations, the outcome of the IRS dispute and other disclosed legal contingencies.
- The difference between the $43.4 million interest expense in the statements and $43.7 million in MD&A.