Perrigo Company plc — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2014, ended December 28, 2013. Perrigo became the successor registrant to Perrigo Company on December 18, 2013, when it completed its acquisition of Elan. Results are therefore not fully comparable with the prior year; Elan’s results are included only from the acquisition date.
Financial performance and condition
- Revenue: Second-quarter net sales were $979.0 million, up 11% from $883.0 million. Six-month sales were $1.912 billion, up 16% from $1.653 billion. Management attributed growth to new products and acquisitions, including Elan, Rosemont, Fera and Velcera.
- Profit and margins: Second-quarter gross profit was $360.7 million, with a 36.8% gross margin versus 34.8%. Operating income fell to $86.6 million from $163.9 million; operating margin declined to 8.8% from 18.6%. Perrigo reported a net loss of $86.0 million, or $0.87 per diluted share, versus net income of $106.0 million, or $1.12 per diluted share. For the six months, operating income was $266.2 million versus $320.4 million, and net income was $25.3 million versus $211.5 million.
- Major earnings effects: The quarter included $269.0 million of Elan acquisition-related costs, including a $165.8 million loss on extinguishment of debt. The six-month total was $283.7 million. The filing does not provide a directly comparable adjusted earnings measure.
- Cash flow: Six-month operating cash flow was $220.3 million, compared with $229.6 million. Investing cash outflow was $1.600 billion, primarily reflecting the Elan acquisition; financing cash inflow was $1.122 billion. Cash declined $258.8 million from fiscal year-end to $521.1 million.
- Liquidity and debt: Working capital was $1.324 billion. Total borrowings were $3.300 billion, including $141.2 million current and $3.159 billion long-term. Perrigo had no outstanding borrowings under its $600 million revolving facility or $200 million receivables securitization program. Credit ratings were Baa3 (stable) from Moody’s and BBB (negative) from S&P.
- Dividends: Six-month dividends were $0.18 per share, compared with $0.17 a year earlier.
Material changes and business segments
- Elan was acquired for approximately $9.45 billion in cash and stock. Perrigo issued about 39.4 million shares; former Elan shareholders owned approximately 29% of Perrigo immediately after the transaction.
- Second-quarter segment sales were $536.3 million in Consumer Healthcare (down 1%), $139.7 million in Nutritionals (up 15%), $246.6 million in Rx Pharmaceuticals (up 52%), and $30.0 million in API (down 27%). Specialty Sciences contributed $7.4 million of sales and a $19.0 million operating loss for the period from December 18 to December 28.
- Consumer Healthcare’s quarterly sales weakness reflected declines in existing products, particularly contract manufacturing and analgesics. Nutritionals benefited from existing products and improved operating efficiencies. Rx growth reflected acquisitions and new products. API sales were pressured by competition and lower sales under a post-exclusivity customer agreement; new temozolomide sales partly offset the decline.
- Elan added a substantial Tysabri royalty asset and other specialty-science activities. The filing reports $51.0 million of Elan Tysabri royalties for the three-month period ending in December, but only $7.4 million of Specialty Sciences revenue was consolidated by Perrigo after acquisition.
Outlook, commentary, risks and unusual items
- Management expects recurring operating-cost and tax savings from Elan, but cautions that integration is complex and benefits may be delayed or not fully realized. It expects approximately $306 million in annual amortization expense associated with acquired Elan intangibles and approximately $100 million in annual interest expense following new debt issuance.
- Management expects $8–$10 million of additional Elan employee termination costs in the second half of fiscal 2014 and stated that restructuring and integration costs for the remainder of the fiscal year were not anticipated to exceed $15 million before tax. Planned fiscal 2014 capital expenditures were $150–$185 million.
- Elan’s purchase-price allocation is preliminary; subsequent valuation adjustments could materially affect reported assets, liabilities or earnings. Acquired Tysabri royalties, goodwill, intangible assets and equity investments are subject to performance and impairment risks.
- Perrigo sold its Prothena investment after quarter-end for net proceeds of approximately $79.4 million and expected to recognize an approximately $9.8 million loss in the third quarter of fiscal 2014.
- Key risks include Tysabri safety concerns, including PML, competition and regulatory changes; Elan integration and synergy execution; uncertainty over U.S. tax treatment of the Irish parent and future international tax-law changes; and competitive pressure in API and OTC products. Perrigo also disclosed Tysabri product-liability lawsuits, an appeal in the Ramat Hovav environmental litigation, and Israeli Eltroxin class-action certification proceedings; outcomes were not reasonably predictable for these matters.
- Other unusual items included $6.0 million of in-process R&D write-offs, a $4.9 million reduction in Fera contingent consideration, and $165.8 million of debt-extinguishment charges. The quarter’s reported results are also affected by seasonality in cough/cold/allergy and animal-health products.
Important facts for investors to verify
- How final Elan purchase accounting, acquired-intangible amortization and integration costs affect future earnings and cash generation.
- Whether anticipated Elan cost savings and tax benefits are realized, and how the Irish incorporation and U.S. tax rules affect the effective tax rate.
- The sustainability of Tysabri royalty revenue in light of PML risks, competition and regulatory developments.
- Debt-service capacity, refinancing needs and credit-rating developments following the increase in borrowings.
- Whether API declines, OTC competitor re-entry and seasonal demand alter segment performance; and the eventual outcomes of disclosed litigation and contingencies.