Perrigo Company plc — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 28, 2019; filed November 6, 2019. Perrigo sells OTC and other consumer self-care products and generic prescription pharmaceuticals. Segment reporting was reorganized in 2019 into Consumer Self-Care Americas (CSCA), Consumer Self-Care International (CSCI), and Prescription Pharmaceuticals (RX); comparisons below use the reported figures.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,191.1m | $1,133.1m | $3,514.6m | $3,536.5m |
| Gross profit / margin | $412.8m / 34.7% | $424.8m / 37.5% | $1,292.5m / 36.8% | $1,388.5m / 39.3% |
| Operating income (loss) / margin | $54.4m / 4.6% | $(122.0)m / (10.8)% | $211.7m / 6.0% | $129.0m / 3.6% |
| Net income (loss) | $92.2m | $(67.5)m | $165.1m | $49.6m |
| Diluted EPS | $0.67 | $(0.49) | $1.21 | $0.36 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $298.3m | $398.7m |
Cash flow from investing was $(489.8)m for the nine months, including the Ranir acquisition; financing provided $33.3m. Capital expenditures were $90.3m, making operating cash flow less capital expenditures approximately $208.0m. Cash declined to $398.5m from $551.1m at year-end 2018.
At September 28, 2019, total borrowings were $3,364.6m, including $3,361.5m long-term debt and $3.1m current indebtedness. The $1.0bn revolving credit facility was undrawn, and Perrigo reported compliance with debt covenants. Current assets were $2,739.8m and current liabilities $1,324.7m. Total lease liabilities were $159.6m.
Material changes and operating drivers
- Q3 sales increased 5%, while nine-month sales declined 0.6%. The quarterly increase included $77.0m from Ranir and $51.7m from new products. Nine-month sales benefited from $171.3m of new-product growth and $77.0m from Ranir, offset by competition-driven declines, unfavorable euro translation, discontinued products, divestitures, and the Ranitidine withdrawal.
- Gross margin fell 2.8 percentage points in Q3 and 2.5 points for the nine months. Management cited pricing pressure, operating inefficiencies, unfavorable product mix, and foreign exchange. Nine-month gross profit fell $96.0m despite higher reported operating income.
- Operating income improved year over year largely because prior-year impairment charges were not repeated: impairment expense declined $210.9m in Q3 and $180.6m for the nine months. The prior-year period included significant animal-health impairment charges. Q3 net income also included a $72.4m gain on the animal-health sale and a $2.6m gain from remeasurement of the Royalty Pharma milestone asset.
- Segment trends diverged: nine-month CSCA sales were down 1% and operating income rose to $283.3m, substantially reflecting lower impairment and R&D expense; CSCI sales fell 4% and operating income was $18.4m; RX sales grew 6%, but operating income fell 37% to $95.0m amid price pressure, lower margins, manufacturing inefficiencies, and impairment charges.
- Perrigo acquired Ranir for $750.0m on July 1; it contributed $77.0m in Q3 sales and no net income, including a $5.6m inventory fair-value charge. The company sold its animal-health business for base consideration of $185.0m, subject to final working-capital adjustments.
Outlook, risks, and unusual items
- No specific consolidated revenue or earnings guidance is provided in the supplied filing text. Management said RX pricing softness was expected to continue for the foreseeable future. It continued preparations to separate RX, but gave no timetable; estimated separation-preparation costs are $45m–$80m, excluding restructuring and transaction costs.
- Following concerns that Ranitidine products may contain NDMA, Perrigo halted shipments on October 8, 2019 and conducted a voluntary retail market withdrawal. The company reported Q3-related sales reductions of $7.4m in CSCA and $1.8m in CSCI, with gross-profit reductions of $15.5m and $2.9m, respectively.
- Significant tax disputes remain unresolved. The Irish Revenue assessment is €1.636bn, excluding interest and penalties, relating to the Tysabri transaction; Perrigo is challenging it, and judicial-review proceedings were scheduled for April 2020. An IRS transfer-pricing NOPA proposes $843m, including a 40% penalty but excluding potentially material interest. A separate IRS draft NOPA could, if sustained, increase tax expense by about $170m for 2014–2015 and by up to a preliminary estimate of $200m for 2015–2019, excluding interest and penalties. Management disputes the positions; payment is not currently due while proceedings continue.
- Other notable risks include generic-drug price-fixing and securities litigation, the RX U.S. reporting unit’s reduced goodwill headroom (fair value exceeded carrying value by about 10% at June 2019), and additional impairment exposure. The company recorded $10.8m of Q3 impairment for Evamist and $27.8m earlier in 2019 for a generic product.
- The 2020 Royalty Pharma milestone remains uncertain: Perrigo held a $91.7m asset at quarter-end, but receiving the $400m milestone depends on Tysabri royalty payments exceeding $351m in 2020. If the threshold is not met, the asset would be written off; if met, the company expects to recognize $308.3m of income.
Important facts for investors to verify
- Progress and financial consequences of the Irish tax assessment and both IRS matters, including any final NOPA and potential interest or penalties.
- Ranitidine withdrawal costs, any further product or regulatory developments, and the effect on sales and margins.
- Whether RX separation proceeds, its structure, timing, total costs, and implications for debt and shared operations.
- Ranir integration, acquisition accounting adjustments, realized synergies, and the impact of its lower-margin products on consolidated profitability.
- Whether operating cash flow stabilizes, given the $100.4m year-over-year decline, working-capital uses, acquisition spending, and debt obligations.
- Performance of the RX U.S. reporting unit and other acquired or definite-lived intangible assets, including future impairment indicators.