Perrigo Company plc — Q1 2019 Form 10-Q
Reporting period: Three months ended March 30, 2019; comparisons are with the three months ended March 31, 2018. Unaudited results. Perrigo sells over-the-counter and self-care products and generic prescription pharmaceuticals.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1,174.5 million | $1,217.0 million | Down 4% |
| Gross profit / margin | $448.8 million / 38.2% | $492.7 million / 40.5% | Margin down 230 bps |
| Operating income / margin | $102.3 million / 8.7% | $156.3 million / 12.8% | Down 35% |
| Net income | $63.9 million | $80.8 million | Down 21% |
| Diluted EPS | $0.47 | $0.57 | Down $0.10 |
| Operating cash flow | $94.5 million | $172.4 million | Down $77.9 million |
Gross-margin pressure reflected pricing, unfavorable product mix, and higher costs on certain products. New product sales partly offset lower existing-product sales, currency effects, and discontinued products. The effective tax rate was 21.1%, versus 26.9%, primarily because the prior-year period included additional valuation allowances against deferred tax assets.
Segments and material changes
- Consumer Self-Care Americas: Sales fell 3% to $581.8 million; operating income fell 21% to $94.2 million. Pricing, lower volumes in several categories, commodity costs, and infant-formula production inefficiencies weighed on results.
- Consumer Self-Care International: Sales fell 7% to $350.8 million; operating income fell 35% to $8.1 million. Unfavorable currency translation and lower volume were partly offset by new products and lower operating expenses.
- Prescription Pharmaceuticals: Sales rose 2% to $241.9 million, largely on new products; operating income was nearly flat at $60.6 million. Management said competitive pricing pressure remains a concern.
- Unallocated expenses increased $24.8 million, mainly from higher legal and consulting fees and executive-management restructuring.
- Management changed segment reporting, moving the Israeli diagnostic business from International to Prescription Pharmaceuticals and adjusting allocations; comparisons reflect the revised presentation.
Cash, debt, and liquidity
Cash and cash equivalents were $837.9 million at March 30, up from $551.1 million at year-end. Operating cash flow was $94.5 million; capital expenditures were $21.1 million. Investing cash flow of $230.1 million included a $250.0 million Royalty Pharma milestone receipt. Financing cash outflow was $41.6 million, including $25.9 million of dividends. The operating cash-flow decline reflected lower earnings and working-capital movements, including customer-program accruals and receivables.
Total borrowings were $3.218 billion, including $467.9 million classified as current; long-term debt, net of current portion, was $2.750 billion. The company had no borrowings on its $1.0 billion revolving credit facility and reported compliance with debt covenants. It stated that cash, operating cash flow, and available borrowing capacity should meet short- and long-term needs, while noting that adverse tax outcomes could materially affect liquidity. Adoption of the new lease standard resulted in $157.8 million of lease liabilities at quarter-end.
Outlook, notable items, and risks
- Perrigo was preparing to separate its Prescription Pharmaceuticals business, targeting completion by year-end 2019, though the form of separation could delay completion into 2020. Estimated preparation costs were $45 million to $80 million, depending on structure. No numerical earnings guidance is provided in the filing text.
- After quarter-end, Perrigo agreed to sell its animal-health business to PetIQ for $185 million cash plus a working-capital adjustment, and agreed to acquire Ranir for $750 million on a cash-free, debt-free basis. Ranir was expected to close in Q3 2019, funded with about $450 million of cash and the balance through short-term debt.
- Tax disputes are a major uncertainty. Irish Revenue assessed €1.636 billion, excluding interest and potential penalties, relating to the 2013 Tysabri asset sale; Perrigo disputes the assessment and is pursuing review and appeal. Separately, an IRS notice received April 26, 2019 proposed $843 million of additional tax and a 40% penalty, excluding offsets and potentially material interest. Perrigo disputes the position; no payment is required pending resolution.
- The company faces generic-drug price-fixing litigation, securities litigation, and other legal matters. Perrigo says outcomes cannot be predicted; an adverse resolution of certain matters could materially affect financial condition, results, or cash flows.
- A $83.6 million Royalty Pharma contingent-milestone asset depends on Tysabri sales thresholds in 2020. If the threshold is not met, the asset would be written off; if exceeded, Perrigo expects to recognize a $316.4 million gain.
- Q1 included $9.3 million of restructuring expense, primarily related to executive-management reorganization, and a $4.1 million impairment of an in-process R&D asset due to revised development and regulatory timelines.
Most important facts for investors to verify
- Progress and final structure, timing, and costs of the planned RX separation, alongside the Ranir acquisition and animal-health divestiture.
- Developments in the Irish tax assessment and IRS proposed adjustment, including potential interest, penalties, offsets, and any impact on liquidity.
- Whether pricing pressure, foreign exchange, product mix, and higher costs continue to weigh on revenue and margins, particularly in RX and consumer self-care.
- Cash generation and working-capital trends, debt maturities, and funding plans for the acquisition and other strategic actions.
- Resolution of price-fixing and securities litigation, and achievement of the Tysabri-related milestone conditions.