Perrigo Company plc — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; compared with the three months ended April 1, 2017. Unaudited U.S. GAAP results. Perrigo is a global healthcare company operating in Consumer Healthcare Americas (CHCA), Consumer Healthcare International (CHCI), and Prescription Pharmaceuticals (RX).
Financial results and liquidity
Unless otherwise noted, amounts are in millions of U.S. dollars.
| Metric | Q1 2018 | Prior period |
|---|---|---|
| Net sales | $1,217.0 | $1,194.0 |
| Gross profit / margin | $492.7 / 40.5% | $464.4 / 38.9% |
| Operating income / margin | $156.3 / 12.8% | $128.5 / 10.8% |
| Net income | $80.8 | $71.6 |
| Diluted earnings per share | $0.57 | $0.50 |
| Operating cash flow | $172.4 | $194.5 |
| Capital expenditures | $13.4 | $22.0 |
| Cash and cash equivalents, quarter-end | $687.3 | $678.7 at December 31, 2017 |
| Total borrowings | $3,338.6 | $3,341.2 at December 31, 2017 |
Gross profit and operating income improved despite modest sales growth. Operating cash flow fell $22.1 million year over year, reflecting working-capital movements, including inventory build and timing of payments and collections. Investing activities used $2.1 million, versus $2.3 billion of inflows in the prior-year quarter, which included $2.2 billion proceeds from the Tysabri financial-asset sale. Financing activities used $162.6 million, including $108.1 million of share repurchases and $26.7 million of dividends.
At March 31, current assets were $2,900.7 million and current liabilities were $1,392.5 million. The company reported no revolving-credit borrowings and had a $1.0 billion revolver maturing in 2023. It was in compliance with debt covenants. In March, Perrigo refinanced a €350 million term loan with a new loan due March 2020. Credit ratings were Baa3 (stable) from Moody’s and BBB- (stable) from S&P.
Material changes and segment performance
- Consolidated sales increased $23.0 million, or about 2%. New-product sales and favorable foreign exchange contributed; exited Russian and API businesses, prior-year distribution phase-outs, and discontinued products partly offset growth.
- CHCA sales rose 3% to $601.6 million and operating income increased to $113.1 million from $75.0 million, supported by volume, supply-chain efficiencies, product mix, and substantially lower restructuring expense. Management said category pricing pressure is expected to continue.
- CHCI sales rose 7% to $401.4 million and operating income was $14.9 million versus $0.2 million. Foreign exchange, new products, and mix helped; lower existing-product sales and exited-business effects partly offset gains. Management continued brand-prioritization, sales-force restructuring, and manufacturing in-sourcing initiatives.
- RX sales declined 2% to $214.0 million and operating income fell to $61.9 million from $88.2 million. Lower pricing and the absence of prior-year gains on ANDA sales and contingent consideration were key factors; prior-year impairment charges were a partial offset. Management forecast a high-single-digit RX pricing decline for full-year 2018 and continued a portfolio review to assess potential strategic alternatives.
Comparability is affected by accounting and unusual items. Perrigo adopted ASC 606 on January 1, 2018; the filing estimates adoption increased reported Q1 2018 sales by $5.6 million and net income by $2.5 million versus the former method. Prior-year results included the $17.1 million Tysabri-related financial-asset gain, significant restructuring charges, and gains and impairment charges in RX. Q1 2018 also included a $9.6 million decrease in the fair value of contingent Tysabri milestone payments, a $0.5 million debt-extinguishment loss, and $1.5 million of restructuring charges.
Outlook, risks, and contingencies
- No consolidated full-year financial guidance is stated in the provided filing text. Management expects RX pricing pressure to persist, forecasting a high-single-digit decline in RX pricing for 2018. Pricing pressure is also expected to continue in CHCA.
- The fair value of potential Tysabri milestone receipts was $124.9 million at quarter-end. Payment depends on global Tysabri sales exceeding specified thresholds in 2018 and 2020; competition was weighing on projected sales. The filing describes possible substantial changes in recognized income or expense if thresholds are or are not met.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31, 2018 because a material weakness in income-tax controls identified in 2017 had not been remediated. Remediation work was underway; management said more time was needed to demonstrate operating effectiveness.
- Tax matters include a lawsuit seeking $163.6 million plus interest in refunds of previously paid federal taxes, penalties, and interest. The company also disclosed an IRS draft transfer-pricing adjustment for an acquired subsidiary that could be material, but whose amount could not be quantified; Perrigo disputes the positions and intends to contest them. Other tax audits remain ongoing.
- Legal matters include U.S. and Israeli securities litigation relating to past disclosures, the Omega acquisition, and other allegations; generic-drug price-fixing litigation; Tysabri product-liability cases; and an Omega acquisition arbitration. The filing says outcomes or potential losses cannot be reliably predicted for several matters. An Eltroxin class-action settlement remained subject to court review and objections.
- Other risks highlighted include competition and pricing, customer acceptance of new products, foreign-exchange and interest-rate movements, litigation and regulatory matters, tax uncertainty, execution of cost-reduction initiatives, and the possibility of further control deficiencies.
Investor verification priorities
- Track remediation and independent testing of the income-tax control material weakness, and whether controls become effective.
- Review RX pricing, portfolio-review decisions, and the sustainability of CHCA and CHCI margin improvements.
- Monitor operating cash conversion, inventory levels, debt maturities, refinancing terms, and remaining liquidity.
- Assess Tysabri milestone assumptions and outcomes, including the 2018 sales threshold and related fair-value changes.
- Follow IRS audits and refund litigation, securities and antitrust cases, Tysabri product-liability proceedings, and the Eltroxin settlement.
- Compare reported growth with the ASC 606-adjusted figures and account for prior-year divestiture proceeds and gains when evaluating trends.