Perrigo Company plc — Form 10-Q Summary
Reporting period: Three months ended September 27, 2014, the company’s first quarter of fiscal 2015 (not calendar 2014 Q1). Comparatives are for the three months ended September 28, 2013. Amounts are in U.S. dollars.
Business context
Perrigo develops, manufactures and distributes OTC and generic prescription pharmaceuticals, nutritional products and active pharmaceutical ingredients. Following its December 2013 acquisition of Elan, it also receives royalties from Tysabri sales. Its five reportable segments are Consumer Healthcare, Nutritionals, Rx Pharmaceuticals, API and Specialty Sciences.
Financial performance and liquidity
| Metric | Q1 FY2015 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $951.5 million | $933.4 million | Up 2% |
| Gross profit / margin | $321.8 million / 33.8% | $356.3 million / 38.2% | Down $34.5 million / 4.4 percentage points |
| Operating income / margin | $137.2 million / 14.4% | $179.7 million / 19.3% | Down 24% |
| Net income | $96.3 million | $111.4 million | Down 14% |
| Diluted EPS | $0.72 | $1.18 | Down 39% |
| Operating cash flow | $195.1 million | $98.7 million | Up $96.4 million |
- Interest and other expense, net, was $28.6 million, up from $22.4 million. Income tax expense was $12.3 million; the effective tax rate was 11.4%, versus 29.2%.
- Cash and cash equivalents were $891.5 million at quarter-end, up from $799.5 million at June 28, 2014. Working capital, including cash, was $1.616 billion.
- Cash used in investing activities was $30.7 million, including $31.7 million of capital expenditures. Cash used in financing activities was $61.3 million, including $39.5 million of long-term debt repayments and $14.1 million of dividends.
- Total borrowings were $3.192 billion: $2.294 billion of senior notes and $895 million of term loans, with no revolver or receivables-securitization borrowings. Net debt, calculated as borrowings less cash, was approximately $2.301 billion. Perrigo reported compliance with debt covenants.
- Basic and diluted weighted-average shares rose to 133.9 million and 134.4 million, respectively, from 94.2 million and 94.7 million, principally reflecting shares issued in the Elan transaction. This affects per-share comparisons.
Material changes and segment trends
- Sales included $91.9 million of incremental Specialty Sciences royalties from Tysabri and $23.5 million of new-product sales. Those contributions were partly offset by weaker Consumer Healthcare and API sales.
- Consumer Healthcare sales fell 8% to $493.3 million and operating income fell 27% to $65.3 million. Management cited timing of seasonal promotions, lower contract sales, a product temporarily taken off the market, and the branded analgesic competitor’s return; smoking-cessation sales and new products partly offset the decline.
- Nutritionals sales declined 3% to $125.3 million, while operating income increased 12% to $8.6 million, reflecting improved product mix and manufacturing efficiencies.
- Rx Pharmaceuticals sales fell 4% to $194.5 million and operating income fell 22% to $64.7 million. Discontinued products and planned wholesaler chargebacks and stock adjustments weighed on sales; new launches partly offset the decline.
- API sales declined 43% to $24.8 million and operating income fell 68% to $7.1 million, mainly due to the expiration of temozolomide exclusivity and competition.
- Specialty Sciences reported $91.9 million of sales, principally Tysabri royalties, and $72.8 million of intangible amortization. The segment table reports $14.9 million of operating income, while the MD&A segment table describes a $14.9 million operating loss; investors should verify this apparent inconsistency.
- Gross profit and margin declined primarily because of product mix and higher acquired-intangible amortization. Amortization expense was $106.5 million, versus $29.8 million a year earlier, mainly due to Elan. Management expected approximately $218.3 million of annual amortization from Elan-acquired intangibles.
Outlook, commentary and risks
- No consolidated earnings guidance is provided in the supplied filing text. Management expected fiscal 2015 capital expenditures of $140 million to $170 million, funded from operating cash flow or revolving facilities, and anticipated a lower full-year effective tax rate than in fiscal 2014 due to Elan-related tax structure and income mix.
- Management said cash, operating cash flow and available borrowing capacity were expected to meet foreseeable needs. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
- Perrigo described a shift in API strategy toward both third-party products and vertical integration. It warned that API external revenue may decline as third-party development opportunities are limited, while intercompany activity may rise.
- On November 6, 2014, after quarter-end, Perrigo agreed to acquire 95.77% of Omega Pharma for a total value of EUR 3.6 billion, including assumption of EUR 1.1 billion of debt. The agreement contemplated EUR 1.8 billion cash and Perrigo shares; completion was subject to customary conditions, including antitrust approval, and was expected in fiscal Q3 2015. Financing commitments included a EUR 1.75 billion bridge facility and potential new or amended term and revolving facilities. This transaction may materially increase leverage.
- On October 31, 2014, after quarter-end, Perrigo completed its $83 million cash acquisition of a women’s healthcare product portfolio from Lumara Health.
- The IRS asserted approximately $43 million of additional tax for fiscal 2009 and 2010, excluding interest and penalties; Perrigo disagreed and intended to contest the notice. Total uncertain-tax-position liabilities were $291.5 million at quarter-end. The outcome of tax audits and litigation could materially affect results or cash flows.
- Perrigo had accrued $15 million for the Texas Medicaid investigation but said potential exposure could be higher. Tysabri product-liability lawsuits remain pending; Perrigo and Biogen share 50% of related losses and expenses. The Neot Hovav environmental matter was closed in Perrigo’s favor after an Israeli Supreme Court decision.
- Credit ratings were Baa3 (stable) from Moody’s and BBB (negative) from S&P. The filing cited possible effects of rating changes on borrowing costs and market access. It also highlighted tax-law and corporate-tax-residence risks, including possible changes affecting its treatment as a foreign corporation for U.S. tax purposes.
Most important facts for investors to verify
- Whether underlying segment performance improves after seasonal timing, product withdrawals, competitive returns and planned wholesaler adjustments.
- The reconciliation of Specialty Sciences’ reported operating result, given the conflicting $14.9 million income versus loss presentation.
- Omega Pharma’s closing status, final purchase consideration, financing mix, debt assumed and resulting leverage; the deal was subject to conditions when disclosed.
- The progress and potential financial impact of the IRS dispute, other tax audits and the company’s uncertain-tax-position exposures.
- The sustainability of Tysabri royalties and the effect of acquired-intangible amortization on reported earnings and cash generation.
- Whether management’s capital-spending, tax-rate and liquidity expectations are achieved, and any changes in credit ratings or borrowing availability.