Perrigo Company plc — FY2014 Form 10-K
Reporting period: Fiscal year ended June 28, 2014 (52 weeks); the filing also reports fourth-quarter results. This is not a calendar 2013 Q4 filing. Amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
Perrigo develops, manufactures and distributes store-brand over-the-counter healthcare products, nutritionals, generic prescription drugs and active pharmaceutical ingredients. Following its December 18, 2013 acquisition of Elan, it also receives royalties principally from Tysabri. FY2014 includes Elan results from the acquisition date, so year-over-year comparisons are affected by the acquisition and associated financing and integration costs.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $4,060.8 million | $3,539.8 million |
| Gross profit / margin | $1,447.7 million / 35.7% | $1,280.0 million / 36.2% |
| Operating income / margin | $567.0 million / 14.0% | $679.1 million / 19.2% |
| Net income | $205.3 million | $441.9 million |
| Diluted earnings per share | $1.77 | $4.68 |
| Cash from operating activities | $693.5 million | $553.8 million |
| Cash and cash equivalents at year-end | $799.5 million | $779.9 million |
| Total borrowings at year-end | $3,234.2 million | $1,974.1 million |
Sales rose 15%, while net income fell 54%. The decline reflected substantial Elan transaction and financing costs, including a $165.8 million loss on extinguishment of debt, higher restructuring and administrative costs, and increased amortization. Gross margin eased 0.5 percentage points. The company reported $600 million available on its revolving credit facility and $200 million available under its receivables securitization program, neither of which was drawn at year-end. It was in compliance with debt covenants.
Fourth-quarter sales were $1,144.2 million, gross profit $415.7 million and net income $131.7 million, compared with $967.2 million, $356.2 million and $118.5 million, respectively, in FY2013’s fourth quarter.
Material changes versus the prior year
- FY2014 sales increased $521.0 million, including $288.0 million from acquisitions and $231.4 million from new products.
- Rx Pharmaceuticals sales rose 31% to $927.1 million; Consumer Healthcare rose 6% to $2,219.0 million; Nutritionals rose 9% to $551.7 million.
- API sales declined 14% to $137.6 million; management cited competition and lower sales of existing products.
- Specialty Sciences contributed $146.7 million in Tysabri royalty revenue for the partial year, but reported a $68.6 million operating loss, including significant acquired-intangible amortization and restructuring costs.
- Operating cash flow increased 25% to $693.5 million. Investing cash outflow was $1,704.8 million, principally reflecting acquisitions; financing cash inflow was $1,028.0 million.
Outlook, risks and unusual items
- Management expected FY2015 capital expenditures of $130–$170 million and research and development spending above FY2014 in dollars, but relatively flat as a percentage of sales.
- Management expected recurring operating-cost and tax savings from Elan, and a lower FY2015 effective tax rate due to the post-acquisition structure and income mix. Elan-related acquired intangible amortization was expected to be approximately $291.1 million annually; the filing separately estimates total FY2015 amortization expense of $427 million.
- Management said API third-party revenue would likely decline as the business shifts toward India production and supplying Perrigo’s own businesses. Commercial shipments from the India API facility were expected in FY2015.
- Elan/Tysabri royalties are important to future results and depend on Biogen’s sales. Risks include Tysabri’s PML safety profile, competing MS therapies and regulatory or reimbursement changes. Tysabri accounted for 92% of total royalty revenue.
- Texas Medicaid investigators sought information about reported drug prices. Perrigo accrued $15.0 million for potential settlement or other outcomes; the company said liability could exceed the accrual.
- Other disclosed legal exposures include Tysabri product-liability cases, an appeal in Israeli environmental litigation alleging damages exceeding $72.5 million, and Eltroxin class-action certification proceedings. Outcomes were not predictable in the filing.
- Business risks include extensive drug and infant-formula regulation, product quality and recall exposure, price competition, raw-material and supplier constraints, customer concentration, and operations in Israel. Walmart represented 19% of FY2014 sales.
Most important facts for investors to verify
- How much of FY2014 sales growth and cash generation is organic versus acquired, and whether Elan synergies and tax savings are being realized.
- Debt repayment capacity, refinancing needs and the effect of higher debt and interest expense following the Elan acquisition.
- Tysabri royalty trends, including the applicable royalty tiers, competition, and any new safety or regulatory developments.
- Resolution and adequacy of the $15 million Texas Medicaid accrual and the status of other significant litigation.
- Execution of the API shift to India, including commercial shipments, costs, quality compliance and the expected decline in third-party revenue.
- Acquisition accounting and impairment assumptions: Elan purchase-price allocation was not fully finalized, while goodwill and intangible assets rose substantially. The auditor issued unqualified financial-statement and internal-control opinions, but Elan was excluded from the year-end internal-control assessment pending integration.