Perrigo Company plc — 2017 Form 10-K Summary
Business context and reporting period
Perrigo is an Ireland-incorporated global healthcare company selling store-brand and branded OTC products, infant formula, and generic prescription drugs, primarily in North America and Europe. Its report covers the year ended December 31, 2017, with 2016 as the comparable full year. The company also reports fourth-quarter results; its fiscal year is the calendar year.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $4.946 billion | $5.281 billion |
| Gross profit / margin | $1.980 billion / 40.0% | $2.052 billion / 38.9% |
| Operating income (loss) / margin | $598.2 million / 12.1% | $(1.9997) billion / (37.9)% |
| Net income (loss) | $119.6 million | $(4.013) billion |
| Diluted earnings (loss) per share | $0.84 | $(28.01) |
| Cash from operating activities | $698.9 million | $654.9 million |
Full-year sales declined 6.3%. Gross margin improved, while gross-profit dollars fell. The return to profit mainly reflects the absence of the exceptionally large 2016 impairment charges and Tysabri-related fair-value losses; it should not be read as a comparable improvement in underlying earnings. 2017 included $47.5 million of impairment charges, $61.0 million of restructuring expense, and a $135.2 million loss on early debt extinguishment.
Fourth-quarter 2017 sales were $1.283 billion, gross profit was $512.7 million, net income was $73.1 million, and diluted EPS was $0.52. In fourth-quarter 2016, sales were $1.331 billion, gross profit $487.7 million, and net loss $1.359 billion.
Segment results: Consumer Healthcare Americas (CHCA) sales were $2.430 billion, down 3%, with operating income of $445.0 million; Consumer Healthcare International (CHCI) sales were $1.491 billion, down 10%, with operating income of $12.5 million; and Prescription Pharmaceuticals (RX) sales were $969.7 million, down 7%, with operating income of $307.6 million. CHCI’s swing from a $2.087 billion operating loss largely reflects the absence of prior-year impairments; RX’s reported improvement similarly benefited from the absence of a prior-year impairment, while its gross margin declined.
Cash and cash equivalents were $678.7 million at year-end, compared with $622.3 million in 2016. Total borrowings were $3.341 billion, down from $5.797 billion; the company repaid $2.611 billion of long-term debt during 2017. Investing activities provided $2.338 billion, primarily from the Tysabri asset sale, while financing activities used $3.005 billion. Capital expenditures were $88.6 million. Management said cash, operating cash flows, and available borrowing capacity should fund foreseeable needs; projected 2018 capital expenditures were $90 million to $115 million.
Material changes versus the prior comparable period
- Net sales fell by $334.4 million. CHCI sales declined partly because the company exited unprofitable distribution arrangements, which reduced 2017 sales by $200.3 million with an immaterial operating-income effect.
- CHCA operating income increased to $445.0 million from $399.8 million, supported by lower expenses, product mix, and supply-chain efficiencies, despite pricing pressure and the absence of sales from the divested U.S. VMS business.
- RX sales and gross profit fell amid pricing pressure and $67.2 million lower Entocort sales. The company expects continued competitive pressure in this segment.
- Cash from operations increased by $44.0 million. The $2.2 billion cash proceeds from selling the Tysabri financial asset were a major source of investing cash; Perrigo also sold its India and Israel API businesses and its Russian business.
- Year-end cash increased, while debt was substantially reduced. The company recorded a $135.2 million debt-extinguishment loss in connection with early redemptions and tender offers.
Outlook, commentary, risks, and unusual items
- Management forecast a high-single-digit RX pricing decline in 2018 and expected pricing pressure in RX and CHCA to persist. It continued a portfolio review of RX to assess strategic alternatives.
- The company reduced its global non-production workforce by approximately 750 employees and recorded $61.0 million of restructuring expense. Management said supply-chain reorganization and cost initiatives were generating savings, but acknowledged benefits are not assured.
- Perrigo sold its Tysabri royalty asset for $2.2 billion cash and may receive additional payments of up to $250 million in 2018 and $400 million in 2020, subject to sales thresholds. The milestone asset was valued at $134.5 million at year-end; management anticipated lower 2018 Tysabri sales because of competition from Ocrevus.
- The 2017 effective tax rate was 57.3%. The U.S. Tax Act created provisional tax impacts, including a $17.5 million current tax expense for the transition tax on $1.2 billion of accumulated foreign earnings; the company said further analysis remained necessary.
- The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. A material weakness in income-tax accounting controls remained unremediated at year-end; management said remediation actions were ongoing and expected remaining work in 2018.
- Material risks include generic-drug price competition and customer consolidation; regulatory, product-quality, and supply disruptions; foreign exchange and Brexit exposure; further impairment risk in goodwill and intangible assets; and significant tax and securities litigation. The company reported that DOJ search warrants were executed at Perrigo facilities in connection with an industry drug-pricing investigation; no charges had been brought against Perrigo as of the filing. It also disclosed generic-drug price-fixing lawsuits and disputed IRS tax matters.
- Management and finance leadership changed during the year and early 2018: Uwe Roehrhoff became CEO in January 2018, and Ronald Winowiecki was appointed CFO in February 2018.
Important facts for investors to verify
- Whether RX pricing pressure, including the forecast high-single-digit 2018 decline, and CHCA pricing trends translate into further revenue or margin deterioration.
- Whether the operating-income recovery is sustainable after excluding prior-year impairments and other unusual items, and whether CHCI and RX meet operational improvement targets.
- Whether Perrigo remediates the income-tax control material weakness and maintains timely, reliable SEC reporting.
- How the IRS disputes, securities and generic-drug antitrust litigation, and the DOJ investigation develop, including potential financial exposure.
- Whether Tysabri sales satisfy the 2018 and 2020 milestone thresholds, and whether goodwill valuations—particularly CHCI brands and Animal Health—remain supportable.