Perrigo Company plc — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparative quarter ended October 1, 2022. Nine-month results are compared with the nine months ended October 1, 2022. Amounts are in millions of U.S. dollars except per-share data.
Business context
Perrigo is an OTC health and wellness company focused on consumer self-care, selling primarily in North America and Europe. Its reportable segments are Consumer Self-Care Americas (CSCA) and Consumer Self-Care International (CSCI). The former Rx business is reported as discontinued operations. The HRA Pharma and Gateway acquisitions contributed to the current-period results.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $1,123.8 | $1,100.2 | $3,498.7 | $3,296.3 |
| Gross profit | $411.2 | $362.9 | $1,253.1 | $1,072.8 |
| Gross margin | 36.6% | 33.0% | 35.8% | 32.5% |
| Operating income | $62.1 | $33.1 | $167.5 | $47.9 |
| Operating margin | 5.5% | 3.0% | 4.8% | 1.5% |
| Net income (loss) | $14.2 | $(49.4) | $19.6 | $(116.9) |
| Diluted EPS | $0.10 | $(0.37) | $0.14 | $(0.87) |
| Net cash from operating activities | — | — | $196.8 | $121.4 |
Q3 sales increased 2.1%; nine-month sales increased 6.1%. Nine-month growth included acquisition contributions, pricing and new products, partly offset by lower legacy Nutrition sales, exited products and unfavorable currency translation. Operating income improved substantially in both periods, with pricing, product mix and acquisitions supporting gross profit; higher operating expenses and inflation partly offset those gains. Interest expense was $43.5 in Q3 and $131.1 for nine months, versus $41.0 and $115.1, respectively.
At September 30, 2023, cash and equivalents were $598.3; working capital was $1,196.7 (defined by the company excluding cash and current indebtedness). Total borrowings were $4,086.6, including $38.1 current indebtedness; long-term debt, net of current portion, was $4,048.5. The $1.0 billion revolving facility was undrawn, and the company reported compliance with debt covenants. Total liabilities were $6,020.2. Nine-month capital expenditures were $75.0, and dividends paid were $112.1.
Material changes and segment performance
- CSCA: Q3 sales declined 2.6% to $703.5, while operating income rose to $91.1 from $75.2. Nine-month sales increased 2.7% to $2,217.9 and operating income increased to $272.0 from $240.0. Pricing, Gateway and higher-margin product prioritization supported profitability; legacy U.S. Nutrition faced lower productivity and evolving FDA requirements.
- CSCI: Q3 sales increased 11.2% to $420.3 and operating income was $13.6 versus $1.3. Nine-month sales increased 12.7% to $1,280.7 and operating income was $43.6 versus $19.0. Pricing, HRA Pharma contributions and product demand helped, while inflation and distributor transitions weighed on results.
- Q3 gross margin rose 3.6 percentage points year over year; nine-month gross margin rose 3.3 points. The filing attributes improvement to pricing, acquisitions, new products and product mix, partly offset by input-cost inflation and lower infant-formula manufacturing productivity.
- Foreign currency translation reduced nine-month sales by $12.7, while favorable translation increased Q3 sales by $22.4. Nine-month comprehensive loss was $31.5, including a $65.0 foreign-currency translation loss.
Outlook, commentary and notable items
- The filing does not provide specific near-term revenue or earnings guidance. Perrigo estimates its Supply Chain Reinvention Program could deliver annual run-rate savings of $200–$300 by the end of 2028, including $150–$200 by the end of 2025. Estimated implementation costs are $350–$570 through 2028, including capital investment, restructuring and implementation costs; benefits depend on successful execution.
- FDA communications on infant-formula safety and manufacturing have increased costs and reduced production volumes. Perrigo received an FDA warning letter on August 30, 2023 following an inspection of its recently acquired Wisconsin facility and said it is working with FDA to address the issues.
- Opill received final FDA approval for OTC use in July 2023. Its acquired in-process research and development asset was reclassified as finite-lived; Q3 CSCA expenses included Opill pre-launch costs.
- Q3 restructuring charges were $15.5, including an $11.2 asset impairment in CSCI related to the supply-chain program. The remaining restructuring liability was $8.2; the company expected most HRA Pharma integration restructuring costs to be incurred by year-end 2023.
- At September 30, the company had $67.6 accrued for litigation contingencies and a $32.9 insurance recovery receivable. Management cannot reasonably estimate the maximum possible loss or range for certain matters. Notable proceedings include former-Rx generic drug pricing lawsuits, securities litigation, talc and ranitidine product claims, and customer indemnity demands.
- Tax matters remain uncertain. Perrigo settled an IRS intercompany-interest issue in May 2023 and the IRS withdrew proposed Tysabri royalty adjustments in April 2023. Separate omeprazole and ANDA-related disputes remain; the filing notes a potential $24–$112 additional tax liability, excluding interest and penalties, if its position on the omeprazole issue is not sustained.
- Management cited inflation, interest-rate and currency volatility, supply-chain risks, and the wars in Ukraine and Israel. Moody’s downgraded Perrigo in March 2023; the 2030 notes’ coupon increased to 4.650%. Credit ratings at quarter-end were Ba2 (negative), BB (stable) and BB+ (negative). The earliest listed public bond maturity is $700 due in December 2024.
Important facts for investors to verify
- Progress in resolving the FDA warning-letter findings and the effect of infant-formula production constraints on volume, costs and margins.
- Whether pricing and product-mix gains persist as inflation, consumer demand and distributor transitions evolve.
- Execution, realized savings, remaining costs and timing of the Supply Chain Reinvention Program and HRA Pharma integration.
- Liquidity and refinancing plans for the $700 of notes due in 2024, alongside debt levels, interest costs and credit ratings.
- Developments in tax disputes and litigation, including potential exposure beyond recorded accruals and the recoverability of the insurance receivable.
- Commercial launch and performance of Opill and other new products; the filing provides no specific near-term financial guidance.