Perrigo Company plc — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended October 1, 2022; comparisons are with periods ended October 2, 2021. Perrigo describes itself as a provider of over-the-counter health and wellness products. Its continuing operations report in Consumer Self-Care Americas (CSCA) and Consumer Self-Care International (CSCI).
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,100.2M | $1,042.7M | $3,296.3M | $3,033.8M |
| Gross profit | $362.9M | $336.4M | $1,072.8M | $1,053.8M |
| Gross margin | 33.0% | 32.3% | 32.5% | 34.7% |
| Operating income | $33.1M | $438.3M | $47.9M | $363.7M |
| Net income (loss) | ($49.4M) | ($58.9M) | ($116.9M) | ($78.5M) |
| Diluted EPS | ($0.37) | ($0.44) | ($0.87) | ($0.59) |
| Operating cash flow | — | — | $121.4M | $261.7M |
Q3 continuing-operations loss was $52.1M; nine-month continuing-operations loss was $118.2M. Discontinued operations contributed $2.7M of Q3 income and $1.3M for the nine months.
At October 1, cash and cash equivalents were $468.7M, down from $1,864.9M at year-end 2021. Total borrowings were $4,111.0M, versus $3,520.5M at year-end; reported long-term debt, net of current portion, was $4,077.5M. The $1.0B revolving facility had no borrowings outstanding. Perrigo reported compliance with its debt covenants. Nine-month cash used in investing was $1,932.6M, including $1,901.4M for acquisitions; financing provided $464.1M.
Material changes and drivers
- Sales rose 5.5% in Q3 and 8.7% for the nine months. Management cited pricing, market-share gains, higher cough/cold demand, and HRA Pharma, partly offset by unfavorable foreign exchange and divestitures.
- Gross margin increased 70 basis points in Q3, but declined 220 basis points year to date. Management cited inflation, freight, unfavorable currency translation, lower operating efficiencies, and lower-margin contract sales, partly offset by pricing and volume.
- Operating income fell sharply against prior-year periods that included a $417.6M Omega arbitration award. The award was recorded in other operating income in 2021; it is not a recurring operating contribution. Nine-month 2022 results also included $43.9M of HRA Pharma transaction costs and $32.2M of restructuring charges.
- Perrigo completed its $1.9B HRA Pharma acquisition on April 29, 2022, funded with cash and new borrowings. From acquisition through October 1, HRA Pharma contributed $128.7M in sales and a $26.3M operating loss, including acquisition-related inventory step-up and intangible amortization. Purchase accounting remained provisional.
- The company sold its Latin American businesses and ScarAway brand in 2022, and had sold its RX business in 2021. Sales to the divested RX business under contract manufacturing and supply arrangements continued.
- Net nine-month interest expense rose to $115.1M from $94.5M. Perrigo refinanced debt in April, including new term loans, and redeemed certain 2023 notes; it recorded an $8.9M debt-extinguishment loss.
Outlook, risks and contingencies
- The filing provides no quantified earnings or sales guidance. Management said pricing and procurement actions were beginning to offset inflationary pressures, but the duration and extent of inflation, supply-chain disruption, labor costs, and pricing acceptance remained uncertain.
- Perrigo initiated a Supply Chain Reinvention Program aimed at lowering structural costs and improving profitability. It recorded $22.7M of related restructuring and implementation charges in the first nine months. On November 1, 2022, it acquired Nestlé’s Gateway infant-formula plant and Good Start brand for $110M and announced an additional $60M plant investment.
- The FDA postponed the advisory committee meeting on Perrigo’s Opill daily oral contraceptive OTC application and extended the PDUFA date by 90 days. A new meeting date had not been set; approval was not assured.
- Material uncertainties include U.S. and other tax disputes, including IRS transfer-pricing and interest-deduction matters; the company estimated a possible $8M settlement for one chargeback issue, covered by reserves. A separate IRS interest-rate matter remained unresolved, with potential tax effects described in the filing.
- Litigation includes generic-drug price-fixing allegations, securities cases, and product-liability claims involving talc and ranitidine. Perrigo reported $67.8M in litigation accruals and a $42.8M insurance-recovery receivable, while noting that total exposure and insurance recovery could differ from estimates.
- Credit ratings were BB+ (Fitch), BB (S&P), and Ba1 (Moody’s); Moody’s outlook was negative. The 2030 notes’ coupon increased to 4.4% after a ratings downgrade. The company cited leverage, refinancing, interest-rate, foreign-exchange, COVID-19, and Ukraine-related risks.
- Management reported disclosure controls and internal control over financial reporting as effective. HRA Pharma, with $2.0B of net assets, was excluded from the internal-control assessment while integration and testing continued.
Investor verification priorities
- Assess the sustainability of sales growth and margins after separating pricing, seasonal cough/cold demand, acquisition contribution, foreign exchange, and divestitures.
- Track HRA Pharma integration, its operating performance, provisional purchase-price allocation, and the expected realization of synergies.
- Review cash conversion, working-capital needs, debt maturities, floating-rate exposure, covenant headroom, and the effect of reduced cash balances.
- Follow the Opill FDA review and the potential costs and milestones of the Supply Chain Reinvention Program and Gateway investment.
- Monitor developments in IRS disputes, generic-drug litigation, product-liability cases, and insurance coverage; compare outcomes with recorded reserves and disclosed potential exposures.