Perrigo Company plc — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 29, 2014 (fiscal 2014 third quarter), compared with periods ended March 30, 2013. This differs from the request metadata identifying 2013 Q3. Perrigo became the successor registrant following its December 2013 acquisition of Elan.
Financial performance
| Metric | Three months ended Mar. 29, 2014 | Prior-year quarter | Nine months ended Mar. 29, 2014 | Prior-year period |
|---|---|---|---|---|
| Net sales | $1,004.2 million | $919.8 million | $2,916.6 million | $2,572.6 million |
| Gross profit / margin | $315.0 million / 31.4% | $331.4 million / 36.0% | $1,031.9 million / 35.4% | $923.8 million / 35.9% |
| Operating income / margin | $103.3 million / 10.3% | $178.6 million / 19.4% | $369.5 million / 12.7% | $499.0 million / 19.4% |
| Net income | $48.1 million | $111.9 million | $73.4 million | $323.5 million |
| Diluted EPS | $0.36 | $1.18 | $0.67 | $3.42 |
- Quarterly sales rose 9%, but gross profit fell 5% and net income fell 57%. Management attributed sales growth mainly to acquisitions and new products; lower gross margin reflected Elan-related intangible amortization, weaker volumes and product mix.
- For the nine-month period, sales rose 13%, while operating income declined 26%. Results included a $165.8 million loss on extinguishment of debt, $284.9 million of total Elan acquisition-related costs, restructuring charges, and higher amortization following the acquisition. The filing reports $181.1 million of intangible amortization for the period.
- Operating cash flow was $400.8 million, versus $380.1 million. Investing cash outflow was $1,645.7 million, principally reflecting $1,598.3 million of net acquisition spending. Financing provided $1,074.9 million. Cash declined $170.5 million to $609.4 million.
- At March 29, 2014, working capital was $1,351.4 million. Total borrowings were $3,267.2 million, including $141.7 million current; cash and cash equivalents were $609.4 million. No borrowings were outstanding under the $600 million revolver or $200 million receivables facility.
- Quarterly dividend declared was $0.105 per share; nine-month dividends totaled $32.0 million.
Material changes and business developments
- Elan was acquired on December 18, 2013, in a cash-and-stock transaction valued at approximately $9.5 billion. Former Perrigo and Elan shareholders held approximately 71% and 29%, respectively, of the combined company at closing. Elan added Specialty Sciences and Tysabri royalty rights.
- Elan contributed $53.4 million of Tysabri royalties in the quarter. The Specialty Sciences segment recorded a $54.5 million quarterly operating loss, including $76.4 million of intangible amortization in cost of sales and restructuring charges.
- Other acquisitions included Aspen’s Australia/New Zealand OTC product portfolio and Fera’s methazolomide distribution and license agreement. Purchase-price allocations, including Elan’s, remained preliminary.
- Quarterly segment sales were broadly mixed: Consumer Healthcare $537.3 million (flat year over year), Nutritionals $137.8 million (+3%), Rx Pharmaceuticals $223.4 million (+18%), API $32.0 million (-22%), and Specialty Sciences $53.4 million. Consumer Healthcare and API faced lower volumes and competitive pressure; Rx growth reflected acquisitions and new products.
Outlook, risks and unusual items
- Management expected recurring operating-cost and tax savings from Elan, and a lower annual effective tax rate beginning in fiscal 2015 due to the new structure and income mix. It also expected approximately $306 million of annual amortization expense from Elan-acquired intangible assets.
- Restructuring and integration costs were not expected to exceed $5 million, before tax, for the remainder of fiscal 2014. Fiscal 2014 capital expenditures were forecast at $150–185 million; management expected annual interest expense of approximately $100 million following debt issuance.
- Management cautioned that seasonal demand, the return of branded OTC competitors, API competition and changing customer orders could affect results. It anticipated future API revenue pressure as it shifts toward lower-cost production in India and vertical integration.
- Important risks include Tysabri safety and competitive developments, particularly progressive multifocal leukoencephalopathy (PML); integration and synergy execution; preliminary acquisition valuations and potential asset impairment; infant-formula regulatory requirements; and tax-law, tax-residency and audit uncertainty. The IRS and Israeli tax authorities were conducting audits; the company said a material impact was possible but not estimable.
- Contingencies include Texas Medicaid investigative demands, Israeli Eltroxin class-action proceedings, an appeal in the Ramat Hovav environmental matter, and Tysabri product-liability lawsuits. The filing states outcomes and potential liabilities could not be predicted for several matters.
- Management reported effective disclosure controls. Acquired businesses representing approximately 63% of consolidated assets were excluded from the interim internal-control evaluation while documentation and testing continued.
Investor facts to verify
- Whether Elan integration delivers anticipated cost and tax savings, and how acquired-intangible amortization affects earnings and cash generation.
- Trends in Tysabri royalties, including product safety, competition, regulatory developments and the royalty arrangement’s impact on Specialty Sciences profitability.
- Final Elan purchase accounting, goodwill and intangible-asset valuations, and any subsequent impairment or purchase-price adjustments.
- Debt levels, interest costs, refinancing needs and credit ratings; Moody’s rated the company Baa3 stable and S&P BBB negative at quarter-end.
- Developments in tax audits and the company’s Irish tax status, as well as the named legal and regulatory contingencies.