Perrigo Company plc — Q2 2022 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended July 2, 2022, compared with periods ended July 3, 2021. Perrigo is focused on consumer self-care, reported in Consumer Self-Care Americas (CSCA) and Consumer Self-Care International (CSCI). The April 29 acquisition of HRA Pharma expanded both segments and completed the company’s stated transformation to a consumer self-care company.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $1,121.7 million | $981.1 million | $2,196.2 million | $1,991.1 million |
| Gross profit | $372.1 million | $349.0 million | $709.9 million | $717.4 million |
| Gross margin | 33.2% | 35.6% | 32.3% | 36.0% |
| Operating income (loss) | $(6.9) million | $(125.9) million | $14.8 million | $(74.6) million |
| Net income (loss) | $(65.1) million | $(57.7) million | $(67.6) million | $(19.6) million |
| Diluted EPS | $(0.48) | $(0.43) | $(0.50) | $(0.15) |
- Q2 sales rose 14.3%; first-half sales rose 10.3%. Growth reflected stronger cough/cold demand, infant formula share gains during a competitor recall, pricing, contract manufacturing sales to the divested RX business, and HRA Pharma sales. Currency headwinds and divestitures partly offset growth.
- Gross margin declined year over year amid inflation, freight costs, unfavorable foreign exchange, and a greater contribution from lower-margin contract manufacturing sales. Management said pricing actions and procurement measures offset the negative gross-profit-dollar impact in Q2.
- Operating results improved substantially against prior periods that included $158.6 million of impairment charges related to Latin America assets. Q2 operating loss also reflected acquisition-related costs and higher unallocated expenses; first-half operating income does not mean the company was profitable after interest and other expenses.
- Q2 interest expense was $38.3 million versus $31.6 million; other expense was $53.8 million versus $0.4 million of other income. First-half results included a $9.3 million loss on extinguishment of debt and $16.2 million of losses on HRA-related currency options.
Cash, liquidity, and debt
- Cash and equivalents were $485.3 million at July 2, 2022, down from $1,864.9 million at December 31, 2021. Current assets were $2,651.5 million and current liabilities $1,014.6 million.
- First-half operating cash flow was $62.2 million, compared with cash used of $82.1 million in the prior-year period. Investing activities used $1,911.7 million, principally reflecting the $1,901.4 million net cash outflow for HRA Pharma. Financing activities provided $507.1 million.
- Total borrowings outstanding were $4,116.9 million, including $4,086.1 million of long-term debt and $30.8 million of current indebtedness. The company entered into new secured facilities—a $1.0 billion revolver, $500 million Term Loan A, and $1.1 billion Term Loan B—to fund the acquisition and refinance debt. No revolver borrowings were outstanding at quarter end. Perrigo reported compliance with debt covenants.
- The company paid $69.6 million in dividends during the first half. It reported no share repurchases in the periods presented.
Material changes, outlook, and risks
- Acquisition and portfolio changes: HRA Pharma was acquired for approximately $1.9 billion. From acquisition through July 2, it contributed $57.8 million in sales and a $13.1 million net loss, including purchase-accounting inventory and intangible amortization effects. Acquisition accounting remained provisional. Perrigo also sold its Latin America businesses and the ScarAway brand.
- Management outlook: The filing provides no quantified earnings or sales guidance. Management anticipated that pricing and other actions would substantially offset inflationary pressures in the second half of 2022, while cautioning that inflation, labor availability, freight, and customer acceptance of price increases remained uncertain. Perrigo received FDA approval for OTC omeprazole mini capsules and expected to launch later in 2022. HRA Pharma submitted an application for OTC Opill; approval was uncertain.
- Operating risks: Supply-chain disruption, higher material, labor, and logistics costs, COVID-19-related demand volatility, and the war in Ukraine could affect results. Perrigo halted sales to Russian distributors in March; Ukraine sales were severely depressed. Management noted that escalation or worsening economic conditions could have a material impact.
- Tax and legal contingencies: Multiple IRS disputes remain unresolved, including transfer-pricing and interest-deduction matters. Perrigo described potential additional tax exposures for certain issues, but said it could not estimate a reasonably possible range for some matters. The company reported $67.8 million of accrued litigation losses and a $43.5 million insurance recovery receivable; ultimate costs and insurance coverage are uncertain. Matters include generic-drug price-fixing litigation, securities cases, talcum-powder claims, and ranitidine litigation. Perrigo said it could not reasonably estimate outcomes for certain claims.
- Other notable items: Foreign-currency translation reduced first-half comprehensive income by $207.0 million. HRA acquisition-related transaction costs were $43.3 million for the first half. Management concluded disclosure controls and internal control over financial reporting were effective as of July 2, 2022, but excluded HRA Pharma from its internal-control assessment while integration work proceeds.
Important facts for investors to verify
- Whether HRA Pharma integration, growth, and anticipated synergies meet management’s expectations, and how provisional purchase accounting changes.
- Whether pricing and productivity gains can offset continuing inflation, freight and labor costs without weakening demand or margins.
- How cash generation and liquidity evolve after the acquisition, given lower cash and approximately $4.1 billion of borrowings.
- Developments and potential financial effects of IRS disputes and material litigation, including whether insurance recoveries remain available.
- Whether currency exposure, Ukraine-related disruption, and the timing of new product launches materially affect sales and earnings.