Perrigo Company plc — 2018 Form 10-K Summary
Business context and reporting period
Annual report for the year ended December 31, 2018; the filing also provides unaudited fourth-quarter results. Perrigo is a global healthcare company focused on store-brand and branded consumer health products and generic prescription pharmaceuticals. Its reportable segments are Consumer Healthcare Americas (CHCA), Consumer Healthcare International (CHCI), and Prescription Pharmaceuticals (RX). CEO Murray Kessler, appointed in October 2018, introduced a strategy to make Perrigo more consumer-focused.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $4,731.7 million | $4,946.2 million |
| Gross profit / margin | $1,831.5 million / 38.7% | $1,979.5 million / 40.0% |
| Operating income / margin | $236.5 million / 5.0% | $598.2 million / 12.1% |
| Net income | $131.0 million | $119.6 million |
| Diluted EPS | $0.95 | $0.84 |
| Cash from operating activities | $593.0 million | $698.9 million |
| Cash and cash equivalents at year-end | $551.1 million | $678.7 million |
| Total borrowings outstanding | $3,242.4 million | $3,341.2 million |
Annual sales fell 4.3%, gross margin declined 1.3 percentage points, and operating income fell 60.5%. Net income and diluted EPS increased despite lower operating income, reflecting below-operating-income items, including a $188.7 million gain in change in financial assets, primarily associated with Tysabri milestone valuations. The effective tax rate was 54.9%, compared with 57.3% in 2017. Year-end current assets were $2,902.2 million and current liabilities were $1,537.4 million.
Fourth-quarter 2018 sales were $1,195.2 million, gross profit was $443.0 million, and net income was $81.5 million, versus $1,283.0 million, $512.7 million, and $73.1 million, respectively, in fourth-quarter 2017. The company generated $593.0 million in operating cash, spent $102.6 million on capital expenditures, repurchased $400.0 million of shares, and paid $104.9 million in dividends during 2018. The $1.0 billion revolving credit facility had no borrowings outstanding at year-end; Perrigo reported compliance with debt covenants and stable investment-grade ratings.
Material changes versus the prior comparable period
- CHCA: Sales decreased 1% to $2,411.6 million; operating income fell to $147.6 million from $445.0 million. The decrease primarily reflected $222.6 million of impairments, lower animal-health sales, pricing pressure, and higher input costs. New-product sales were $48.7 million.
- CHCI: Sales increased slightly to $1,495.9 million; operating income rose to $16.5 million from $12.5 million. Improved gross margin from brand prioritization, pricing, and insourcing was partly offset by higher operating expenses. New-product sales were $77.8 million.
- RX: Sales declined 15% to $824.2 million and operating income declined 28% to $222.6 million. Competitive pricing and lower volumes outweighed $43.2 million of new-product sales.
- Consolidated impairment charges were $224.4 million, up from $47.5 million in 2017, primarily due to CHCA animal-health goodwill and intangible assets.
- Operating cash flow decreased $105.9 million. Working-capital movements included a $98.6 million cash use from higher inventories.
Outlook, risks, contingencies, and unusual items
- Perrigo is preparing to separate RX, potentially through a sale, spin-off, merger, or another structure, and was targeting completion by the end of 2019; timing and form were not assured. Estimated preparation costs were $45 million to $80 million, excluding restructuring and transaction costs.
- Management expected $145 million to $209 million in capital expenditures over the next 12 months, primarily for manufacturing productivity, capacity, and quality and regulatory projects, to be funded from operating cash flows.
- Management expects RX pricing softness to continue despite reduced year-over-year pricing pressure in fourth-quarter 2018. CHCA also faces ongoing pricing pressure. CHCI restructuring and brand prioritization are intended to reduce selling costs and improve margins.
- Irish Revenue assessed an Irish corporation tax liability of €1.636 billion, excluding interest and possible penalties, relating to the 2013 Tysabri intellectual-property sale. Perrigo disputes the assessment, appealed it, and received leave to seek judicial review. The tax appeal was stayed pending judicial review; payment, if any, is not required until applicable proceedings are completed. An unfavorable outcome could materially affect liquidity and capital resources.
- In 2018 Perrigo recognized a $170.1 million gain after Tysabri met the 2018 sales threshold. The $250 million milestone payment was received in February 2019. A further 2020 milestone depends on specified royalty thresholds; its year-end 2018 fair value was $73.2 million.
- Other significant risks include generic-drug pricing and competition, pending price-fixing and securities litigation, foreign-exchange exposure, customer concentration (Walmart represented 12.8% of sales), and the possibility of further impairments. The CHCI BCH reporting unit had less than a 10% fair-value cushion over carrying value.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective controls at year-end and remediation of previously identified income-tax control weaknesses.
Most important facts for investors to verify
- Progress, structure, cost, and expected benefits of the RX separation, including its interaction with shared operations and debt arrangements.
- Developments in the Irish tax assessment and related proceedings, potential interest or penalties, and implications for liquidity and strategy.
- Whether RX and CHCA pricing pressure, sales volumes, and segment margins stabilize, and whether CHCI restructuring delivers expected savings.
- Cash conversion and working-capital trends, planned capital expenditures, debt maturities, and capacity to sustain dividends and repurchases.
- Further impairment risk, particularly for the CHCI BCH reporting unit, and resolution or financial exposure from antitrust and securities litigation.