Perrigo Company plc — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 27, 2020. Perrigo sells consumer self-care products and generic prescription pharmaceuticals through Consumer Self-Care Americas (CSCA), Consumer Self-Care International (CSCI), and Prescription Pharmaceuticals (RX). Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,219.1 | $1,149.0 | $2,560.1 | $2,323.5 |
| Gross profit / margin | $434.7 / 35.7% | $430.8 / 37.5% | $917.9 / 35.9% | $879.6 / 37.9% |
| Operating income / margin | $117.4 / 9.6% | $55.0 / 4.8% | $263.1 / 10.3% | $157.3 / 6.8% |
| Net income | $60.6 | $9.0 | $167.0 | $72.9 |
| Diluted EPS | $0.44 | $0.07 | $1.22 | $0.54 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $462.7 | $158.3 |
Q2 sales increased 6%; six-month sales increased 10%. Operating income rose 113% in Q2 and 67% for the half. Higher revenue and lower operating expenses contributed, including the absence of prior-year impairment and restructuring charges and lower selling and administration costs. These gains were partly offset by lower gross margins from product mix, pricing pressure, and operational inefficiencies. The filing does not provide adjusted or non-GAAP profit measures in the supplied text.
Q2 segment sales and operating income were: CSCA $627.6 and $106.3; CSCI $321.1 and $10.5; RX $270.4 and $47.8. For the six months, segment sales and operating income were: CSCA $1,328.2 and $230.8; CSCI $703.8 and $35.6; RX $528.1 and $99.4.
Liquidity, debt and cash flow
Cash and cash equivalents were $1,456.3 at June 27, 2020, versus $354.3 at year-end 2019. Six-month operating cash flow was $462.7; investing cash flow was negative $21.7 and financing cash flow was $666.8. Cash generation benefited notably from accounts receivable collections and timing of payments.
Total borrowings were $4,142.5, including $606.5 classified as current; long-term debt, net of current portion, was $3,536.0. The company had no borrowings under its $1.0 billion revolving credit facility and reported compliance with debt covenants. It issued $750 million of 3.150% senior notes due 2030 in June. After quarter-end, on July 6, it used proceeds to redeem $590 million of notes due in 2021, incurring $19 million of early redemption costs expected to be recorded in Q3. Management said available cash, operating cash flow, and borrowing capacity should be sufficient for short- and long-term needs.
The company paid $61.9 million in dividends in the first half and made no share repurchases. At quarter-end, the balance sheet showed total assets of $12,128.3 and shareholders’ equity of $5,910.9.
Material changes and notable items
- CSCA sales grew 8% in Q2 and 14% in the first half, supported by acquisitions, e-commerce, and COVID-related demand. CSCI sales fell 2% in Q2 but rose 4% for the half; RX sales rose 13% and 10%, respectively, with generic albuterol a significant contributor.
- COVID-19 shifted demand: initial pantry stocking and stronger demand for some products in March and April was followed by slower demand in May and June. Perrigo estimated a net positive first-half sales impact of $50–$70 million and approximately $8 million of incremental pandemic operating costs; it estimated full-year incremental costs of $20–$25 million.
- The High Ridge oral-care asset acquisition contributed $19.8 million of Q2 sales and a $3.5 million net loss, including transaction and inventory step-up costs. Perrigo also acquired Steripod and Dexsil.
- Perrigo sold Rosemont Pharmaceuticals for approximately $195 million, recording a $17.4 million pretax loss. The sale included a $46.4 million write-off of accumulated foreign currency translation adjustments.
- The company invested in Kazmira, obtaining an approximately 20% stake and a supply agreement for THC-free CBD products. It paid $15 million at closing; the remaining investment consideration is due within 18 months, with related promissory-note financing also disclosed.
Outlook, risks and contingencies
No formal consolidated earnings guidance is stated in the filing. Management said pandemic-related demand, supply-chain effects, consumer behavior, and market access remain uncertain. It expects softness in RX pricing to continue. Perrigo plans to separate RX through a possible sale, spin-off, merger, or other structure, but has not committed to a timetable; estimated preparation costs if completed are $45–$80 million, excluding restructuring and transaction costs.
Significant contingencies include tax disputes and litigation. The Irish tax assessment is €1.636 billion, excluding interest and penalties; Perrigo disputes it, and a court was considering a judicial-review challenge. An IRS NOPA concerning interest deductions estimates approximately $170 million of potential tax expense for 2014–2015, excluding interest and penalties; the company also described possible additional exposure of up to $200 million for later years, subject to analysis. A separate IRS transfer-pricing NOPA proposes $843 million, including a 40% penalty, before offsets and interest. These are disputed claims, not amounts reported as payable immediately.
Perrigo faces generic-drug price-fixing claims, securities litigation, and product-liability matters, including ranitidine and talcum-powder cases; outcomes and potential losses could not be reasonably estimated for several matters. Goodwill in the BCS reporting unit had less than 10% fair-value headroom over carrying value after COVID-related forecast reductions; no impairment was recorded, but further deterioration could trigger one. A $99 million contingent Tysabri-related asset may be written off if 2020 royalty receipts fail to meet a specified threshold; if met, the asset could increase to $400 million and generate $301 million of income.
Most important facts for investors to verify
- Whether sales growth and operating-income improvement persist after COVID-related demand shifts and the effects of acquisitions and prior-year charges.
- Whether gross-margin pressure, RX pricing, and operating inefficiencies continue, and how much of reported earnings reflects recurring performance.
- Progress and cash-flow consequences of the Irish and U.S. tax disputes, antitrust and securities litigation, and product-liability claims.
- COVID-19 developments affecting consumer demand, supply availability, incremental costs, and the BCS goodwill impairment assessment.
- Execution, financing, costs, and timing of the proposed RX separation, and the outcome of the Tysabri contingent milestone.
- Post-quarter debt redemption effects, including the $19 million early-redemption charge and resulting debt maturities and liquidity.