Perrigo Company plc — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended October 1, 2016; comparisons are to periods ended September 26, 2015. Perrigo changed its fiscal year to the calendar year beginning January 1, 2016. The company sells OTC consumer healthcare products, branded consumer healthcare products, prescription pharmaceuticals, and receives royalties from Tysabri.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $1,354.9 million | $1,344.7 million | $4,219.1 million | $3,925.4 million |
| Gross profit | $506.3 million | $548.8 million | $1,596.4 million | $1,555.7 million |
| Gross margin | 37.4% | 40.8% | 37.8% | 39.6% |
| Operating income (loss) | $(1,515.2) million | $188.6 million | $(1,580.7) million | $614.7 million |
| Net income (loss) | $(1,255.2) million | $112.6 million | $(1,395.4) million | $74.2 million |
| Diluted earnings (loss) per share | $(8.76) | $0.77 | $(9.74) | $0.51 |
- Q3 sales rose 1%; nine-month sales rose 7%. The nine-month comparison is affected by Omega, acquired in March 2015, whose prior-year results included only six months.
- Gross margin declined in both comparisons, with management citing Rx pricing pressure and BCH product mix among the factors weighing on performance.
- Operating cash flow was $703.5 million for the first nine months, down from $866.7 million. Capital expenditures were $84.6 million. Cash and cash equivalents were $362.7 million at October 1.
- Total borrowings were $5.903 billion, including $265.0 million current indebtedness; long-term debt, less current portion, was $5.638 billion. Debt increased in part following issuance of $1.2 billion of senior notes. The company repaid $500 million of notes due 2016 and reported compliance with debt covenants.
- Current assets were $2.627 billion and current liabilities $1.540 billion. The filing says cash, operating cash flow, and borrowing capacity are expected to cover known and foreseeable liquidity and capital needs, while noting that lenders could be unwilling or unable to lend under adverse conditions.
Material changes and unusual items
- The principal driver of the reported loss was $2.127 billion of impairment charges for the first nine months, including $1.680 billion in Q3. Charges primarily related to Omega-related BCH goodwill and intangible assets. The Q3 charges included $804.1 million of goodwill, $575.7 million of indefinite-lived intangibles, and $290.2 million of definite-lived intangibles. Certain Q3 goodwill valuations remained preliminary and could be adjusted in Q4.
- Management cited lower BCH performance expectations, softer sales of certain brands, weaker execution of product strategies, lower forecast volume with a major Belgian wholesaler, macroeconomic pressures, and adverse currency effects including Brexit-related sterling weakness. It reclassified $672.4 million of remaining brand assets to definite-lived assets and began amortizing them on October 2.
- Q3 BCH sales were nearly flat year over year at $304.0 million, while the segment reported a $1.684 billion operating loss, largely reflecting impairments. CHC and Rx sales increased modestly, but operating income fell in both segments. Specialty Sciences sales benefited from higher Tysabri royalties, including a one-time favorable adjustment.
- Pricing pressure in U.S. businesses, particularly Rx, is expected to continue. New-product sales remain below the company’s prior expectations, with launches delayed by regulatory processes and revised market-share and timing assumptions.
- Acquisitions included the $416.4 million Tretinoin product portfolio and the $62.0 million purchase of remaining Generic Benzaclin rights. Perrigo sold its U.S. VMS business for $61.8 million in August 2016 and is pursuing a sale of its India API business.
Outlook, risks, and contingencies
- The filing provides no clear numerical earnings or revenue guidance in the supplied text. Management said it expected pricing pressure to persist, new-product sales to remain below earlier expectations, and BCH market challenges to continue. It planned to complete annual impairment testing in Q4 2016.
- On November 10, 2016, after the quarter-end, Perrigo announced it was exploring strategic alternatives for the Tysabri royalty asset, evaluating the Rx business for possible alternatives, and reviewing segment and corporate costs; it expected these reviews to conclude by the end of March 2017.
- Disclosure controls were deemed ineffective because of a material weakness in controls over interim income-tax accounting and review. Remediation was underway but not yet fully tested and validated.
- Risks include further impairment charges, continued competitive and pricing pressure, product launch delays, Brexit-related impacts, possible Tysabri competition from Ocrevus, and management transition. The company also disclosed securities litigation, an Eltroxin class-action matter in Israel, Tysabri product-liability cases, and significant tax uncertainties, including a disputed IRS claim of approximately $68.9 million for 2009–2010.
- Credit ratings were Baa3 (negative outlook) from Moody’s and BBB- (stable) from S&P. These ratings may affect future borrowing costs and capital-market access.
Key facts for investors to verify
- Final Q4 valuation results for BCH goodwill and intangible assets, and whether further impairments are recorded.
- Whether BCH sales, margins, and execution improve against management’s revised forecasts, particularly in Belgium, France, Germany, and Italy.
- Progress on Rx pricing, product launches, and strategic review, including any decisions to divest businesses or assets.
- Cash conversion, working-capital trends, debt maturities, liquidity availability, and credit-rating developments.
- Completion and independent validation of remediation for the material weakness, and developments in tax audits and litigation.