Perrigo Company plc — FY2015 Form 10-K
Reporting period: Fiscal year ended June 27, 2015 (52 weeks), not calendar 2014 Q4. The filing also reports unaudited fourth-quarter results. Unless noted otherwise, financial amounts are in U.S. dollars.
Business context and reporting period
Perrigo sells OTC consumer healthcare products, branded OTC products, generic and specialty prescription pharmaceuticals, and receives royalties primarily from Tysabri. The March 30, 2015 acquisition of Omega expanded its European branded OTC business; fiscal 2015 includes only about three months of Omega results. Perrigo reorganized its reporting segments, with historical segment results recast to the new presentation.
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $4,603.9 million | $4,060.8 million |
| Gross profit / gross margin | $1,712.5 million / 37.2% | $1,447.7 million / 35.7% |
| Operating income / operating margin | $747.7 million / 16.2% | $567.0 million / 14.0% |
| Net income | $128.0 million | $205.3 million |
| Diluted EPS | $0.92 | $1.77 |
| Operating cash flow | $1,198.3 million | $693.5 million |
| Cash and cash equivalents | $785.6 million | $799.5 million |
| Total borrowings | $5,311.4 million | $3,206.8 million |
Capital expenditures were $137.0 million; management estimated $160–$195 million for the next 12 months. Dividends declared were $0.46 per share, versus $0.39 in FY2014. Working capital excluding cash was $703.6 million, compared with $676.7 million.
Material changes versus the prior year
- Sales increased 13%, while gross margin rose 1.5 percentage points. Acquisitions and new products contributed to growth; CHC sales declined 3%, partly reflecting competition and discontinued products. Rx Pharmaceuticals sales rose 8%.
- Operating income increased 32%, but net income fell 38%. Other expense rose to $343.2 million, largely reflecting $324.8 million of aggregate losses on currency hedges associated with the Omega and pending GSK purchases. The filing says the Omega hedge losses were economically offset in the final purchase-price settlement.
- Interest expense increased to $146.0 million from $103.5 million, primarily due to acquisition-related borrowing. Debt increased substantially following Omega financing and assumed debt.
- Operating cash flow rose by $504.8 million, helped by earnings adjustments, working-capital movements and higher Tysabri royalties. Investing cash outflow was $2,646.9 million, including acquisitions and derivative settlements.
Outlook, risks and unusual items
- Management expects R&D expense to increase in dollars but remain relatively flat to slightly higher as a percentage of sales. It expects future interest expense to be comparable to FY2015. The filing does not provide specific earnings or sales guidance.
- Management cited integration of Omega, including potential synergies, higher branded-business selling costs, acquired-intangible amortization and possible restructuring. The GSK brand portfolio acquisition (€200 million) and Naturwohl/Yokebe acquisition (€130 million) were pending at the filing date and expected to close in calendar Q3 2015.
- Mylan’s unsolicited takeover pursuit was ongoing; Perrigo reported $13.4 million of related fees and noted Irish takeover rules could constrain strategic actions. Its credit rating was Baa3 stable at Moody’s and BBB on negative watch at S&P.
- Other notable items include a 48.4% effective tax rate, primarily affected by deferred-tax valuation allowances and Omega transaction costs; a $6.8 million goodwill impairment; and $5.1 million of restructuring expense.
- Contingencies include the Texas Medicaid investigation, for which Perrigo accrued $24 million and recorded a $7 million receivable from former Paddock owners; Tysabri product-liability lawsuits, with Perrigo responsible for 50% of losses and expenses; and an IRS dispute. Perrigo paid the $68.9 million asserted for FY2009–2010 and filed a refund request. Total uncertain tax-position liabilities were $384.3 million.
- Walmart accounted for 15% of FY2015 sales. Tysabri royalties generated $338.4 million of pretax income, leaving results exposed to product safety, competition, currency and regulatory developments.
Important facts for investors to verify
- How much of FY2015 sales and cash-flow growth is attributable to acquisitions, and whether Omega integration delivers expected benefits and costs.
- The scale and timing of remaining debt service, refinancing needs, and the effect of currency movements on debt, sales and earnings.
- Whether the large hedge-related losses are nonrecurring in future periods and how they reconcile to the acquisition economics and cash flows.
- Updates on the Mylan offer, GSK and Naturwohl closings, and related costs or strategic constraints.
- Developments in the Texas Medicaid matter, IRS refund dispute, Tysabri litigation and uncertain tax positions.
- Acquisition accounting remained preliminary for Omega and Gelcaps. Management and the auditor excluded those businesses’ controls from the FY2015 internal-control assessment; together they represented $1,049.2 million of assets and $407.9 million of FY2015 sales. The financial-statement audit opinion was unqualified.