Perrigo Company plc — 2020 Form 10-K Summary
Business context and reporting period
Perrigo is an Ireland-incorporated provider of consumer self-care products, including OTC medicines, infant nutrition and oral care, and generic prescription pharmaceuticals. This annual report covers the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter filing. Reportable segments were Consumer Self-Care Americas (CSCA), Consumer Self-Care International (CSCI), and Prescription Pharmaceuticals (RX). Management’s stated strategy is to transform Perrigo into a consumer self-care-focused company.
Financial results and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $5,063.3 million | $4,837.4 million |
| Gross profit / margin | $1,815.2 million / 35.9% | $1,773.3 million / 36.7% |
| Operating income / margin | $115.4 million / 2.3% | $204.8 million / 4.2% |
| Net income (loss) / diluted EPS | $(162.6) million / $(1.19) | $146.1 million / $1.07 |
| Cash from operating activities | $636.2 million | $387.8 million |
| Capital expenditures | $170.4 million | $137.7 million |
| Cash and cash equivalents at year-end | $641.5 million | $354.3 million |
| Total borrowings outstanding | $3,566.1 million | $3,369.2 million |
Sales increased 5%, with acquisition contributions and growth in parts of consumer self-care offset in part by divestitures, weaker cough-and-cold demand, and other category declines. Gross margin fell 0.8 percentage points; operating income declined 44%, with higher impairment charges a major factor. Cash from operations increased, supported in part by working-capital and tax-payment timing. The $1.0 billion revolving credit facility had no borrowings outstanding at year-end, and Perrigo reported compliance with debt covenants.
Segment results: CSCA sales were $2,693.0 million and operating income was $472.0 million; CSCI sales were $1,395.2 million and operating income was $32.3 million; RX sales were $975.1 million and operating loss was $177.7 million. RX’s loss included $346.8 million of goodwill impairment charges. Fourth-quarter 2020 sales were $1,289.5 million and net loss was $175.0 million, or $(1.29) per diluted share.
Material changes and unusual items
- CSCA sales rose 8%, reflecting oral-care acquisitions and growth in selected OTC categories, partly offset by divested animal health sales and softer cough-and-cold demand. CSCI sales rose 1%; RX sales rose 1%, but RX operating results deteriorated sharply.
- Perrigo recorded $346.8 million of RX U.S. goodwill impairments in 2020, including a $144.4 million fourth-quarter charge. The Albuterol recall and market withdrawal also resulted in a $22.5 million net charge; Perrigo did not expect to reintroduce the product during 2021.
- A $95.3 million non-cash write-off followed the failure to meet the sales threshold for a potential Tysabri contingent milestone. The company also recorded a $20.0 million loss on early debt extinguishment.
- In June, Perrigo issued $750.0 million of 3.150% senior notes due 2030 and used part of the proceeds to redeem $590.0 million of notes due in 2021.
- Acquisitions included Dr. Fresh oral-care assets and Eastern European OTC brands; Perrigo also sold its Rosemont Pharmaceuticals business for approximately $195 million, recording a $21.1 million pre-tax loss.
Outlook, risks and contingencies
Management expected cough-and-cold demand to remain lower into the first half of 2021, while noting that further COVID-19 waves could cause new demand surges. The company anticipated COVID-related operating costs to continue in 2021 and forecast capital expenditures of $180–$230 million over the next 12 months. No clear consolidated earnings or revenue guidance for 2021 is provided in the filing text.
On March 1, 2021, after year-end, Perrigo announced an agreement to sell its generic RX business to Altaris for $1.55 billion in total consideration, including $1.5 billion in cash; closing was expected by the end of Q3 2021, subject to customary conditions. RX was to be reported as discontinued operations beginning in Q1 2021. The sale would make Perrigo more focused but less diversified.
- Tax disputes: Material matters include an Irish assessment of €1.636 billion plus potential interest and penalties, an IRS proposal concerning Athena of $843 million plus potential interest, and other U.S. and Israeli disputes. Perrigo contests the matters; the filing states that payment of the additional assessed amounts is generally not required before final adverse determinations. The company reported $504.9 million of liabilities for uncertain tax positions, including interest and penalties.
- Legal and product risks: Perrigo faces generic-drug pricing antitrust litigation, securities litigation, and product liability claims including ranitidine and talcum powder cases. The company states that outcomes of certain matters cannot be reasonably estimated.
- Operations and market risks: COVID-19, pricing pressure, customer concentration, regulatory requirements, recalls, supplier dependence, foreign exchange and potential supply disruption of an RX product could affect results. The company warned a 2021 supply disruption could have a material RX revenue impact.
- Impairment exposure: Management identified RX U.S. and certain consumer self-care reporting units as potentially susceptible to further impairment if performance, market multiples or discount-rate assumptions worsen.
Ernst & Young issued an unqualified opinion on the financial statements and internal controls. Management also concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020.
Most important facts for investors to verify
- Whether and when the RX sale closes, the final proceeds and liabilities transferred, and the resulting use of proceeds and leverage.
- How much of the 2020 operating decline reflects recurring business performance versus impairments, recall costs, divestitures and other unusual items.
- Progress on cough-and-cold demand, COVID-related costs, the RX supply risk and planned capital spending.
- Developments and potential cash exposure from the Irish, IRS and Israeli tax disputes, antitrust cases and product liability claims.
- Liquidity, debt maturities, covenant headroom and the sustainability of dividends and repurchases given the company’s debt and transformation plans.