Perrigo Company plc — Form 10-Q summary
Reporting period: Three and six months ended December 27, 2014. Although the request metadata says “2014 Q2,” this filing reports Perrigo’s second quarter of fiscal 2015; the comparable period ended December 28, 2013. Figures are unaudited and in U.S. dollars unless noted.
Business context
Perrigo develops, manufactures, and distributes OTC and generic prescription pharmaceuticals, nutritional products, APIs, and specialty-science products, including royalty-bearing Tysabri rights. It has five reportable segments: Consumer Healthcare, Nutritionals, Rx Pharmaceuticals, API, and Specialty Sciences. Results are seasonal and the filing cautions that interim results may not indicate full-year performance. The company plans to move to a calendar fiscal year beginning in 2016, with a transition period from June 28 through December 31, 2015.
Financial results and liquidity
| Metric | Three months ended Dec. 27, 2014 | Three months ended Dec. 28, 2013 | Six months ended Dec. 27, 2014 | Six months ended Dec. 28, 2013 |
|---|---|---|---|---|
| Net sales | $1,071.7 million | $979.0 million | $2,023.1 million | $1,912.4 million |
| Gross profit / margin | $383.8 million / 35.8% | $360.7 million / 36.8% | $705.5 million / 34.9% | $717.0 million / 37.5% |
| Operating income / margin | $184.4 million / 17.2% | $86.6 million / 8.8% | $321.5 million / 15.9% | $266.2 million / 13.9% |
| Net income (loss) | $70.2 million | $(86.0) million | $166.5 million | $25.3 million |
| Diluted EPS | $0.51 | $(0.87) | $1.23 | $0.26 |
For the quarter, sales rose 9%, primarily from $79.2 million of incremental Specialty Sciences sales following the Elan acquisition and $53.9 million of new-product sales, partly offset by weaker Consumer Healthcare and Nutritionals sales and $6.7 million of unfavorable currency effects. Operating expenses fell 27%, mainly because the prior-year quarter included substantial Elan acquisition costs. Other expense included significant Omega-related currency-hedging losses. The prior-year loss also reflected a $165.8 million debt-extinguishment charge, so the net-income comparison is affected by unusual items.
For the six-month period, sales increased 6%, but gross profit declined 2% and gross margin fell 2.6 percentage points. Management attributed margin pressure mainly to higher intangible amortization and product mix, as well as lower Consumer Healthcare sales and the loss of temozolomide exclusivity. Operating income increased 21%, while net income benefited from the absence of the prior-year debt-extinguishment loss.
Segment highlights for the quarter: Consumer Healthcare sales declined 1% and operating income declined 16%; Nutritionals sales declined 7% and operating income declined 46%; Rx Pharmaceuticals sales increased 12% and operating income increased 9%; API sales were flat and operating income declined 10%; Specialty Sciences sales were $86.6 million, primarily Tysabri royalties, versus $7.4 million in the prior-year period, which included only post-acquisition activity.
Six-month operating cash flow was $467.7 million, versus $220.3 million a year earlier. Investing cash outflow was $156.6 million, versus $1,599.5 million, largely reflecting the prior-year Elan acquisition; financing cash inflow was $2,509.0 million. Cash and equivalents were $3,596.1 million at period-end, up from $799.5 million at June 28, 2014, primarily due to financing for the proposed Omega acquisition. Management reported working capital, including cash, of $4.0 billion.
Total borrowings were $4,801.7 million, including $362.3 million current and $4,439.4 million long-term debt. Perrigo had a $600 million revolving facility and a $200 million receivables securitization program, with no borrowings under either at period-end. Its credit ratings were Baa3 (stable) from Moody’s and BBB (negative) from S&P. The quarterly dividend declared was $0.105 per share.
Material developments, outlook, and risks
- Proposed Omega acquisition: Perrigo agreed to acquire 95.77% of Omega Pharma for total consideration valued at €3.6 billion, including assumed debt of €1.1 billion. Consideration includes €1.8 billion cash and 5,397,711 Perrigo shares; closing was expected in the second half of fiscal 2015, subject to customary conditions and regulatory approvals. The filing does not report a completed acquisition.
- Financing and exposure: Perrigo raised approximately $1.6 billion net from bonds, issued about $1.0 billion net in equity, and repaid $895 million of prior term loans. Omega-related euro hedges generated $64.7 million of losses in the quarter; management expected changes in the hedges’ value before closing to be economically offset in the acquisition-price settlement. The new bonds are subject to mandatory redemption if the acquisition is not completed by, or the agreement is terminated before, August 6, 2015.
- Management outlook: Management said first-half Consumer Healthcare results were affected by category declines, promotion timing, and lower contract sales; Nutritionals faced competition and pricing pressure in VMS and lower infant-food promotions. It expected these trends, other than VMS and infant foods, not to continue and anticipated atypically stronger second-half results, supported by new products. Fiscal 2015 capital expenditures were estimated at $140 million to $170 million. No specific earnings-per-share guidance was provided in the supplied filing text.
- Unusual items: The quarter included a $10 million collaboration option payment recorded in R&D, a $2.5 million Nutritionals inventory loss for which the company expected insurance recovery, and $9.6 million of debt-extinguishment expense. Six-month acquisition-related Omega costs totaled $92 million across administration, interest, other expense, and debt extinguishment.
- Tax and legal contingencies: The IRS asserted an additional approximately $69.2 million obligation for fiscal 2009–2010, including interest and penalties. Perrigo disputed the assessment, paid it in January 2015 to pursue its challenge in court, and recorded the payment as a deferred charge. The company was also under Israeli tax audits for fiscal 2011–2012 and newly notified of IRS audits for those years. A $15 million accrual covered the Texas Medicaid matter; Tysabri product-liability cases could result in substantial judgments, with Perrigo responsible for 50% of losses and expenses. The Eltroxin claims remained unresolved. The Neot Hovav environmental matter was closed after Israel’s Supreme Court ruled in Perrigo’s favor.
- Other risks: The Omega agreement could be terminated, regulatory approval could be delayed or conditioned, and a termination fee of approximately €100 million could apply in specified circumstances. The filing also highlights integration, leverage and debt-service risks, potential acceleration of Omega debt, tax-law uncertainty, and cybersecurity and operational-disruption risks.
Most important facts for investors to verify
- Whether Omega closed on schedule, what regulatory conditions or divestitures applied, and the final purchase price and financing needs.
- How acquisition-related debt and assumed Omega liabilities affected leverage, interest costs, ratings, and available liquidity after closing.
- Whether management’s expectation of stronger second-half fiscal 2015 results materialized, particularly in Consumer Healthcare and Nutritionals.
- The resolution and financial impact of the IRS dispute and ongoing tax audits, including recovery of the $69.2 million payment.
- Whether Omega hedge losses were offset at closing as management expected, and whether material legal, product-liability, or other contingencies changed.