PERRIGO CO PLC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________________
FORM 10-Q
_______________________________________________
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[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 001-36353
_______________________________________________
Perrigo Company plc
(Exact name of registrant as specified in its charter)
_______________________________________________
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Ireland
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Not Applicable
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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Treasury Building, Lower Grand Canal Street, Dublin 2, Ireland
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-
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(Address of principal executive offices)
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(Zip Code)
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(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer [X]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
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Smaller reporting company [ ]
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] YES [X] NO
As of
November 4, 2016
, there were
143,374,427
ordinary shares outstanding.
PERRIGO COMPANY PLC
FORM 10-Q
INDEX
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PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
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1
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2
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3
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4
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5
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6
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7
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8
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9
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10
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11
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12
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13
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14
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15
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16
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17
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PART II. OTHER INFORMATION
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Cautionary Note Regarding Forward-Looking Statements
Certain statements in this report are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our, or our industry's, actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements.
In particular, statements about our expectations, beliefs, plans, objectives, assumptions, future events or future performance contained in this report, including certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential” or the negative of those terms or other comparable terminology.
Please see Item 1A of our Form 10-KT for the transition period from
June 28, 2015
to
December 31, 2015
and Part II, Item 1A of this Form 10-Q for a discussion of certain important risk factors that relate to forward-looking statements contained in this report. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control, including the timing, amount and cost of share repurchases, future impairment charges, our ability to achieve our guidance, and the ability to execute and achieve the desired benefits of announced initiatives. These and other important factors, including those discussed in our Form 10-KT for the transition period from
June 28, 2015
to
December 31, 2015
, in this Form 10-Q under "Risk Factors" and in any subsequent filings with the Securities and Exchange Commission, may cause actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. The forward-looking statements in this report are made only as of the date hereof, and unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
TRADEMARKS, TRADENAMES AND SERVICE MARKS
This report contains trademarks, trade names and service marks that are the property of Perrigo Company plc, as well as, for informational purposes, trademarks, trade names, and service marks that are the property of other organizations. Solely for convenience, certain trademarks, trade names, and service marks referred to in this report appear without the
®
,
™ and
SM
symbols, but those references are not intended to indicate that we or the applicable owner, as the case may be, will not assert, to the fullest extent under applicable law, our or their rights to such trademarks, trade names, and service marks.
1
Perrigo Company plc
- Item 1
PERRIGO COMPANY PLC
(in millions, except per share amounts)
(unaudited)
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Three Months Ended
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Nine Months Ended
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|||||||||||||
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October 1,
2016 |
September 26,
2015 |
October 1,
2016 |
September 26,
2015 |
|||||||||||
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Net sales
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$
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1,354.9
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$
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1,344.7
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$
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4,219.1
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$
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3,925.4
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|||
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Cost of sales
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848.6
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795.9
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2,622.7
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2,369.7
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|||||||
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Gross profit
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506.3
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548.8
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1,596.4
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1,555.7
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|||||||
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Operating expenses
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|||||||||||||||
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Distribution
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21.6
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24.9
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65.9
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63.3
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|||||||
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Research and development
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50.2
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41.6
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142.5
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139.7
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Selling
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154.6
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167.9
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506.9
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391.6
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|||||||
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Administration
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108.6
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123.6
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316.8
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343.3
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|||||||
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Impairment charges
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1,679.9
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—
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2,127.1
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—
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|||||||
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Restructuring
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6.6
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2.2
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17.9
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3.1
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|||||||
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Total operating expenses
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2,021.5
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360.2
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3,177.1
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941.0
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|||||||
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Operating income (loss)
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(1,515.2
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)
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188.6
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(1,580.7
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)
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614.7
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|||||||
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Interest expense, net
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54.6
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43.4
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163.2
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132.7
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|||||||
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Other expense, net
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1.0
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13.0
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34.1
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294.2
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|||||||
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Loss on extinguishment of debt
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0.7
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—
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1.1
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0.9
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Income (loss) before income taxes
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(1,571.5
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)
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132.2
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(1,779.1
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)
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186.9
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Income tax expense (benefit)
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(316.3
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)
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19.6
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(383.7
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112.7
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Net income (loss)
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$
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(1,255.2
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)
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$
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112.6
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$
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(1,395.4
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)
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$
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74.2
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|||
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Income (loss) per share
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|||||||||||||||
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Basic
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$
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(8.76
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)
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$
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0.77
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$
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(9.74
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)
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$
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0.51
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|||
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Diluted
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$
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(8.76
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)
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$
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0.77
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$
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(9.74
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)
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$
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0.51
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|||
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Weighted-average shares outstanding
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|||||||||||||||
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Basic
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143.3
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146.3
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143.2
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144.4
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Diluted
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143.3
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146.9
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143.2
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145.0
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|||||||
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Dividends declared per share
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$
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0.145
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$
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0.125
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$
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0.435
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$
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0.375
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|||
See accompanying Notes to the Condensed Consolidated Financial Statements
2
Perrigo Company plc
- Item 1
PERRIGO COMPANY PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(unaudited)
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Three Months Ended
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Nine Months Ended
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||||||||||||||
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October 1,
2016 |
September 26,
2015 |
October 1,
2016 |
September 26,
2015 |
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Net income (loss)
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$
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(1,255.2
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)
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$
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112.6
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$
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(1,395.4
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)
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$
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74.2
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|||
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Other comprehensive income (loss):
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|||||||||||||||
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Foreign currency translation adjustments
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27.0
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(39.8
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)
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71.8
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50.9
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|||||||
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Change in fair value of derivative financial instruments, net of tax
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3.6
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0.1
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(3.5
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)
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5.6
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|||||||
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Change in fair value of investment securities, net of tax
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9.8
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2.5
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18.4
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(2.4
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)
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|||||||
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Change in post-retirement and pension liability adjustments, net of tax
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(0.2
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)
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—
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0.3
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3.7
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|||||||
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Other comprehensive income (loss), net of tax
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40.2
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(37.2
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)
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87.0
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57.8
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Comprehensive income (loss)
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$
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(1,215.0
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)
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$
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75.4
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$
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(1,308.4
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)
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$
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132.0
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|
|||
See accompanying Notes to the Condensed Consolidated Financial Statements
3
Perrigo Company plc
- Item 1
PERRIGO COMPANY PLC
(in millions)
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(Unaudited)
|
|||||||
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October 1,
2016 |
December 31,
2015 |
||||||
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Assets
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|||||||
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Cash and cash equivalents
|
$
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362.7
|
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$
|
417.8
|
|
|
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Accounts receivable, net of allowance for doubtful accounts of $4.4 million and $3.0 million, respectively
|
1,129.2
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|
1,193.1
|
|
|||
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Inventories
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884.6
|
|
844.4
|
|
|||
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Prepaid expenses and other current assets
|
250.6
|
|
289.1
|
|
|||
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Total current assets
|
2,627.1
|
|
2,744.4
|
|
|||
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Property and equipment, net
|
881.3
|
|
886.2
|
|
|||
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Goodwill and other indefinite-lived intangible assets
|
5,282.7
|
|
7,281.2
|
|
|||
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Other intangible assets, net
|
8,340.9
|
|
8,190.5
|
|
|||
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Non-current deferred income taxes
|
129.3
|
|
54.6
|
|
|||
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Other non-current assets
|
206.3
|
|
237.0
|
|
|||
|
Total non-current assets
|
14,840.5
|
|
16,649.5
|
|
|||
|
Total assets
|
$
|
17,467.6
|
|
$
|
19,393.9
|
|
|
|
Liabilities and Shareholders’ Equity
|
|||||||
|
Liabilities
|
|||||||
|
Accounts payable
|
$
|
507.9
|
|
$
|
554.9
|
|
|
|
Payroll and related taxes
|
106.8
|
|
125.3
|
|
|||
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Accrued customer programs
|
325.5
|
|
398.0
|
|
|||
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Accrued liabilities
|
258.7
|
|
308.4
|
|
|||
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Accrued income taxes
|
76.2
|
|
85.2
|
|
|||
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Current indebtedness
|
265.0
|
|
1,018.3
|
|
|||
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Total current liabilities
|
1,540.1
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|
2,490.1
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|
|||
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Long-term debt, less current portion
|
5,638.0
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4,971.6
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|
|||
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Non-current deferred income taxes
|
1,169.3
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|
1,563.7
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|
|||
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Other non-current liabilities
|
448.9
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|
332.4
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|
|||
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Total non-current liabilities
|
7,256.2
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|
6,867.7
|
|
|||
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Total liabilities
|
8,796.3
|
|
9,357.8
|
|
|||
|
Commitments and contingencies - Note 14
|
|||||||
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Shareholders’ equity
|
|||||||
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Preferred shares, $0.0001 par value, 10 million shares authorized
|
—
|
|
—
|
|
|||
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Ordinary shares, €0.001 par value, 10 billion shares authorized
|
8,151.4
|
|
8,144.6
|
|
|||
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Accumulated other comprehensive income
|
71.5
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|
(15.5
|
)
|
|||
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Retained earnings
|
449.0
|
|
1,907.6
|
|
|||
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Total controlling interest
|
8,671.9
|
|
10,036.7
|
|
|||
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Noncontrolling interest
|
(0.6
|
)
|
(0.6
|
)
|
|||
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Total shareholders’ equity
|
8,671.3
|
|
10,036.1
|
|
|||
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Total liabilities and shareholders' equity
|
$
|
17,467.6
|
|
$
|
19,393.9
|
|
|
|
Supplemental Disclosures of Balance Sheet Information
|
|||||||
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Preferred shares, issued and outstanding
|
—
|
|
—
|
|
|||
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Ordinary shares, issued and outstanding
|
143.4
|
|
143.1
|
|
|||
See accompanying Notes to the Condensed Consolidated Financial Statements
4
Perrigo Company plc
- Item 1
PERRIGO COMPANY PLC
(in millions)
(unaudited)
|
Nine Months Ended
|
|||||||
|
|
October 1,
2016 |
September 26,
2015 |
|||||
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Cash Flows From (For) Operating Activities
|
|||||||
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Net income (loss)
|
$
|
(1,395.4
|
)
|
$
|
74.2
|
|
|
|
Adjustments to derive cash flows
|
|||||||
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Depreciation and amortization
|
556.3
|
|
470.4
|
|
|||
|
Loss on acquisition-related foreign currency derivatives
|
—
|
|
300.0
|
|
|||
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Share-based compensation
|
16.1
|
|
29.7
|
|
|||
|
Impairment charges
|
2,127.1
|
|
—
|
|
|||
|
Loss on extinguishment of debt
|
1.1
|
|
0.9
|
|
|||
|
Non-cash restructuring charges
|
17.9
|
|
3.1
|
|
|||
|
Deferred income taxes
|
(507.2
|
)
|
7.7
|
|
|||
|
Other non-cash adjustments
|
34.5
|
|
15.3
|
|
|||
|
Subtotal
|
850.4
|
|
901.3
|
|
|||
|
Increase (decrease) in cash due to:
|
|||||||
|
Accounts receivable
|
113.6
|
|
(30.9
|
)
|
|||
|
Inventories
|
(29.9
|
)
|
(28.6
|
)
|
|||
|
Accounts payable
|
(51.8
|
)
|
(6.5
|
)
|
|||
|
Payroll and related taxes
|
(40.0
|
)
|
(26.6
|
)
|
|||
|
Accrued customer programs
|
(74.7
|
)
|
17.7
|
|
|||
|
Accrued liabilities
|
(42.8
|
)
|
46.7
|
|
|||
|
Accrued income taxes
|
9.7
|
|
0.3
|
|
|||
|
Other
|
(31.0
|
)
|
(6.7
|
)
|
|||
|
Subtotal
|
(146.9
|
)
|
(34.6
|
)
|
|||
|
Net cash from (for) operating activities
|
703.5
|
|
866.7
|
|
|||
|
Cash Flows From (For) Investing Activities
|
|||||||
|
Acquisitions of businesses, net of cash acquired
|
(432.1
|
)
|
(2,499.9
|
)
|
|||
|
Asset acquisitions
|
(65.1
|
)
|
(4.0
|
)
|
|||
|
Additions to property and equipment
|
(84.6
|
)
|
(127.6
|
)
|
|||
|
Proceeds from sale of business
|
58.5
|
|
—
|
|
|||
|
Settlement of acquisition-related foreign currency derivatives
|
—
|
|
(304.8
|
)
|
|||
|
Other investing
|
(1.0
|
)
|
(2.7
|
)
|
|||
|
Net cash from (for) investing activities
|
(524.3
|
)
|
(2,939.0
|
)
|
|||
|
Cash Flows From (For) Financing Activities
|
|||||||
|
Issuances of long-term debt
|
1,190.3
|
|
—
|
|
|||
|
Payments on long-term debt
|
(545.8
|
)
|
(903.3
|
)
|
|||
|
Borrowings (repayments) of revolving credit agreements and other financing, net
|
(803.6
|
)
|
28.6
|
|
|||
|
Deferred financing fees
|
(2.8
|
)
|
(3.3
|
)
|
|||
|
Premium on early debt retirement
|
(0.6
|
)
|
—
|
|
|||
|
Issuance of ordinary shares
|
8.2
|
|
6.2
|
|
|||
|
Cash dividends
|
(62.4
|
)
|
(54.2
|
)
|
|||
|
Other financing
|
(17.4
|
)
|
(15.5
|
)
|
|||
|
Net cash from (for) financing activities
|
(234.1
|
)
|
(941.5
|
)
|
|||
|
Effect of exchange rate changes on cash
|
(0.2
|
)
|
(75.8
|
)
|
|||
|
Net increase (decrease) in cash and cash equivalents
|
(55.1
|
)
|
(3,089.6
|
)
|
|||
|
Cash and cash equivalents, beginning of period
|
417.8
|
|
3,596.1
|
|
|||
|
Cash and cash equivalents, end of period
|
$
|
362.7
|
|
$
|
506.5
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|||||||
|
Cash paid/received during the year for:
|
|||||||
|
Interest paid
|
$
|
124.1
|
|
$
|
92.5
|
|
|
|
Interest received
|
$
|
1.1
|
|
$
|
1.0
|
|
|
|
Income taxes paid
|
$
|
116.6
|
|
$
|
130.0
|
|
|
|
Income taxes refunded
|
$
|
6.0
|
|
$
|
3.1
|
|
|
See accompanying Notes to the Condensed Consolidated Financial Statements
5
Perrigo Company plc
- Item 1
Note 1
NOTE 1 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. General Information
The Company
Perrigo Company plc was incorporated under the laws of Ireland on June 28, 2013 and became the successor registrant of Perrigo Company, a Michigan corporation, on December 18, 2013 in connection with the acquisition of Elan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo," the "Company," "we," "our," "us," and similar pronouns used herein refer to Perrigo Company plc, its subsidiaries, and all predecessors of Perrigo Company plc and its subsidiaries. We are a leading global over-the-counter ("OTC") consumer goods and specialty pharmaceutical company, offering patients and customers high quality products at affordable prices. From our beginning in 1887 as a packager of home remedies, we have grown to become the world's largest manufacturer of OTC healthcare products and supplier of infant formulas for the store brand market. We are also a leading provider of generic extended topical prescription products, and we receive royalties from sales of the multiple sclerosis drug Tysabri
®
. We provide “Quality Affordable Healthcare Products
®
” across a wide variety of product categories and geographies, primarily in North America, Europe, and Australia, as well as in other markets, including Israel, China, and Latin America.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and footnotes included in our Transition Report on Form 10-KT for the transition period from
June 28, 2015
to
December 31, 2015
. In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation have been included. The Condensed Consolidated Financial Statements include our accounts and the accounts of all majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Our fiscal year previously consisted of a 52- or 53-week year ending on or around June 30 of each year with each quarter ending on the Saturday closest to each calendar quarter-end. Beginning on January 1, 2016, we changed our fiscal year to begin on January 1 and end on December 31 of each year. We will continue to cut off our quarterly accounting periods on the Saturday closest to the end of the calendar quarter, with the fourth quarter ending on December 31 of each year.
During the three months ended April 2, 2016, we identified certain errors in our consolidated financial statements for the transition period of June 28, 2015 to December 31, 2015, related primarily to the accrual estimates associated with product returns and tax-related items in our Branded Consumer Healthcare ("BCH") segment. These errors were corrected during the three months ended April 2, 2016 by increasing the consolidated operating loss by
$14.5 million
, which when combined with tax-related items, increased the consolidated net loss by
$13.7 million
within the Condensed Consolidated Statements of Operations. We concluded that these errors were not material to the consolidated financial statements for the transition period of June 28, 2015 to December 31, 2015 and are not expected to be material to the consolidated financial statements for the year ending December 31, 2016.
6
Perrigo Company plc
- Item 1
Note 1
b. Recent Accounting Standard Pronouncements
Below are recent accounting standard updates that we are still assessing to determine the effect on our consolidated financial statements. We do not believe that any other recently issued accounting standards could have a material effect on our consolidated financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.
|
Recently Issued Accounting Standards Not Yet Adopted
|
||||||
|
Standard
|
Description
|
Effective Date
|
Effect on the Financial Statements or Other Significant Matters
|
|||
|
Improvements to Employee Share-Based Payment Accounting
|
This guidance is intended to simplify several aspects of the accounting for share-based payment award transactions. It will require all income tax effects of awards to be recorded through the income statement when they vest or settle as opposed to certain amounts being recorded in additional paid-in capital. An entity will also have to elect whether to account for forfeitures as they occur or by estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change (as currently required). The guidance will also increase the amount an employer can withhold to cover income taxes on awards. Early adoption is permitted.
|
January 1, 2017
|
We are currently evaluating the implications of adoption on our consolidated financial statements.
|
|||
|
Revenue from Contracts with Customers
|
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. This guidance allows for two adoption methods, full retrospective approach or modified retrospective approach. Early adoption is not permitted.
|
January 1, 2018
|
We are currently evaluating the possible adoption methodologies and the implications of adoption on our consolidated financial statements.
|
|||
|
Leases
|
This guidance was issued to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. For leases with a term of 12 months or less, lessees are permitted to make an election to not recognize right-of-use assets and lease liabilities. Upon adoption, lessees will apply the new standard as of the beginning of the earliest comparative period presented in the financial statements, however lessees will be able to exclude leases that expire as of the implementation date. Early adoption is permitted.
|
January 1, 2019
|
We are currently evaluating the implications of adoption on our consolidated financial statements and considering whether to early adopt the standard.
|
|||
7
Perrigo Company plc
- Item 1
Note 1
|
Recently Issued Accounting Standards Not Yet Adopted (continued)
|
||||||
|
Standard
|
Description
|
Effective Date
|
Effect on the Financial Statements or Other Significant Matters
|
|||
|
Measurement of Credit Losses on Financial Instruments
|
This guidance changes the impairment model for most financial assets and certain other instruments, replacing the current "incurred loss" approach with an "expected loss" credit impairment model, which will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, and off-balance sheet credit exposures such as letters of credit. Early adoption is permitted.
|
January 1, 2020
|
We are currently evaluating the new standard for potential impacts on our receivables, debt, and other financial instruments and considering whether to early adopt the standard.
|
|||
NOTE 2 –
ACQUISITIONS AND DIVESTITURES
All of the below acquisitions, with the exception of the generic Benzaclin™ product purchase, have been accounted for under the acquisition method of accounting based on our analysis of the acquired inputs and processes, and the related assets acquired and liabilities assumed were recorded at fair value as of the acquisition date.
Fair value estimates are based on a complex series of judgments about future events and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.
The effects of all of the acquisitions described below are included in the Condensed Consolidated Financial Statements prospectively from the date of each acquisition. Unless otherwise indicated, acquisition costs incurred were immaterial and were recorded in Administration expense.
Current Year Acquisitions
Generic Benzaclin
™
Product
On
August 2, 2016
, we purchased the remaining
60.9%
product rights to a generic Benzaclin™ product ("Generic Benzaclin™"), which we had developed and marketed in collaboration with Barr Laboratories, Inc. ("Barr"), a subsidiary of Teva Pharmaceuticals, for
$62.0 million
in cash. In September 2007, we entered into an initial development, marketing and commercialization agreement with Barr, in which Barr contributed to the product's development costs and we developed and marketed the product in the U.S. and Israel. Under this agreement, we paid Barr a percentage of net income from the product's sales in these territories, adjusted for Barr's contributions to the product's development costs. By purchasing the remaining product right from Barr, we are now entitled to 100% of income from sales of the product. Operating results attributable to Generic Benzaclin™ are included within our Prescription Pharmaceuticals ("Rx") segment. The intangible asset acquired is a distribution and license agreement with a
nine
-year useful life.
Tretinoin Product Portfolio
On
January 22, 2016
, we acquired a portfolio of generic dosage forms and strengths of
Retin-A
®
(tretinoin), a topical prescription acne treatment, from Matawan Pharmaceuticals, LLC, for
$416.4 million
in cash ("Tretinoin Products"), which further expanded our extended topicals portfolio. We were the authorized generic distributor of these products from 2005 to 2013. Operating results attributable to the acquisition are included within our Rx segment. The intangible assets acquired included generic product rights valued using the multi-period excess earnings method and assigned a
20
-year useful life, and non-compete agreements valued using the lost income method and assigned a
five
-year useful life. The goodwill acquired is deductible for tax purposes.
8
Perrigo Company plc
- Item 1
Note 2
Development-Stage Rx Products
In May 2015, we entered into an agreement with a clinical stage biotechnology company for two specialty pharmaceutical products in development ("Development-Stage Rx Products"). We paid
$18.0 million
for an option to acquire the two products, which was recorded in Research and Development expense. On
March 1, 2016
, to further invest in our specialty Rx portfolio, we exercised the option for both products, which requires us to make contingent payments if we obtain regulatory approval and achieve certain sales milestones. We will also be obligated to make certain royalty payments over periods ranging from
seven
to
ten
years from the launch of each product.
We accounted for the option exercise as a business acquisition within our Rx segment, recording IPR&D and contingent consideration on the balance sheet. The IPR&D was valued using the multi-period excess earnings method and has an indefinite useful life until such time as the research is completed (at which time it will become a definite-lived intangible asset), or is determined to have no future use (at which time it would be impaired). The contingent consideration is an estimate of the future milestone payments and royalties based on probability-weighted outcomes, sensitivity analysis, and discount rates reflective of the risk involved. The amount of contingent consideration recognized was
$24.9 million
and was recorded in
Other non-current liabilities
.
9
Perrigo Company plc
- Item 1
Note 2
Purchase Price Allocation of Current Year Acquisitions
The purchase accounting allocation for four small product acquisitions in our Consumer Healthcare ("CHC") and Rx segments (included in "All Other" in the table below) are preliminary a
nd are
based on the valuation information, estimates, and assumptions available at
October 1, 2016
. As we finalize the fair value estimate, additional purchase price adjustments may be recorded during the measurement period to contingent consideration and intangible assets.
The below table indicates the purchase price allocation for acquisitions completed in the current year (in millions):
|
Tretinoin Products
|
Development-Stage Rx Products
|
All Other
(1)
*
|
|||||||||
|
Purchase price paid
|
$
|
416.4
|
|
$
|
—
|
|
$
|
21.9
|
|
||
|
Contingent consideration
|
—
|
|
24.9
|
|
30.6
|
|
|||||
|
Total purchase consideration
|
$
|
416.4
|
|
$
|
24.9
|
|
$
|
52.5
|
|
||
|
Assets acquired:
|
|||||||||||
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
—
|
|
$
|
3.8
|
|
||
|
Accounts receivable
|
—
|
|
—
|
|
4.9
|
|
|||||
|
Inventories
|
1.4
|
|
—
|
|
7.1
|
|
|||||
|
Prepaid expenses and other current assets
|
—
|
|
—
|
|
0.1
|
|
|||||
|
Property and equipment
|
—
|
|
—
|
|
1.2
|
|
|||||
|
Goodwill
|
1.7
|
|
—
|
|
0.2
|
|
|||||
|
Definite-lived intangibles
:
|
|||||||||||
|
Distribution and license agreements, supply agreements
|
—
|
|
—
|
|
3.4
|
|
|||||
|
Developed product technology, formulations, and product rights
|
411.0
|
|
—
|
|
23.3
|
|
|||||
|
Customer relationships and distribution networks
|
—
|
|
—
|
|
8.2
|
|
|||||
|
Non-compete agreements
|
2.3
|
|
—
|
|
—
|
|
|||||
|
Indefinite-lived intangibles
:
|
|||||||||||
|
In-process research and development
|
—
|
|
24.9
|
|
7.0
|
|
|||||
|
Total intangible assets
|
$
|
413.3
|
|
$
|
24.9
|
|
$
|
41.9
|
|
||
|
Total assets
|
$
|
416.4
|
|
$
|
24.9
|
|
$
|
59.2
|
|
||
|
Liabilities assumed:
|
|||||||||||
|
Accounts payable
|
$
|
—
|
|
$
|
—
|
|
$
|
2.8
|
|
||
|
Accrued liabilities
|
—
|
|
—
|
|
0.1
|
|
|||||
|
Long-term debt
|
—
|
|
—
|
|
3.3
|
|
|||||
|
Net deferred income tax liabilities
|
—
|
|
—
|
|
0.5
|
|
|||||
|
Total liabilities
|
$
|
—
|
|
$
|
—
|
|
$
|
6.7
|
|
||
|
Net assets acquired
|
$
|
416.4
|
|
$
|
24.9
|
|
$
|
52.5
|
|
||
* Opening balance sheet is preliminary
|
(1)
|
Consists of
four
product acquisitions in the CHC and Rx segments
|
10
Perrigo Company plc
- Item 1
Note 2
Prior Year Acquisitions
Entocort
®
On
December 15, 2015
, we completed our acquisition of Entocort
®
(budesonide) capsules, as well as the authorized generic capsules, for sale within the U.S., from AstraZeneca plc for
$380.2 million
in cash. Entocort
®
is a gastroenterology medicine for patients with mild to moderate Crohn's disease. The acquisition complemented our Rx portfolio. Operating results attributable to the acquisition are included within our Rx segment. The intangible assets acquired included branded and authorized generic product rights with useful lives of
10
and
15
years, respectively, which were valued using the multi-period excess earnings method.
Naturwohl Pharma GmbH
On
September 15, 2015
, we completed our acquisition of
100%
of Naturwohl Pharma GmbH ("Naturwohl"), a Munich, Germany-based nutritional business known for its leading German dietary supplement brand, Yokebe
®
. The acquisition built on our BCH segment's OTC product portfolio and European commercial infrastructure. The assets were purchased through an all-cash transaction valued at
€133.5 million
(
$150.4 million
). Operating results attributable to Naturwohl are included in the BCH segment. The intangible assets acquired included a trademark with a
20
-year useful life, customer relationships with a
15
-year useful life, non-compete agreements with a
three
-year useful life, and a licensing agreement with a
three
-year useful life. We utilized the relief from royalty method for valuing the trademark, the multi-period excess earnings method for valuing the customer relationships, and the lost income method for valuing the non-compete agreements and the licensing agreement. The goodwill acquired is not deductible for tax purposes.
ScarAway
®
On
August 28, 2015
, we completed our acquisition of ScarAway
®
, a leading U.S. OTC scar management brand portfolio comprised of five products, from Enaltus, LLC, for
$26.7 million
in cash. This acquisition served as our entry into the niche branded OTC business in the U.S. Operating results attributable to ScarAway
®
are included in the CHC segment. The intangible assets acquired included a trademark with a
25
-year useful life, non-compete agreements with a
four
-year useful life, developed product technology with an
eight
-year useful life, and customer relationships with a
15
-year useful life. We utilized the relief from royalty method for valuing the trademark and developed product technology, the multi-period excess earnings method for valuing the customer relationships, and the lost income method for valuing the non-compete agreements. The goodwill acquired is deductible for tax purposes.
GlaxoSmithKline
Consumer Healthcare Product Portfolio
On
August 28, 2015
, we completed our acquisition of a portfolio of well-established OTC brands from GlaxoSmithKline Consumer Healthcare (“GSK Products”). This acquisition further leveraged our European market share and expanded our product offerings. The assets were purchased through an all-cash transaction valued at
€200.0 million
(
$223.6 million
). Operating results attributable to the acquired GSK Products are included primarily in the BCH segment. The intangible assets acquired included trademarks with a
20
-year useful life and customer relationships with a
15
-year useful life. We utilized the relief from royalty method for valuing the trademarks and the multi-period excess earnings method for valuing the customer relationships. The goodwill acquired is deductible for tax purposes and recorded primarily in the BCH segment.
Gelcaps Exportadora de Mexico, S.A. de C.V.
On
May 12, 2015
, we completed our acquisition of
100%
of Gelcaps Exportadora de Mexico, S.A. de C.V. ("Gelcaps"), the Mexican operations of Durham, North Carolina-based Patheon Inc., for
$37.9 million
in cash. The acquisition added softgel manufacturing technology to our supply chain capabilities and broadened our presence, product portfolio, and customer network in Mexico. Operating results attributable to Gelcaps are included in the CHC segment. The intangible assets acquired included a trademark with a
25
-year useful life and customer relationships with a
20
-year useful life. We utilized the relief from royalty method for valuing the trademark and the multi-period excess earnings method for valuing the customer relationships.
11
Perrigo Company plc
- Item 1
Note 2
Based on valuation estimates utilizing the comparative sales method, a step-up in the value of inventory of
$0.6 million
was recorded in the opening balance sheet, which was charged to cost of goods sold during the three months ended June 27, 2015. In addition, property, plant and equipment was written up by
$0.9 million
to its estimated fair market value based on a valuation method that included both the cost and market approaches. This additional step-up in value is being depreciated over the estimated remaining useful lives of the assets. The goodwill recorded is not deductible for tax purposes.
Omega Pharma Invest N.V.
On
March 30, 2015
, we completed our acquisition of Omega Pharma Invest N.V. ("Omega"), a limited liability company incorporated under the laws of Belgium. Omega was a leading European OTC company and is providing us several key benefits, including advancing our growth strategy outside the U.S. by providing access across a larger global platform with critical mass in key European countries, establishing commercial infrastructure in the high barrier-to-entry European OTC marketplace, strengthening our product portfolio while enhancing scale and distribution, and expanding our international management capabilities.
We purchased
95.77%
of the issued and outstanding share capital of Omega (
685,348,257
shares) from Alychlo N.V. (“Alychlo”) and Holdco I BE N.V. (together with Alychlo, the “Sellers”), limited liability companies incorporated under the laws of Belgium, under the terms of the Share Purchase Agreement dated November 6, 2014 (the "Share Purchase Agreement"). Omega holds the remaining
30,243,983
shares as treasury shares.
The acquisition was a cash and stock transaction made up of the following consideration (in millions except per share data):
|
Perrigo ordinary shares issued
|
5.4
|
|
||
|
Perrigo per share price at transaction close on March 30, 2015
|
$
|
167.64
|
|
|
|
Total value of Perrigo ordinary shares issued
|
$
|
904.9
|
|
|
|
Cash consideration
|
2,078.3
|
|
||
|
Total consideration
|
$
|
2,983.2
|
|
|
The cash consideration shown in the above table was financed by a combination of debt and equity. We issued
$1.6 billion
of debt as described in
Note 10
, and issued
6.8 million
ordinary shares, which raised
$999.3 million
, net of issuance costs.
The Sellers agreed to indemnify us for certain potential future losses. The Sellers’ indemnification and other obligations to us under the Share Purchase Agreement are secured by up to
€120.9 million
(
$135.9 million
as of October 1, 2016) in cash that has been escrowed or is committed to be escrowed and
1.08 million
of our ordinary shares, which are both being held in escrow to secure such obligations. Under the terms of the Share Purchase Agreement, Alychlo and its affiliates are subject to a
three
-year non-compete in Europe, and the Sellers are subject to a
two
-year non-solicit, in each case subject to certain exceptions. The Share Purchase Agreement contains other customary representations, warranties, and covenants of the parties thereto. Our Board of Directors has authorized us to issue an arbitral claim against the sellers, which we plan to do.
The operating results attributable to Omega are included in the BCH segment. We incurred general transaction costs (legal, banking and other professional fees), financing fees, and debt extinguishment charges in connection with the Omega acquisition. The amounts recorded were not allocated to a reporting segment. The table below details the acquisition costs, as well as losses on hedging activities associated with the acquisition purchase price, and where they were recorded for the
nine months ended
September 26, 2015
(in millions):
12
Perrigo Company plc
- Item 1
Note 2
|
Nine Months Ended
|
||||
|
Line item
|
September 26, 2015
|
|||
|
Administration
|
$
|
18.1
|
|
|
|
Interest expense, net
|
18.7
|
|
||
|
Other expense, net
|
258.2
|
|
||
|
Total acquisition-related costs
|
$
|
295.0
|
|
|
See
Note 8
for further details on losses on the Omega-related hedging activities shown above in Other expense, net, and
Note 10
for details on the loss on extinguishment of debt.
We acquired the following intangible assets: indefinite-lived brands, a definite-lived trade name with an
eight
-year useful life, definite-lived brands with a
22
-year useful life, a distribution network with a
21
-year useful life, and developed product technology with useful lives ranging from
four
to
13
years. We also recorded goodwill, which is not deductible for tax purposes and represents the value we assigned to the expected synergies described above, in our BCH segment. We utilized the multi-period excess earnings method to value the indefinite-lived brands, the definite-lived brands, and distribution network. We utilized the relief from royalty method to value the developed product technology and definite-lived trade name.
Based on valuation estimates utilizing the comparative sales method, a step-up in the value of inventory of
$15.1 million
was recorded in the opening balance sheet and was charged to cost of goods sold during the three months ended June 27, 2015. In addition, property, plant and equipment were written up
$41.5 million
to their estimated fair market value based on a valuation method that included both the cost and market approaches. This additional step-up in value is being depreciated over the estimated remaining useful lives of the assets. Additionally, the fair value of the debt assumed
on the date of acquisition exceeded par value by
$101.9 million
, which was recorded as part of the carrying value of the underlying debt and will be amortized as a reduction of interest expense over the remaining terms of the respective debt instruments. For more information on the debt we assumed from Omega and our subsequent payments on the debt, see
Note 10
.
13
Perrigo Company plc
- Item 1
Note 2
Purchase Price Allocation of Prior Year Acquisitions
The purchase accounting allocation for the Entocort
®
and GSK Products acquisitions were finalized during the three months ended April 2, 2016. Changes to the allocations were due to adjustments to the intangible asset valuation assumptions. The purchase accounting for all other prior year acquisitions was final as of
December 31, 2015
.
The below table indicates the purchase price allocation for acquisitions completed during the
year ended
December 31, 2015
(in millions):
|
Entocort
®
|
Naturwohl
|
ScarAway
®
|
GSK Products
|
Gelcaps
|
Omega
|
All Other
(1)
|
|||||||||||||||||||||
|
Purchase price paid
|
$
|
380.2
|
|
$
|
150.4
|
|
$
|
26.7
|
|
$
|
223.6
|
|
$
|
37.9
|
|
$
|
2,983.2
|
|
$
|
15.3
|
|
||||||
|
Contingent consideration
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
13.9
|
|
|||||||||||||
|
Total purchase consideration
|
$
|
380.2
|
|
$
|
150.4
|
|
$
|
26.7
|
|
$
|
223.6
|
|
$
|
37.9
|
|
$
|
2,983.2
|
|
$
|
29.2
|
|
||||||
|
Assets acquired:
|
|||||||||||||||||||||||||||
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
4.6
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4.6
|
|
$
|
14.7
|
|
$
|
—
|
|
||||||
|
Accounts receivable
|
—
|
|
3.3
|
|
—
|
|
—
|
|
7.3
|
|
260.1
|
|
—
|
|
|||||||||||||
|
Inventories
|
0.2
|
|
1.5
|
|
1.0
|
|
—
|
|
7.2
|
|
202.5
|
|
—
|
|
|||||||||||||
|
Prepaid expenses and other current assets
|
—
|
|
—
|
|
—
|
|
—
|
|
2.1
|
|
39.2
|
|
—
|
|
|||||||||||||
|
Property and equipment
|
—
|
|
—
|
|
—
|
|
—
|
|
6.0
|
|
130.8
|
|
—
|
|
|||||||||||||
|
Goodwill
|
—
|
|
61.0
|
|
3.5
|
|
32.6
|
|
6.0
|
|
1,900.4
|
|
—
|
|
|||||||||||||
|
Definite-lived intangibles
:
|
|||||||||||||||||||||||||||
|
Distribution and license agreements, supply agreements
|
—
|
|
21.4
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||||
|
Developed product technology, formulations, and product rights
|
380.0
|
|
—
|
|
0.5
|
|
—
|
|
—
|
|
27.2
|
|
—
|
|
|||||||||||||
|
Customer relationships and distribution networks
|
—
|
|
25.9
|
|
9.8
|
|
61.5
|
|
6.6
|
|
1,056.3
|
|
—
|
|
|||||||||||||
|
Trademarks, trade names, and brands
|
—
|
|
64.2
|
|
11.4
|
|
129.5
|
|
—
|
|
287.5
|
|
—
|
|
|||||||||||||
|
Non-compete agreements
|
—
|
|
0.3
|
|
0.5
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||||
|
Indefinite-lived intangibles
:
|
|||||||||||||||||||||||||||
|
Trademarks, trade names, and brands
|
—
|
|
—
|
|
—
|
|
—
|
|
4.4
|
|
2,003.8
|
|
—
|
|
|||||||||||||
|
In-process research and development
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
29.2
|
|
|||||||||||||
|
Total intangible assets
|
$
|
380.0
|
|
$
|
111.8
|
|
$
|
22.2
|
|
$
|
191.0
|
|
$
|
11.0
|
|
$
|
3,374.8
|
|
$
|
29.2
|
|
||||||
|
Other non-current assets
|
—
|
|
—
|
|
—
|
|
—
|
|
0.4
|
|
2.4
|
|
—
|
|
|||||||||||||
|
Total assets
|
$
|
380.2
|
|
$
|
182.2
|
|
$
|
26.7
|
|
$
|
223.6
|
|
$
|
44.6
|
|
$
|
5,924.9
|
|
$
|
29.2
|
|
||||||
|
Liabilities assumed:
|
|||||||||||||||||||||||||||
|
Accounts payable
|
$
|
—
|
|
$
|
2.8
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3.3
|
|
$
|
243.1
|
|
$
|
—
|
|
||||||
|
Short-term debt
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
24.6
|
|
—
|
|
|||||||||||||
|
Accrued liabilities
|
—
|
|
1.6
|
|
—
|
|
—
|
|
1.6
|
|
43.9
|
|
—
|
|
|||||||||||||
|
Payroll and related taxes
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
51.3
|
|
—
|
|
|||||||||||||
|
Accrued customer programs
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
39.8
|
|
—
|
|
|||||||||||||
|
Long-term debt
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,471.0
|
|
—
|
|
|||||||||||||
|
Net deferred income tax liabilities
|
—
|
|
27.4
|
|
—
|
|
—
|
|
1.4
|
|
1,014.5
|
|
—
|
|
|||||||||||||
|
Other non-current liabilities
|
—
|
|
—
|
|
—
|
|
—
|
|
0.4
|
|
53.5
|
|
—
|
|
|||||||||||||
|
Total liabilities
|
—
|
|
31.8
|
|
—
|
|
—
|
|
6.7
|
|
2,941.7
|
|
—
|
|
|||||||||||||
|
Net assets acquired
|
$
|
380.2
|
|
$
|
150.4
|
|
$
|
26.7
|
|
$
|
223.6
|
|
$
|
37.9
|
|
$
|
2,983.2
|
|
$
|
29.2
|
|
||||||
|
(1)
|
Consists of
eight
product acquisitions in the CHC, BCH, and Rx segments
|
14
Perrigo Company plc
- Item 1
Note 2
Actual and Unaudited Pro Forma Impact of Acquisitions
Our Condensed Consolidated Financial Statements include operating results from the Tretinoin Products, Entocort
®
, Naturwohl, GSK Products, ScarAway
®
, Omega, and Gelcaps acquisitions, as well as from four small product acquisitions, from the date of each acquisition through
October 1, 2016
. Net sales and operating
income
attributable to acquisitions completed in the current year and included in our financial statements totaled
$25.3 million
and
$13.0 million
, respectively, for the
three months ended
October 1, 2016
and totaled
$47.7 million
and
$31.3 million
, respectively, for the
nine months ended
October 1, 2016
.
The following unaudited pro forma information gives effect to the Tretinoin Products, Entocort
®
, Naturwohl, GSK Products, ScarAway
®
, Omega, and Gelcaps acquisitions, as well as four small product acquisitions, as if the acquisitions had occurred on the first day of the
nine months ended
September 26, 2015
and had been included in our Results of Operations for all periods presented thereafter (in millions):
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(Unaudited)
|
October 1,
2016 |
September 26,
2015 |
October 1,
2016 |
September 26,
2015 |
|||||||||||
|
Net sales
|
$
|
1,359.6
|
|
$
|
1,429.9
|
|
$
|
4,243.3
|
|
$
|
4,451.4
|
|
|||
|
Net income (loss)
|
$
|
(1,254.9
|
)
|
$
|
142.0
|
|
$
|
(1,392.8
|
)
|
$
|
154.7
|
|
|||
The historical consolidated financial information of Perrigo, and the Tretinoin Products, Entocort
®
, Naturwohl, GSK Products, ScarAway
®
, Omega and Gelcaps acquisitions and the four small product acquisitions, has been adjusted in the pro forma information to give effect to pro forma events that are (1) directly attributable to the transactions, (2) factually supportable and (3) expected to have a continuing impact on combined results. In order to reflect the occurrence of the acquisitions on the first day of the
nine months ended
September 26, 2015
as required, the unaudited pro forma results include adjustments to reflect the incremental amortization expense to be incurred based on the current values of each acquisition's identifiable intangible and tangible assets, along with the reclassification of acquisition-related costs from the
nine months ended
October 1, 2016
to the
nine months ended
September 26, 2015
. The unaudited pro forma results do not reflect future events that have occurred or may occur after the acquisitions.
Current Year Divestitures
On
August 5, 2016
, we completed the sale of our U.S. Vitamins, Minerals, and Supplements ("VMS") business within our CHC segment to International Vitamins Corporation ("IVC") for
$61.8 million
inclusive of an estimated working capital adjustment. The assets and liabilities related to this sale were classified as held-for-sale at December 31, 2015. Prior to closing the sale, we determined that the carrying value of the VMS business exceeded its fair value less the cost to sell, resulting in an impairment charge of
$6.2 million
, which was recorded in Impairment charges on the Condensed Consolidated Statements of Operations during the
nine months ended
October 1, 2016
.
NOTE 3 –
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Changes in the carrying amount of goodwill, by reportable segment, were as follows (in millions):
|
Reporting Segments:
|
December 31, 2015
|
Business acquisitions
|
Business divestitures
|
Impairments
|
Changes in assets held for sale
|
Currency translation adjustment
|
October 1,
2016 |
|||||||||||||||||||||
|
CHC
|
$
|
1,890.0
|
|
$
|
0.2
|
|
$
|
(8.5
|
)
|
$
|
—
|
|
$
|
13.0
|
|
$
|
(6.8
|
)
|
$
|
1,887.9
|
|
|||||||
|
BCH
|
1,980.5
|
|
—
|
|
—
|
|
(967.5
|
)
|
—
|
|
92.4
|
|
1,105.4
|
|
||||||||||||||
|
Rx
|
1,222.2
|
|
1.7
|
|
—
|
|
—
|
|
—
|
|
(13.7
|
)
|
1,210.2
|
|
||||||||||||||
|
Specialty Sciences
|
200.7
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
200.7
|
|
||||||||||||||
|
Other
|
71.5
|
|
—
|
|
—
|
|
—
|
|
11.7
|
|
3.2
|
|
86.4
|
|
||||||||||||||
|
Total goodwill
|
$
|
5,364.9
|
|
$
|
1.9
|
|
$
|
(8.5
|
)
|
$
|
(967.5
|
)
|
$
|
24.7
|
|
$
|
75.1
|
|
$
|
4,490.6
|
|
|||||||
15
Perrigo Company plc
- Item 1
Note 3
In connection with the preparation of our financial statements for the three-month period ended April 2, 2016, we identified indicators of goodwill impairment in our BCH - rest of world (“BCH - ROW”) reporting unit, which comprises primarily operations attributable to the Omega acquisition in all geographic regions except for Belgium. The primary impairment indicators included the decline in our 2016 performance expectations and a reduction in our long-range revenue growth forecast. Step one of the goodwill impairment test involved determining the fair value of the reporting unit using a discounted cash flow technique and comparing it to the reporting unit’s carrying value. The main assumptions supporting the cash flow projections used to determine the reporting unit’s fair value included revenue growth based on product line extensions, product life cycle strategies, and geographical expansion within the markets in which the reporting unit distributes products, gross margins consistent with historical trends, and advertising and promotion investments largely consistent with the reporting unit's growth plans. The BCH - ROW reporting unit did not pass step one of goodwill impairment testing. The change in fair value from previous estimates was due primarily to the changes in the market and performance of certain brands such that the evaluation of brand prioritization and product extensions or launches in new regions are being more focused to maximize the potential of all brands in the segment's portfolio.
The second step of the goodwill impairment test required that we determine the implied fair value of the BCH - ROW reporting unit’s goodwill, which involved determining the value of the reporting unit’s individual assets and liabilities. Due to the complex and time-consuming nature of step two, based on our evaluation and initial estimates of the fair values of the assets and liabilities and the deficit of the fair value when compared to the related book value, we recorded an estimated impairment charge of
$193.6 million
for the three months ended April 2, 2016. We finalized the step two fair value calculation during the three months ended July 2, 2016, which resulted in a
$30.3 million
reduction to the estimated impairment charge recorded during the three months ended April 2, 2016.
In connection with the preparation of our financial statements for the three months ended October 1, 2016, we identified additional indicators of goodwill impairment in both our BCH - ROW and our BCH - Belgium reporting units. With respect to both reporting units, the primary impairment indicators included an additional decline in our 2016 performance expectations for the remainder of the year and a reduction in our long-range revenue growth and margin forecasts due to the factors outlined below. Step one of the goodwill impairment test involved determining the fair value of the reporting units using a discounted cash flow technique and comparing it to the respective reporting units' carrying value. The main assumptions supporting the cash flow projections used to determine each reporting unit’s fair value included revenue growth based on product line extensions, product life cycle strategies, and geographical expansion within the markets in which the reporting unit distributes products, gross margins consistent with historical trends and including supply chain cost improvement plans, and advertising and promotion investments largely consistent with the reporting unit's growth plans. Both the BCH - ROW and the BCH - Belgium reporting units did not pass step one of goodwill impairment testing. As it relates to the BCH - ROW reporting unit, the changes in fair value from previous estimates were due primarily to (1) changes in the market and performance of certain brands due to moderated new product launch assumptions, (2) execution of certain key product strategies falling short of expectations causing a reduction to baseline forecast models in France, Germany and Italy, (3) certain macro-economic factors having continued to impact the business more than expected in France, Russia and Turkey in addition to unfavorable foreign currency impacts experienced primarily in the UK related to Brexit. As it relates to BCH - Belgium reporting unit, the changes in fair value from previous estimates due to change in the forecast as a result of a reduction in volume with a major wholesaler due to factors consistent with those outlined for BCH - ROW.
The second step of the goodwill impairment test required that we determine the implied fair value of both the BCH - ROW and BCH - Belgium reporting units' goodwill, which involved determining the value of each reporting unit’s individual assets and liabilities. Based on our evaluation and initial estimates of the fair values of the assets and liabilities and the deficit of the fair value when compared to the related book value, we recorded an estimated impairment charge of
$734.7 million
related to the BCH - ROW reporting unit and
$69.4 million
related to the BCH - Belgium reporting unit for the three months ended October 1, 2016. Both charges were recorded in Impairment charges on the Condensed Consolidated Statements of Operations within our BCH segment. Due to the complex and time-consuming nature of step two, we expect to finalize the fair value calculation during the fourth quarter of 2016, which could result in an adjustment to the estimated impairment charge. As of October 1, 2016, the implied fair value of goodwill that remains in the BCH - ROW and BCH - Belgium reporting units is
$1.0 billion
and
$70.2 million
, respectively.
16
Perrigo Company plc
- Item 1
Note 3
While no impairment charges were recorded as a result of the goodwill impairment testing for the transition period of
June 28, 2015
to
December 31, 2015
, our Specialty Sciences reporting unit's fair value exceeded the carrying value by less than 10%. Management evaluated the primary source of cash flow in this segment, the Tysabri
®
royalty stream, based on a combination of factors including independent external research, information provided from our royalty partner, and internal estimates. Based on this information, management’s assessment of future cash flow from this royalty stream has been reduced primarily due to anticipated new competitors entering the market and unfavorable currency exchange effects. Future performance different from the assumptions utilized in our quantitative analysis may further reduce the fair value of the reporting unit, which may result in the fair value no longer exceeding the carrying value. In February 2016, a competitor's pipeline product, Ocrevus
®
, received breakthrough therapy designation from the FDA and could potentially be approved in 2016. The product would compete with Tysabri
®
and could have a significant negative impact on the royalty we receive from Biogen Idec, Inc. ("Biogen") and the performance of the Specialty Sciences segment. We continue to monitor the progress of all potential competing products and assess the reporting unit for potential impairment should impairment indicators arise, as applicable, and at least annually during our fourth quarter impairment testing.
During the
three months ended
June 27, 2015, we performed our annual goodwill impairment testing, which indicated that our CHC Mexico reporting unit's goodwill fair value was below its net book value as of March 28, 2015. As a result, we initiated the second step of the goodwill impairment test to measure the amount of impairment. We concluded that the goodwill was fully impaired and recorded an impairment of
$6.8 million
in the CHC segment during the
nine months ended
September 26, 2015
in Other expense, net.
Intangible Assets
Other intangible assets and related accumulated amortization consisted of the following (in millions):
|
|
October 1, 2016
|
December 31, 2015
|
|||||||||||||
|
|
Gross
|
Accumulated Amortization
|
Gross
|
Accumulated Amortization
|
|||||||||||
|
Definite-lived intangibles
:
|
|||||||||||||||
|
Distribution and license agreements, supply agreements
|
$
|
6,122.3
|
|
$
|
914.0
|
|
$
|
6,053.4
|
|
$
|
667.2
|
|
|||
|
Developed product technology, formulations, and product rights
|
1,805.9
|
|
529.0
|
|
1,383.5
|
|
426.0
|
|
|||||||
|
Customer relationships and distribution networks
|
1,564.0
|
|
288.8
|
|
1,520.7
|
|
193.0
|
|
|||||||
|
Trademarks, trade names, and brands
|
631.6
|
|
54.7
|
|
539.4
|
|
22.8
|
|
|||||||
|
Non-compete agreements
|
14.6
|
|
11.0
|
|
15.2
|
|
12.7
|
|
|||||||
|
Total definite-lived intangibles
|
$
|
10,138.4
|
|
$
|
1,797.5
|
|
$
|
9,512.2
|
|
$
|
1,321.7
|
|
|||
|
Indefinite-lived intangibles
:
|
|||||||||||||||
|
Trademarks, trade names, and brands
|
$
|
724.2
|
|
$
|
—
|
|
$
|
1,868.1
|
|
$
|
—
|
|
|||
|
In-process research and development
|
67.9
|
|
—
|
|
48.2
|
|
—
|
|
|||||||
|
Total indefinite-lived intangibles
|
792.1
|
|
—
|
|
1,916.3
|
|
—
|
|
|||||||
|
Total other intangible assets
|
$
|
10,930.5
|
|
$
|
1,797.5
|
|
$
|
11,428.5
|
|
$
|
1,321.7
|
|
|||
Certain intangible assets are denominated in currencies other than the U.S. dollar; therefore, their gross and net carrying values are subject to foreign currency movements.
We recorded amortization expense of
$162.1 million
and
$147.6 million
for the
three months ended
October 1, 2016
and
September 26, 2015
, respectively, and
$481.8 million
and
$397.9 million
for the
nine months ended
October 1, 2016
and
September 26, 2015
, respectively. The increase in amortization expense for the 2016 nine-month period was due primarily to the incremental amortization expense incurred on the definite-lived intangible assets acquired from the Omega, Entocort
®
,
and Tretinoin Products acquisitions.
During our impairment testing for the transition period of
June 28, 2015
to
December 31, 2015
, we identified an impairment of certain indefinite-lived intangible assets purchased in conjunction with the Omega acquisition based on management’s expectations of the prospects for future revenues, profits, and cash flows associated with
17
Perrigo Company plc
- Item 1
Note 3
these assets. The assessment resulted in an impairment charge of
$185.1 million
within our BCH segment, which represented the difference between the carrying amount of the intangible assets and their estimated fair value. See our Transition Report on Form 10-KT filed on February 25, 2016 for a further discussion of this impairment charge.
In connection with the preparation of our financial statements for the three-month period ended April 2, 2016, we identified indicators of impairment associated with certain indefinite-lived intangible assets acquired in conjunction with the Omega acquisition. The primary impairment indicators included the decline in our 2016 performance expectations and a reduction in our long-range revenue growth forecast. The assessment utilized the excess earnings method to determine fair value and resulted in an impairment charge of
$273.4 million
in
Impairment charges
on the Condensed Consolidated Statements of Operations within our BCH segment, which represented the difference between the carrying amount of the intangible assets and their estimated fair value. The change in fair value from previous estimates was due primarily to the changes in the market and performance of the brands such that the evaluation of brand prioritization and product extensions or launches in new regions are being more focused to maximize the potential of all brands in the segment's portfolio. The main assumptions supporting the fair value of these assets and cash flow projections included revenue growth based on product line extensions, product life cycle strategies, and geographical expansion within the markets in which the BCH segment distributes products, gross margins consistent with historical trends, and advertising and promotion investments largely consistent with the segment's growth plans.
In connection with the preparation of our financial statements for the three months ended October 1, 2016, we identified additional indicators of impairment associated with certain indefinite-lived and definite-lived intangible brand category assets acquired in conjunction with the Omega acquisition. The primary impairment indicators are discussed above in goodwill. The assessment of the indefinite-lived assets utilized the excess earnings method to determine fair value and resulted in an impairment charge of
$575.7 million
for the three months ended October 1, 2016. With regards to the definite-lived asset, it was determined that the carrying value of the asset group was not recoverable based on an assessment of the undiscounted future cash flows expected to be generated by the asset group. Given this, the excess earnings method was utilized to determine fair value of the definite-lived asset and resulted in an impairment charge of
$290.2 million
for the
three months ended
October 1, 2016
. Both charges, which represented the difference between the carrying amount of the intangible assets and their estimated fair value, were recorded in Impairment charges on the Condensed Consolidated Statements of Operations within our BCH segment. The main assumptions supporting the fair value of these assets and cash flow projections are included in the goodwill discussions above.
The carrying value for certain intangible assets and goodwill equals estimated and implied fair values, respectively, and as a result, any further deterioration in those assets' fair value would lead to a further impairment charge. Future performance different from the assumptions utilized in our quantitative analyses may result in additional changes in the fair value. We will continue to monitor and assess these assets for potential impairment should further impairment indicators arise. We will complete our required annual impairment testing during the fourth quarter of 2016.
In addition, given the additional change in performance expectations for our remaining impaired cough/cold/allergy, anti-parasite, personal care and natural health brands previously recorded as indefinite-lived assets, we reclassified the remaining asset balance of
$672.4 million
related to these four assets to definite-lived assets with a
20
-year useful life and began amortizing the assets as of October 2, 2016.
NOTE 4 -
ACCOUNTS RECEIVABLE FACTORING
We have multiple accounts receivable factoring arrangements with non-related third-party financial institutions (the “Factors”). Pursuant to the terms of the arrangements, we sell to the Factors certain of our accounts receivable balances on a non-recourse basis for credit approved accounts. An administrative fee ranging from
0.14%
to
0.15%
per invoice is charged on the gross amount of accounts receivables assigned to the Factors, plus interest is calculated at the applicable EUR LIBOR rate plus 70 basis points. The total amount factored and excluded from accounts receivable was
$36.4 million
and
$106.7 million
at
October 1, 2016
and
December 31, 2015
, respectively.
18
Perrigo Company plc
- Item 1
Note 5
NOTE 5 –
INVENTORIES
Major components of inventory were as follows (in millions):
|
October 1,
2016 |
December 31,
2015 |
||||||
|
Finished goods
|
$
|
511.6
|
|
$
|
483.4
|
|
|
|
Work in process
|
171.0
|
|
151.4
|
|
|||
|
Raw materials
|
202.0
|
|
209.6
|
|
|||
|
Total inventories
|
$
|
884.6
|
|
$
|
844.4
|
|
|
NOTE 6 –
FAIR VALUE MEASUREMENTS
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable.
|
Level 1:
|
Quoted prices for identical instruments in active markets.
|
|
Level 2:
|
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
|
|
Level 3:
|
Valuations derived from valuation techniques in which one or more significant inputs are not observable.
|
The following table summarizes the valuation of our financial instruments carried at fair value and measured at fair value on a recurring and non-recurring basis by the above pricing categories (in millions):
|
Fair Value
|
||||||||||
|
Fair Value Hierarchy
|
October 1,
2016 |
December 31,
2015 |
||||||||
|
Measured at fair value on a recurring basis:
|
||||||||||
|
Assets:
|
||||||||||
|
Investment securities
|
Level 1
|
$
|
53.0
|
|
$
|
14.9
|
|
|||
|
Foreign currency forward contracts
|
Level 2
|
$
|
5.2
|
|
$
|
4.8
|
|
|||
|
Liabilities:
|
||||||||||
|
Interest rate swap agreements
|
Level 2
|
$
|
—
|
|
$
|
0.3
|
|
|||
|
Foreign currency forward contracts
|
Level 2
|
0.8
|
|
3.9
|
|
|||||
|
Total level 2 liabilities
|
$
|
0.8
|
|
$
|
4.2
|
|
||||
|
Contingent consideration
|
Level 3
|
$
|
75.0
|
|
$
|
17.9
|
|
|||
|
Measured at fair value on a non-recurring basis:
|
||||||||||
|
Assets:
|
||||||||||
|
Goodwill
(1)
|
Level 3
|
$
|
1,105.4
|
|
$
|
—
|
|
|||
|
Indefinite-lived intangible assets
(2)
|
Level 3
|
672.4
|
|
1,031.8
|
|
|||||
|
Definite-lived intangible assets
(3)
|
Level 3
|
66.9
|
|
—
|
|
|||||
|
Assets held for sale, net
|
Level 3
|
14.1
|
|
37.5
|
|
|||||
|
Total level 3 assets
|
$
|
1,858.8
|
|
$
|
1,069.3
|
|
||||
|
(1)
|
Goodwill with a carrying amount of
$1.9 billion
was written down to its implied fair value of
$1.1 billion
, resulting in an impairment charge of
$804.1 million
for the
three months ended
October 1, 2016
; impairment charges totaled
$967.5 million
for the
nine months ended
October 1, 2016
and are included in
Impairment charges
on the Condensed Consolidated Statements of Operations.
|
19
Perrigo Company plc
- Item 1
Note 6
|
(2)
|
Indefinite-lived intangible assets with a carrying amount of
$1.2 billion
were written down to a fair value of
$672.4 million
resulting in total impairment charges of
$575.7 million
for the
three months ended
October 1, 2016
; impairment charges totaled
$849.1 million
for the
nine months ended
October 1, 2016
and are included in
Impairment charges
on the Condensed Consolidated Statements of Operations.
|
|
(3)
|
Definite-lived intangible assets with a carrying amount of
$357.1 million
were written down to a fair value of
$66.9 million
resulting in an impairment charge of
$290.2 million
for the
three and nine months ended
October 1, 2016
, which is included in
Impairment charges
on the Condensed Consolidated Statements of Operations.
|
There were no transfers among Level 1, 2, and 3 during the
three and nine months ended
October 1, 2016
and
September 26, 2015
. Our policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period. See
Note 7
for information on our investment securities. See
Note 8
for a discussion of derivatives.
Contingent consideration represents milestone payment obligations obtained through product acquisitions, which are valued using estimates based on probability-weighted outcomes, sensitivity analysis, and discount rates reflective of the risk involved. The estimates are updated quarterly and the liabilities are adjusted to fair value depending on a number of assumptions, including the competitive landscape and regulatory approvals that may impact the future sales of a product.
The non-recurring fair values included in the table above represent only those assets whose carrying values were adjusted to fair value during the reporting period. See
Note 3
for a more detailed discussion of the impaired goodwill and indefinite-lived intangible assets and the valuation methods used, and
Note 9
for information on the impaired assets held for sale, net.
The table below presents a reconciliation for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in millions). Net realized losses in the table were recorded in Administrative expense.
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
October 1,
2016 |
September 26,
2015 |
October 1,
2016 |
September 26,
2015 |
||||||||||||
|
Contingent Consideration
|
|||||||||||||||
|
Beginning balance
|
$
|
44.9
|
|
$
|
—
|
|
$
|
17.9
|
|
$
|
12.4
|
|
|||
|
Net realized (gains) losses
|
(0.4
|
)
|
—
|
|
(4.0
|
)
|
(12.4
|
)
|
|||||||
|
Purchases or additions
|
30.6
|
|
—
|
|
61.1
|
|
—
|
|
|||||||
|
Foreign currency effect
|
—
|
|
—
|
|
0.1
|
|
—
|
|
|||||||
|
Settlements
|
(0.1
|
)
|
—
|
|
(0.1
|
)
|
—
|
|
|||||||
|
Ending balance
|
$
|
75.0
|
|
$
|
—
|
|
$
|
75.0
|
|
$
|
—
|
|
|||
As of
October 1, 2016
and
December 31, 2015
, our fixed rate long-term debt consisted of public bonds, a private placement note, and retail bonds. As of
October 1, 2016
, the public bonds and private placement note had a carrying value of
$4.6 billion
and a fair value of
$4.7 billion
, based on quoted market prices (Level 1). As of
December 31, 2015
, the public bonds and private placement note had a carrying value of
$3.9 billion
and fair value of
$3.8 billion
, based on quoted market prices (Level 1). As of
October 1, 2016
, our retail bonds had a carrying value of
$826.4 million
(excluding a premium of
$60.7 million
) and a fair value of
$891.4 million
. As of
December 31, 2015
, our retail bonds had a carrying value of
$798.3 million
(excluding a premium of
$82.5 million
) and a fair value of
$859.8 million
. The fair value of our related bonds for both periods was based on interest rates offered for borrowings of a similar nature and remaining maturities (Level 2).
The carrying amounts of our other financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, short-term debt and variable rate long-term debt, approximate their fair value.
20
Perrigo Company plc
- Item 1
Note 7
NOTE 7 –
INVESTMENTS
Available for Sale Securities
Our available for sale securities are reported in
Prepaid expenses and other current assets
. Unrealized investment gains (losses) on available for sale securities were as follows (in millions):
|
October 1,
2016 |
December 31, 2015
|
||||||
|
Equity securities, at cost less impairments
|
$
|
20.1
|
|
$
|
6.4
|
|
|
|
Gross unrealized gains
|
32.9
|
|
9.3
|
|
|||
|
Gross unrealized losses
|
—
|
|
(0.8
|
)
|
|||
|
Estimated fair value of equity securities
|
$
|
53.0
|
|
$
|
14.9
|
|
|
The factors affecting the assessment of impairments include both general financial market conditions and factors specific to a particular company. We recorded impairment charges of
$1.8 million
related to other-than-temporary impairments of marketable equity securities during the
nine months ended
October 1, 2016
due to prolonged losses incurred on each of the investments.
Cost Method Investments
Our cost method investments totaled
$7.0 million
and
$6.9 million
at
October 1, 2016
and
December 31, 2015
, respectively, and are included in
Other non-current assets
.
Equity Method Investments
Our equity method investments totaled
$4.9 million
and
$45.5 million
at
October 1, 2016
and
December 31, 2015
, respectively, and are included in
Other non-current assets
.
Due to significant and prolonged losses incurred on one of our equity method investments, we recorded a
$22.3 million
impairment in Other expense, net, during the
nine months ended
October 1, 2016
. In addition, during the
nine months ended
October 1, 2016
, one of our equity method investments became publicly traded. As a result, we transferred the
$15.5 million
investment to available for sale and recorded an
$8.7 million
unrealized gain, net of tax, in Other Comprehensive Income ("OCI"), as reflected in the available for sale securities table above.
We recorded a net gain of
$0.1 million
and a net
loss
of
$4.1 million
during the
three months ended
October 1, 2016
and
September 26, 2015
, respectively, and a net loss of
$3.8 million
and
$7.7 million
during the
nine months ended
October 1, 2016
, and
September 26, 2015
, respectively, for our proportionate share of the equity method investment earnings or losses. The gains and losses were recorded in Other expense, net.
NOTE 8 –
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We enter into certain derivative financial instruments, when available on a cost-effective basis, to mitigate our risk associated with changes in interest rates and foreign currency exchange rates as follows:
Interest rate risk management -
We are exposed to the impact of interest rate changes through our cash investments and borrowings. We utilize a variety of strategies to manage the impact of changes in interest rates including using a mix of debt maturities along with both fixed-rate and variable-rate debt. In addition, we may enter into treasury-lock agreements and interest rate swap agreements on certain investing and borrowing transactions to manage our exposure to interest rate changes and our overall cost of borrowing.
Foreign currency exchange risk management -
We conduct business in several major currencies other than the U.S. dollar and are subject to risks associated with changing foreign exchange rates. Our objective is to reduce cash flow volatility associated with foreign exchange rate changes on a consolidated basis to allow management to focus its attention on business operations. Accordingly, we enter into various contracts that change in value as foreign exchange rates change to protect the value of existing foreign currency assets and liabilities, commitments, and anticipated foreign currency sales and expenses.
21
Perrigo Company plc
- Item 1
Note 8
All derivative instruments are managed on a consolidated basis to efficiently net exposures and thus take advantage of any natural offsets. Gains and losses related to the derivative instruments are expected to be offset largely by gains and losses on the original underlying asset or liability. We do not use derivative financial instruments for speculative purposes.
All of our designated derivatives were classified as cash flow hedges as of
October 1, 2016
and
December 31, 2015
. Designated derivatives meet hedge accounting criteria, which means the fair value of the hedge is recorded in shareholders’ equity as a component of OCI, net of tax. The deferred gains and losses are recognized in income in the period in which the hedged item affects earnings. Any ineffective portion of the change in fair value of the derivative is immediately recognized in earnings. All of our designated derivatives are assessed for hedge effectiveness quarterly.
We also have economic non-designated derivatives that do not meet hedge accounting criteria. These derivative instruments are adjusted to current market value at the end of each period through earnings. Gains or losses on these instruments are offset substantially by the remeasurement adjustment on the hedged item.
Interest Rate Swaps and Treasury Locks
Interest rate swap agreements are contracts to exchange floating rate for fixed rate payments (or vice versa) over the life of the agreement without the exchange of the underlying notional amounts. The notional amounts of the interest rate swap agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the interest rate swap agreements is recognized as an adjustment to interest expense.
During the
six months ended
December 31, 2015
, we entered into a forward interest rate swap to hedge against changes in the benchmark interest rate between the date the interest rate swap was entered into and the date of expected future debt issuance. The interest rate swap was designated as a cash flow hedge and had a notional amount totaling
$200.0 million
. The interest rate swap was settled upon the issuance of an aggregate
$1.2 billion
principal amount of senior notes on March 7, 2016 for a cumulative after-tax
loss
of
$7.0 million
in OCI during the
nine months ended
October 1, 2016
.
In connection with the Omega acquisition, we assumed a
$20.0 million
private placement note. We also assumed an interest rate swap agreement with a notional amount totaling
$20.0 million
that was in place to hedge the cross currency exchange differences between the U.S. dollar and the euro on the above-mentioned debt. On May 29, 2015, we repaid the loan and the interest rate swap. We also assumed
€500.0 million
(
$544.5 million
) of debt under Omega's revolving credit facility, as well as an interest rate swap agreement with a notional amount of
€135.0 million
(
$147.0 million
) that was in place to hedge the change in the floating rate on that credit facility. On April 8, 2015, we repaid the loan and terminated the interest rate swap. Because both interest rate swaps mentioned above were recorded at fair market value on the date of termination, no gain or loss was recorded. For more information on the acquired debt and termination, see
Note 10
.
During the
nine months ended
September 26, 2015
, we repaid a
$300.0 million
term loan with floating interest rates priced off the LIBOR yield curve, see
Note 10
. As a result of the term loan repayment on June 25, 2015, the forward interest rate swap agreements with notional amounts totaling
$240.0 million
that were in place to hedge the change in the LIBOR rate were terminated as well. We recorded a loss of
$3.6 million
in Other expense, net, during the
nine months ended
September 26, 2015
for the amount remaining in Accumulated Other Comprehensive Income ("AOCI") when the hedges were terminated.
Foreign Currency Derivatives
We enter into foreign currency forward contracts, both designated and non-designated, in order to manage the impact of foreign exchange fluctuations on expected future purchases and related payables denominated in a foreign currency, as well as to hedge the impact of foreign exchange fluctuations on expected future sales and related receivables denominated in a foreign currency. Both types of forward contracts have a maximum maturity date of
15
months. The total notional amount for these contracts was
$482.5 million
and
$755.5 million
as of
October 1, 2016
and
December 31, 2015
, respectively.
22
Perrigo Company plc
- Item 1
Note 8
In order to economically hedge the foreign currency exposure associated with the planned payment of the euro-denominated purchase price of Omega, we entered into non-designated forward contracts that matured during the
three months ended
March 28, 2015. We recorded losses of
$259.8 million
during the
nine months ended
September 26, 2015
related to the settlement of the forward contracts in Other expense, net. The losses on the derivatives due to changes in the euro-to-U.S. dollar exchange rates were economically offset at closing in the final settlement of the euro-denominated Omega purchase price. In June 2015, in order to economically hedge the foreign currency exposure associated with the planned payment of the euro-denominated GSK Products acquisition discussed in
Note 2
, we entered into a non-designated option contract to protect against a strengthening of the euro relative to the U.S. dollar. We recorded losses of
$1.9 million
for the change in fair value of the option contract during the
nine months ended
September 26, 2015
in Other expense, net. Because these derivatives were economically hedging future acquisitions, the cash outflows associated with their settlement are shown as investing activity on the Consolidated Statements of Cash Flows.
Effects of Derivatives on the Financial Statements
The below tables indicate the effects of all derivative instruments on the Condensed Consolidated Financial Statements. All amounts exclude income tax effects and are presented in millions.
The balance sheet location and gross fair value of our outstanding derivative instruments were as follows:
|
Asset Derivatives
|
|||||||||
|
Balance Sheet Location
|
Fair Value
|
||||||||
|
|
October 1,
2016 |
December 31, 2015
|
|||||||
|
Designated derivatives:
|
|||||||||
|
Foreign currency forward contracts
|
Other current assets
|
$
|
3.8
|
|
$
|
3.8
|
|
||
|
Total designated derivatives
|
$
|
3.8
|
|
$
|
3.8
|
|
|||
|
Non-designated derivatives:
|
|||||||||
|
Foreign currency forward contracts
|
Other current assets
|
$
|
1.4
|
|
$
|
1.0
|
|
||
|
Total non-designated derivatives
|
$
|
1.4
|
|
$
|
1.0
|
|
|||
|
Liability Derivatives
|
|||||||||
|
Balance Sheet Location
|
Fair Value
|
||||||||
|
|
October 1,
2016 |
December 31, 2015
|
|||||||
|
Designated derivatives:
|
|||||||||
|
Foreign currency forward contracts
|
Accrued liabilities
|
$
|
0.3
|
|
$
|
2.0
|
|
||
|
Interest rate swap agreements
|
Other non-current liabilities
|
—
|
|
0.3
|
|
||||
|
Total designated derivatives
|
$
|
0.3
|
|
$
|
2.3
|
|
|||
|
Non-designated derivatives:
|
|||||||||
|
Foreign currency forward contracts
|
Accrued liabilities
|
$
|
0.5
|
|
$
|
1.9
|
|
||
|
Total non-designated derivatives
|
$
|
0.5
|
|
$
|
1.9
|
|
|||
The gains (losses) recorded in OCI for the effective portion of our designated cash flow hedges were as follows:
|
Amount of Gain/(Loss) Recorded in OCI
(Effective Portion) |
||||||||||||||||
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
Designated Cash Flow Hedges
|
October 1,
2016 |
September 26,
2015 |
October 1,
2016 |
September 26,
2015 |
||||||||||||
|
Interest rate swap agreements
|
$
|
—
|
|
$
|
—
|
|
$
|
(9.0
|
)
|
$
|
(12.0
|
)
|
||||
|
Foreign currency forward contracts
|
3.4
|
|
(0.5
|
)
|
4.7
|
|
(1.6
|
)
|
||||||||
|
Total
|
$
|
3.4
|
|
$
|
(0.5
|
)
|
$
|
(4.3
|
)
|
$
|
(13.6
|
)
|
||||
23
Perrigo Company plc
- Item 1
Note 8
The gains (losses) reclassified from AOCI into earnings for the effective portion of our designated cash flow hedges were as follows:
|
Amount of Gain/(Loss) Reclassified from AOCI to Income
(Effective Portion) |
||||||||||||||||||
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||
|
Designated Cash Flow Hedges
|
Income Statement Location
|
October 1,
2016 |
September 26,
2015 |
October 1,
2016 |
September 26,
2015 |
|||||||||||||
|
Treasury locks
|
Interest expense, net
|
$
|
—
|
|
$
|
—
|
|
$
|
(0.1
|
)
|
$
|
(0.1
|
)
|
|||||
|
Interest rate swap agreements
|
Interest expense, net
|
(0.6
|
)
|
(0.4
|
)
|
(1.7
|
)
|
(18.6
|
)
|
|||||||||
|
Foreign currency forward contracts
|
Net sales
|
0.1
|
|
(0.1
|
)
|
1.0
|
|
1.8
|
|
|||||||||
|
Cost of sales
|
0.9
|
|
0.2
|
|
1.8
|
|
(4.4
|
)
|
||||||||||
|
Interest expense, net
|
(0.4
|
)
|
—
|
|
(1.3
|
)
|
—
|
|
||||||||||
|
Other expense, net
|
(1.4
|
)
|
(0.1
|
)
|
—
|
|
(0.6
|
)
|
||||||||||
|
Total
|
$
|
(1.4
|
)
|
$
|
(0.4
|
)
|
$
|
(0.3
|
)
|
$
|
(21.9
|
)
|
||||||
The gains (losses) recognized against earnings for the ineffective portion of our designated cash flow hedges were as follows:
|
Amount of Gain/(Loss) Recognized in Income
(Ineffective Portion) |
||||||||||||||||||
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||
|
Designated Cash Flow Hedges
|
Income Statement
Location
|
October 1,
2016 |
September 26,
2015 |
October 1,
2016 |
September 26,
2015 |
|||||||||||||
|
Interest rate swap agreements
|
Other expense, net
|
$
|
—
|
|
$
|
—
|
|
$
|
(0.1
|
)
|
$
|
—
|
|
|||||
|
Foreign currency forward contracts
|
Net sales
|
—
|
|
—
|
|
0.1
|
|
(0.3
|
)
|
|||||||||
|
Cost of sales
|
—
|
|
—
|
|
—
|
|
0.1
|
|
||||||||||
|
Other expense, net
|
—
|
|
—
|
|
0.6
|
|
—
|
|
||||||||||
|
Total
|
$
|
—
|
|
$
|
—
|
|
$
|
0.6
|
|
$
|
(0.2
|
)
|
||||||
The effects of our non-designated derivatives on the Condensed Consolidated Statements of Operations were as follows:
|
Amount of Gain/(Loss) Recognized in Income
|
||||||||||||||||||
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||
|
Non-Designated Derivatives
|
Income Statement Location
|
October 1,
2016 |
September 26,
2015 |
October 1,
2016 |
September 26,
2015 |
|||||||||||||
|
Foreign currency forward contracts
|
Other expense, net
|
$
|
(0.2
|
)
|
$
|
(8.9
|
)
|
$
|
(8.7
|
)
|
$
|
(259.4
|
)
|
|||||
|
Interest expense, net
|
(1.0
|
)
|
0.1
|
|
(1.5
|
)
|
(3.4
|
)
|
||||||||||
|
Total
|
$
|
(1.2
|
)
|
$
|
(8.8
|
)
|
$
|
(10.2
|
)
|
$
|
(262.8
|
)
|
||||||
NOTE 9 –
ASSETS HELD FOR SALE
During the
six months ended
December 31, 2015
, management committed to a plan to sell our U.S. VMS and India Active Pharmaceutical Ingredients ("API") businesses. As a result, the net assets attributable to both businesses were classified as held-for-sale beginning at December 31, 2015. As described in
Note 2
, we completed the sale of our U.S. VMS business to IVC on August 5, 2016. In addition, during the
three months ended
October 1, 2016
, management committed to a plan to sell certain fixed assets associated with our Animal Health pet treats plant. Such assets were classified as held-for-sale beginning at October 1, 2016.
When a group of assets is classified as held-for-sale, the book value is evaluated and adjusted to the lower of its carrying amount or fair value less the cost to sell. At December 31, 2015, we determined that the carrying value of the India API business exceeded its fair value less cost to sell, resulting in an impairment charge of
24
Perrigo Company plc
- Item 1
Note 9
$29.0 million
. We recorded additional impairment charges totaling
$10.8 million
during the
nine months ended
October 1, 2016
. The API business is reported primarily in our Other segment.
At October 1, 2016, we determined that the carrying value of the fixed assets associated with our Animal Health pet treats plant exceeded the fair value less the cost to sell, resulting in an impairment charge of
$3.4 million
. The assets associated with our Animal Health pet treats plant are reported in our CHC segment.
The assets held-for-sale were reported within
Prepaid expenses and other current assets
and liabilities held-for-sale were reported in
Accrued liabilities
. The amounts consisted of the following (in millions):
|
October 1,
2016 |
December 31,
2015 |
||||||||||||||
|
CHC
|
Other
|
CHC
|
Other
|
||||||||||||
|
Assets held for sale
|
|||||||||||||||
|
Current assets
|
$
|
—
|
|
$
|
7.3
|
|
$
|
55.1
|
|
$
|
13.6
|
|
|||
|
Goodwill
|
—
|
|
2.8
|
|
13.0
|
|
14.5
|
|
|||||||
|
Property, plant and equipment
|
13.3
|
|
34.0
|
|
18.8
|
|
37.4
|
|
|||||||
|
Other assets
|
—
|
|
3.2
|
|
—
|
|
3.2
|
|
|||||||
|
Less: impairment reserves
|
(3.4
|
)
|
(39.8
|
)
|
—
|
|
(29.0
|
)
|
|||||||
|
Total assets held for sale
|
$
|
9.9
|
|
$
|
7.5
|
|
$
|
86.9
|
|
$
|
39.7
|
|
|||
|
Liabilities held for sale
|
|||||||||||||||
|
Current liabilities
|
$
|
0.3
|
|
$
|
0.9
|
|
$
|
30.5
|
|
$
|
0.5
|
|
|||
|
Other liabilities
|
—
|
|
2.1
|
|
—
|
|
1.7
|
|
|||||||
|
Total liabilities held for sale
|
$
|
0.3
|
|
$
|
3.0
|
|
$
|
30.5
|
|
$
|
2.2
|
|
|||
25
Perrigo Company plc
- Item 1
Note 10
NOTE 10 –
INDEBTEDNESS
Total borrowings outstanding are summarized as follows (in millions):
|
October 1,
2016 |
December 31,
2015 |
||||||||||
|
Revolving credit agreements
|
|||||||||||
|
2015 Revolver
|
$
|
—
|
|
$
|
380.0
|
|
|||||
|
2014 Revolver
|
—
|
|
300.0
|
|
|||||||
|
Total revolving credit agreements
|
—
|
|
680.0
|
|
|||||||
|
Term loans
|
|||||||||||
|
*
|
2014 Term loan due December 5, 2019
|
463.8
|
|
488.8
|
|
||||||
|
Notes and Bonds
|
|||||||||||
|
Coupon
|
Due
|
||||||||||
|
1.300%
|
November 8, 2016
|
(2)
|
—
|
|
500.0
|
|
|||||
|
*
|
4.500%
|
May 23, 2017
|
(3)
|
202.4
|
|
195.5
|
|
||||
|
*
|
5.125%
|
December 12, 2017
|
(3)
|
337.3
|
|
325.8
|
|
||||
|
2.300%
|
November 8, 2018
|
(2)
|
600.0
|
|
600.0
|
|
|||||
|
*
|
5.000%
|
May 23, 2019
|
(3)
|
134.9
|
|
130.3
|
|
||||
|
3.500%
|
March 15, 2021
|
(4)
|
500.0
|
|
—
|
|
|||||
|
3.500%
|
December 15, 2021
|
(1)
|
500.0
|
|
500.0
|
|
|||||
|
*
|
5.105%
|
July 19, 2023
|
(3)
|
151.8
|
|
146.7
|
|
||||
|
4.000%
|
November 15, 2023
|
(2)
|
800.0
|
|
800.0
|
|
|||||
|
3.900%
|
December 15, 2024
|
(1)
|
700.0
|
|
700.0
|
|
|||||
|
4.375%
|
March 15, 2026
|
(4)
|
700.0
|
|
—
|
|
|||||
|
5.300%
|
November 15, 2043
|
(2)
|
400.0
|
|
400.0
|
|
|||||
|
4.900%
|
December 15, 2044
|
(1)
|
400.0
|
|
400.0
|
|
|||||
|
Total notes and bonds
|
5,426.4
|
|
4,698.3
|
|
|||||||
|
Other financing
|
4.1
|
|
86.0
|
|
|||||||
|
Unamortized premium (discount), net
|
43.3
|
|
73.4
|
|
|||||||
|
Deferred financing fees
|
(34.6
|
)
|
(36.6
|
)
|
|||||||
|
Total borrowings outstanding
|
5,903.0
|
|
5,989.9
|
|
|||||||
|
Current indebtedness
|
(265.0
|
)
|
(1,018.3
|
)
|
|||||||
|
Total long-term debt less current portion
|
$
|
5,638.0
|
|
$
|
4,971.6
|
|
|||||
|
(1)
|
Discussed below collectively as the "2014 Notes."
|
|
(2)
|
Discussed below collectively as the "2013 Notes."
|
|
(3)
|
Debt assumed from Omega.
|
|
(4)
|
Discussed below collectively as the "2016 Notes."
|
|
*
|
Debt denominated in euros subject to fluctuations in the euro-to-U.S. dollar exchange rate.
|
We were in compliance with all covenants under our debt agreements as of
October 1, 2016
.
Revolving Credit Agreements
On
December 9, 2015
, our 100% owned finance subsidiary, Perrigo Finance Unlimited Company (formerly Perrigo Finance plc) ("Perrigo Finance"), entered into a
$750.0 million
revolving credit agreement (the "2015 Revolver"). On March 15, 2016, we used the proceeds of the long-term debt issuance described below under "2016 Notes" to repay the
$750.0 million
then outstanding under the 2015 Revolver and terminated the facility.
On
March 30, 2015
, we assumed a revolving credit facility with
€500.0 million
(
$544.5 million
) outstanding from Omega. On
April 8, 2015
, the
€500.0 million
(
$539.1 million
) outstanding under the assumed revolving credit facility was repaid and the facility was terminated.
26
Perrigo Company plc
- Item 1
Note 10
On
December 5, 2014
, Perrigo Finance entered into a
$600.0 million
revolving credit agreement, which we increased to
$1.0 billion
on March 30, 2015 (the "2014 Revolver"). On March 15, 2016, we used the proceeds of the long-term debt issuance described below under "2016 Notes" to repay the
$435.0 million
then outstanding under the 2014 Revolver. There were no borrowings outstanding under the 2014 Revolver as of
October 1, 2016
.
Term Loans
On
December 5, 2014
, Perrigo Finance entered into a term loan agreement consisting of a
€500.0 million
(
$614.3 million
) tranche, with the ability to draw an additional
€300.0 million
(
$368.6 million
) tranche, maturing December 5, 2019, and we entered into a
$300.0 million
term loan tranche maturing December 18, 2015, which we repaid in full on June 25, 2015. During the
nine months ended
October 1, 2016
, we made
$41.9 million
in scheduled principal payments on the euro-denominated term loan.
Notes and Bonds
2016 Notes
On
March 7, 2016
, Perrigo Finance issued
$500.0 million
in aggregate principal amount of
3.500%
senior notes due 2021 and
$700.0 million
in aggregate principal amount of
4.375%
senior notes due 2026 (together, the "2016 Notes") and received net proceeds of
$1.2 billion
after fees and market discount. Interest on the 2016 Notes is payable semiannually in arrears in March and September of each year, beginning in September 2016. The 2016 Notes are governed by a base indenture and a second supplemental indenture (collectively, the "2016 Indenture"). The 2016 Notes are fully and unconditionally guaranteed on a senior basis by Perrigo, and no other subsidiary of Perrigo guarantees the 2016 Notes. The proceeds were used to repay amounts borrowed under the 2015 Revolver and the 2014 Revolver, as mentioned above. There are no restrictions under the 2016 Notes on our ability to obtain funds from our subsidiaries. Perrigo Finance may redeem the 2016 Notes in whole or in part at any time for cash at the make-whole redemption prices described in the 2016 Indenture.
Notes and Bonds Assumed from Omega
In connection with the Omega acquisition, on
March 30, 2015
, we assumed:
|
•
|
$20.0 million
in aggregate principal amount of
6.190%
senior notes due
2016
, which was repaid on May 29, 2015 in full;
|
|
•
|
€135.0 million
(
$147.0 million
) in aggregate principal amount of
5.1045%
senior notes due
2023
(the "2023 Notes");
|
|
•
|
€300.0 million
(
$326.7 million
) in aggregate principal amount of
5.125%
retail bonds due
2017
;
€180.0 million
(
$196.0 million
) in aggregate principal amount of
4.500%
retail bonds due
2017
; and
€120.0 million
(
$130.7 million
) in aggregate principal amount of
5.000%
retail bonds due
2019
(collectively, the "Retail Bonds").
|
The fair value of the 2023 Notes and Retail Bonds
exceeded par value by
€93.6 million
(
$101.9 million
) on the date of the Omega acquisition. As a result, a fair value adjustment was recorded as part of the carrying value of the underlying debt and will be amortized as a reduction of interest expense over the remaining terms of the respective debt instruments. The adjustment does not affect cash interest payments.
2014 Notes
On
December 2, 2014
, Perrigo Finance issued
$500.0 million
in aggregate principal amount of
3.500%
senior notes due
2021
(the "2021 Notes”),
$700.0 million
in aggregate principal amount of
3.900%
senior notes due
2024
(the “2024 Notes”), and
$400.0 million
in aggregate principal amount of
4.900%
senior notes due
2044
(the “2044 Notes” and, together with the 2021 Notes and the 2024 Notes, the “2014 Notes”) and received net proceeds of
$1.6 billion
after fees and market discount. Interest on the 2014 Notes is payable semiannually in arrears in June and December of each year, beginning in June 2015. The 2014 Notes are governed by a base indenture and a first supplemental indenture (collectively, the "2014 Indenture"). The 2014 Notes are fully and unconditionally guaranteed on a senior unsecured basis by Perrigo, and no other subsidiary of Perrigo guarantees the 2014 Notes.
27
Perrigo Company plc
- Item 1
Note 10
There are no restrictions under the 2014 Notes on our ability to obtain funds from our subsidiaries. Perrigo Finance may redeem the 2014 Notes in whole or in part at any time for cash at the make-whole redemption prices described in the 2014 Indenture.
2013 Notes
On November 8, 2013, Perrigo Company issued
$500.0 million
aggregate principal amount of its 1.300% senior notes due 2016 (the "1.300% 2016 Notes"),
$600.0 million
aggregate principal amount of its 2.300% senior notes due 2018 (the "2018 Notes"),
$800.0 million
aggregate principal amount of its 4.000% senior notes due 2023 (the "4.000% 2023 Notes") and
$400.0 million
aggregate principal amount of its 5.300% senior notes due 2043 (the "2043 Notes" and, together with the 1.300% 2016 Notes, the 2018 Notes and the 4.000% 2023 Notes, the "2013 Notes") in a private placement with registration rights. We received net proceeds of
$2.3 billion
from the issuance of the 2013 Notes after fees and market discount. On September 29, 2016, we repaid all
$500.0 million
of the 1.300% 2016 Notes outstanding.
Interest on the 2013 Notes is payable semiannually in arrears in May and November of each year, beginning in May 2014. The 2013 Notes are governed by a base indenture and a first supplemental indenture (collectively, the "2013 Indenture"). The 2013 Notes are our unsecured and unsubordinated obligations, ranking equally in right of payment to all of our existing and future unsecured and unsubordinated indebtedness. The 2013 Notes are not entitled to mandatory redemption or sinking fund payments. We may redeem the 2013 Notes in whole or in part at any time for cash at the make-whole redemption prices described in the 2013 Indenture. The 2013 Notes were guaranteed on an unsubordinated, unsecured basis by the same entities that guaranteed our then-outstanding credit agreement until November 21, 2014, at which time the 2013 Indenture was amended to remove all guarantors.
Other Financing
Overdraft Facilities
On
March 30, 2015
, we assumed and repaid certain overdraft facilities totaling
€51.4 million
(
$56.0 million
) with the Omega acquisition. Our BCH segment uses overdraft facilities to increase the efficiency of its cash utilization and meet its short-term liquidity needs. We repaid the balance outstanding under the overdraft facilities during the
nine months ended
October 1, 2016
, but retain the ability to use the facilities in our day-to-day cash operations. The balance outstanding under the facilities was
$82.9 million
at
December 31, 2015
and is shown in the above table under "Other Financing".
28
Perrigo Company plc
- Item 1
Note 11
NOTE 11 –
EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY
Earnings per Share
A reconciliation of the numerators and denominators used in the basic and diluted earnings per share ("EPS") calculation is as follows (in millions):
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||
|
|
October 1,
2016 |
September 26,
2015 |
October 1,
2016 |
September 26,
2015 |
|||||||||||
|
Numerator:
|
|||||||||||||||
|
Net income (loss)
|
$
|
(1,255.2
|
)
|
$
|
112.6
|
|
$
|
(1,395.4
|
)
|
$
|
74.2
|
|
|||
|
Denominator:
|
|||||||||||||||
|
Weighted average shares outstanding for basic EPS
|
143.3
|
|
146.3
|
|
143.2
|
|
144.4
|
|
|||||||
|
Dilutive effect of share-based awards*
|
—
|
|
0.6
|
|
—
|
|
0.6
|
|
|||||||
|
Weighted average shares outstanding for diluted EPS
|
143.3
|
|
146.9
|
|
143.2
|
|
145.0
|
|
|||||||
|
Anti-dilutive share-based awards excluded from computation of diluted EPS*
|
—
|
|
0.1
|
|
—
|
|
—
|
|
|||||||
* In the period of a net loss, diluted shares equal basic shares.
Shareholders' Equity
Shares
We issued shares related to the exercise and vesting of share-based compensation as follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||
|
October 1,
2016 |
September 26,
2015 |
October 1,
2016 |
September 26,
2015 |
|||||||
|
185,000
|
|
154,000
|
|
283,000
|
|
246,000
|
|
|||
Share Repurchases
On October 22, 2015, the Board of Directors approved a share repurchase plan of up to
$2.0 billion
, of which
$1.5 billion
is still available to be repurchased through December 31, 2018. We did not repurchase any shares under the share repurchase plan during the
nine months ended
October 1, 2016
.
NOTE 12 –
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in our AOCI balances, net of tax were as follows (in millions):
|
Foreign currency translation adjustments
|
Fair value of derivative financial instruments, net of tax
|
Fair value of investment securities, net of tax
|
Post-retirement and pension liability adjustments, net of tax
|
Total AOCI
|
|||||||||||||||
|
Balance at December 31, 2015
|
$
|
(4.4
|
)
|
$
|
(14.2
|
)
|
$
|
6.3
|
|
$
|
(3.2
|
)
|
$
|
(15.5
|
)
|
||||
|
OCI before reclassifications
|
71.8
|
|
(3.7
|
)
|
17.1
|
|
0.3
|
|
85.5
|
|
|||||||||
|
Amounts reclassified from AOCI
|
—
|
|
0.2
|
|
1.3
|
|
—
|
|
1.5
|
|
|||||||||
|
Other comprehensive income (loss)
|
71.8
|
|
(3.5
|
)
|
18.4
|
|
0.3
|
|
87.0
|
|
|||||||||
|
Balance at October 1, 2016
|
$
|
67.4
|
|
$
|
(17.7
|
)
|
$
|
24.7
|
|
$
|
(2.9
|
)
|
$
|
71.5
|
|
||||
29
Perrigo Company plc
- Item 1
Note 13
NOTE 13 –
INCOME TAXES
The effective tax rate for the
three months ended
October 1, 2016
was
20.1%
on a net loss compared to
14.8%
on net income for the
three months ended
September 26, 2015
. The effective tax rate for the
nine months ended
October 1, 2016
was
21.6%
on a net loss reported in the period compared to
60.3%
on net income for the
nine months ended
September 26, 2015
. For the three and nine months ended
October 1, 2016
, we have estimated income taxes using the annual effective tax rate method.
Income taxes recorded through July 2, 2016 were estimated using the discrete method. For the
three and nine months ended
ended
October 1, 2016
, we had significant changes to our estimates related to additional asset impairments recognized in the third quarter and therefore determined that estimating income taxes using the annual effective tax rate method was the more appropriate method for the period ending
October 1, 2016
.
Our tax rate is subject to adjustment over the balance of the fiscal year due to, among other things: income tax rate changes by governments; the jurisdictions in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various tax returns; adjustments based on differing interpretations of the applicable transfer pricing standards; changes in available tax credits, grants and other incentives; changes in stock-based compensation expense; changes in tax laws or the interpretation of such tax laws (for example, proposals for fundamental U.S. international tax reform); changes in U.S. GAAP; expiration of or the inability to renew tax rulings or tax holiday incentives; and the repatriation of earnings with respect to which we have not previously provided for taxes.
Israel passed legislation in January 2016, effective immediately, reducing the tax rate from
26.5%
to
25%
. The impact on our effective tax rate was minimal.
The United Kingdom passed legislation in September 2016, reducing the tax rate effective April 1, 2020, from
18%
to
17%
. We expect the impact on our effective tax rate to be minimal.
The total liability for uncertain tax positions was
$368.4 million
and
$334.7 million
as of
October 1, 2016
and
December 31, 2015
, respectively, before considering the federal tax benefit of certain state and local items.
We recognize interest and penalties related to uncertain tax positions as a component of income tax expense. The total amount accrued for interest and penalties in the liability for uncertain tax positions was
$56.4 million
and
$52.1 million
as of
October 1, 2016
and
December 31, 2015
, respectively.
We file income tax returns in numerous jurisdictions and are therefore subject to audits by tax authorities. Our primary income tax jurisdictions are Ireland, the U.S., Israel, Belgium, France, and the U.K.
Although we believe that the tax estimates are reasonable and that we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audit and any related litigation could be materially different from estimates or from historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.
The IRS audit of our fiscal years ended June 27, 2009 and June 26, 2010 had previously concluded with the issuance of a statutory notice of deficiency on August 27, 2014. While we had previously agreed on certain adjustments and made associated payments of
$8.0 million
(inclusive of interest) in November 2014, the statutory notice of deficiency asserted various additional adjustments, including transfer pricing adjustments. The statutory notice of deficiency's adjustments for fiscal years 2009 and 2010 asserted an incremental tax obligation of approximately
$68.9 million
, inclusive of interest and penalties. We disagree with the IRS’s positions asserted in the statutory notice of deficiency. To contest the IRS's adjustments, in January 2015 we paid the incremental tax obligation (a prerequisite to contesting the proposed adjustments in U.S. district court), and in June 2015, we filed an administrative request for a refund with the IRS. The payment was recorded during the three months ended March 28, 2015 as a deferred charge on the balance sheet given our anticipated action to recover this amount. The IRS subsequently denied our request for a refund. We anticipate filing a complaint in U.S. district court claiming a
30
Perrigo Company plc
- Item 1
Note 13
refund of the paid amounts prior to August 2017. An unfavorable resolution of this matter could have a material impact on our consolidated financial statements in future periods.
We have ongoing audits in multiple jurisdictions the resolution of which remains uncertain. These jurisdictions include, but are not limited to, the United States and Belgium. The IRS is auditing our fiscal years ended June 25, 2011 and June 30, 2012, and may make adjustments consistent with the adjustments made in the statutory notice of deficiency for fiscal years 2009 and 2010. In February 2016, the Belgium Tax Authority notified us that all Belgium locations will be audited for the years ended December 31, 2013 and December 31, 2014. At this time, we cannot predict the outcome of any audit or related litigation.
NOTE 14 –
COMMITMENTS AND CONTINGENCIES
In view of the inherent difficulties of predicting the outcome of various types of legal proceedings, we cannot determine the ultimate resolution of the matters described below. We establish reserves for litigation and regulatory matters when losses associated with the claims become probable and the amounts can be reasonably estimated. The actual costs of resolving legal matters may be substantially higher or lower than the amounts reserved for those matters. For matters where the likelihood or extent of a loss is not probable or cannot be reasonably be estimated as of
October 1, 2016
, we have not recorded a loss reserve. If certain of these matters are determined against the Company, there could be a material adverse effect on our financial condition, results of operations, or cash flows. We currently believe we have valid defenses to the claims in these lawsuits and intend to defend these lawsuits vigorously regardless of whether or not we have a loss reserve. Other than what is disclosed below, we do not expect the outcome of the litigation matters to which we are currently subject to, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations, or cash flows.
Securities Litigation
On May 18, 2016, a shareholder filed a securities case against the Company and our former CEO, Joseph Papa, in the District of New Jersey (
Roofers’ Pension Fund v. Papa, et al.)
. The plaintiff purports to represent a class of shareholders for the period from April 21, 2015 through May 11, 2016, inclusive. The complaint alleges violations of Securities Exchange Act sections 10(b) (and Rule 10b‑5) and 14(e) against both defendants and 20(a) control person liability against Mr. Papa. In general, the allegations concern the actions taken by the Company and the former executive to defend against the hostile takeover bid by Mylan in the period from April 21, 2015 through November 13, 2015. The plaintiff also alleges that we provided inadequate disclosure concerning alleged integration problems related to the Omega acquisition in the period from April 21, 2015 through May 11, 2016. The case is in an early stage. Four different plaintiff groups have sought appointment as lead plaintiff/lead counsel. The court will decide who will represent the purported class. Once the court has chosen a lead plaintiff, the plaintiff will likely file an amended complaint and the defendants will then have an opportunity to make a motion to dismiss the case.
On July 19, 2016, a shareholder filed a securities class action against the Company and our former CEO, Joseph Papa, in the District of New Jersey. (
Wilson v. Papa, et al
.) The plaintiff purports to represent a class of persons who sold put options on the Company shares between April 21, 2015 and May 11, 2016. In general, the allegations and the claims are the same as those made in the
Roofers' Pension Fund
case described above. Subsequently, this shareholder filed papers in the
Roofers' Pension Fund
case as one of four candidates seeking to be named lead plaintiff or co-lead plaintiff in that case. The
Wilson
plaintiff also filed a motion to have the
Wilson
case consolidated with the
Roofers' Pension Fund
case. The court has not yet acted on the motion to consolidate or the motion for appointment as lead plaintiff.
On May 22, 2016, shareholders filed a securities class action against the Company and five individual defendants: Mr. Papa, our former Executive Vice President and General Manager of the BCH segment Marc Coucke, our Chief Executive Officer John Hendrickson, and our Board members Gary Kunkle, Jr. and Laurie Brlas alleging violations of Israeli law in the District Court of Tel Aviv-Jaffa (
Schwieger et al. v. Perrigo Company plc, et al.).
On June 15, 2016, Perrigo filed a motion to stay the case pending the outcome of the securities class action pending in the New Jersey federal court. The plaintiffs did not oppose the motion. The Israeli court granted the motion on the same day, and the action is stayed.
31
Perrigo Company plc
- Item 1
Note 14
Eltroxin
During October and November 2011, nine applications to certify a class action lawsuit were filed in various courts in Israel related to Eltroxin, a prescription thyroid medication manufactured by a third party and distributed in Israel by our subsidiary, Perrigo Israel Agencies Ltd. The respondents included our subsidiaries, Perrigo Israel Pharmaceuticals Ltd. and/or Perrigo Israel Agencies Ltd., the manufacturers of the product, and various healthcare providers who provide healthcare services as part of the compulsory healthcare system in Israel.
One of the applications was dismissed and the remaining eight applications were consolidated into one application. The applications arose from the 2011 launch of a reformulated version of Eltroxin in Israel. The consolidated application generally alleges that the respondents: (a) failed to timely inform patients, pharmacists and physicians about the change in the formulation; and (b) failed to inform physicians about the need to monitor patients taking the new formulation in order to confirm patients were receiving the appropriate dose of the drug. As a result, claimants allege they incurred the following damages: (a) purchases of product that otherwise would not have been made by patients had they been aware of the reformulation; (b) adverse events to some patients resulting from an imbalance of thyroid functions that could have been avoided; and (c) harm resulting from the patients' lack of informed consent prior to the use of the reformulation.
Several hearings on whether or not to certify the consolidated application took place in December 2013 and January 2014. On May 17, 2015, the District Court certified the motion against Perrigo Israel Agencies Ltd. and dismissed it against the remaining respondents, including Perrigo Israel Pharmaceuticals Ltd.
On June 16, 2015, Perrigo submitted a motion for permission to appeal the decision to certify to the Israeli Supreme Court together with a motion to stay the proceedings of the class action until the motion for permission to appeal is adjudicated. Perrigo has filed its statement of defense to the underlying proceedings and the underlying proceedings have been stayed pending a decision on the motion to appeal.
During a July 11, 2016 hearing on Perrigo’s motion to appeal the certification decision, the court noted that permission should be granted to Perrigo's appeal given issues with the scope of the District Court's decision. The court ultimately recommended the parties pursue mediation, noting that no decision on Perrigo's motion to appeal will be made pending the results of the mediation. The parties are now engaged in the mediation process. At this stage, we cannot reasonably predict the outcome or the liability, if any, associated with this claim.
Tysabri
®
Product Liability Lawsuits
Perrigo and collaborator Biogen are co-defendants in product liability lawsuits arising out of the occurrence of Progressive Multifocal Leukoencephalopathy, a serious brain infection, and serious adverse events, including deaths, which occurred in patients taking Tysabri
®
. Perrigo and Biogen will each be responsible for 50% of losses and expenses arising out of any Tysabri
®
product liability claims. During calendar year 2016, one case in the U.S. was settled and two others were dismissed with prejudice. While the remaining lawsuits will be vigorously defended, management cannot predict how these cases will be resolved. Adverse results in one or more of these lawsuits could result in substantial judgments against the Company.
NOTE 15 –
COLLABORATION AGREEMENTS AND OTHER CONTRACTUAL ARRANGEMENTS
In May 2015, we entered into a development agreement wherein we transferred the ownership rights to two pharmaceutical products to a clinical stage development company to fund and conduct development activities for the products. We do not expect to incur any expense related to the development of either product. If the products are approved by the FDA, we will execute a buy-back agreement to purchase each product for a multiple of the development costs incurred. Based on the initial development budget for each product, the estimated purchase price for both products is approximately
$78.0 million
. If development costs exceed the initial budgeted amounts, the purchase price will increase but will not exceed approximately
$105.0 million
. If the products are approved by the FDA and we purchase the products, we estimate the acquisitions will occur in 2019 and 2020.
32
Perrigo Company plc
- Item 1
Note 15
In June 2016, we added an additional product to the May 2015 development agreement that is subject to similar buy-back terms if the product is approved by the FDA. The estimated purchase price for this additional product, based on the initial development budget, is approximately
$42.0 million
. If development costs exceed the initial budgeted amounts, the purchase price will increase, but will not exceed approximately
$57.0 million
. If the product is approved by the FDA and we purchase the product, we estimate the acquisition will occur in 2020. There can be no assurance that any such products will be approved by the FDA on the anticipated schedule or at all.
NOTE 16 –
RESTRUCTURING CHARGES
We periodically take action to reduce redundant expenses and improve operating efficiencies, typically in connection with business acquisitions. The following reflects our restructuring activity (in millions):
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
October 1,
2016 |
September 26,
2015 |
October 1,
2016 |
September 26,
2015 |
||||||||||||
|
Beginning balance
|
$
|
12.2
|
|
$
|
1.7
|
|
$
|
20.7
|
|
$
|
3.2
|
|
|||
|
Additional charges
|
6.6
|
|
2.2
|
|
17.9
|
|
3.1
|
|
|||||||
|
Payments
|
(8.6
|
)
|
(1.9
|
)
|
(33.3
|
)
|
(4.5
|
)
|
|||||||
|
Non-cash adjustments
|
0.1
|
|
(0.7
|
)
|
5.0
|
|
(0.5
|
)
|
|||||||
|
Ending balance
|
$
|
10.3
|
|
$
|
1.3
|
|
$
|
10.3
|
|
$
|
1.3
|
|
|||
Restructuring activity includes severance, lease exit costs, and asset impairments. The charges incurred during the
three and nine months ended
October 1, 2016
were associated primarily with actions we took to streamline our organization as announced on October 22, 2015 and did not materially impact any one reportable segment. There were no other material restructuring programs in any of the periods presented. All charges are recorded in Restructuring expense. The remaining
$5.1 million
liability for employee severance benefits will be paid within the next year, while cash expenditures related to the remaining
$5.2 million
liability for lease exit costs will be incurred over the remaining terms of the applicable leases.
NOTE 17 –
SEGMENT INFORMATION
Our reporting segments are as follows:
|
•
|
CHC
is focused primarily on the global sale of OTC store brand products including cough, cold, allergy and sinus, analgesic, gastrointestinal, smoking cessation, infant formula and food, animal health, and diagnostic products.
|
|
•
|
BCH
develops, manufactures, markets and distributes many well-known European OTC brands in the natural health and vitamins, cough, cold and allergy, smoking cessation, personal care and derma-therapeutics, lifestyle, and anti-parasite categories.
|
|
•
|
Rx
develops, manufactures and markets a portfolio of generic and specialty pharmaceutical prescription drugs primarily for the U.S. and U.K. markets.
|
|
•
|
Specialty Sciences
is comprised primarily of royalties received from assets focused on the management of multiple sclerosis (Tysabri
®
).
|
We also have an
Other
reporting segment that consists of our API business, which does not meet the quantitative threshold required to be a separately reportable segment. Our segments reflect the way in which our chief operating decision maker reviews our operating results and allocates resources.
33
Perrigo Company plc
- Item 1
Note 17
The below tables show select financial measures by reporting segment (in millions):
|
Total Assets
|
October 1,
2016 |
December 31, 2015
|
||||||
|
CHC
|
$
|
3,873.8
|
|
$
|
4,007.8
|
|
||
|
BCH
|
4,460.2
|
|
6,324.0
|
|
||||
|
Rx
|
3,304.0
|
|
3,015.5
|
|
||||
|
Specialty Sciences
|
5,634.0
|
|
5,833.5
|
|
||||
|
Other
|
195.6
|
|
213.1
|
|
||||
|
Total
|
$
|
17,467.6
|
|
$
|
19,393.9
|
|
||
|
Three Months Ended
|
|||||||||||||||||||||||
|
October 1, 2016
|
September 26, 2015
|
||||||||||||||||||||||
|
Net Sales
|
Operating Income (Loss)
|
Intangible Asset Amortization
|
Net Sales
|
Operating Income (Loss)
|
Intangible Asset Amortization
|
||||||||||||||||||
|
CHC
|
$
|
669.1
|
|
$
|
100.1
|
|
$
|
19.2
|
|
$
|
675.2
|
|
$
|
117.3
|
|
$
|
19.4
|
|
|||||
|
BCH
|
304.0
|
|
(1,684.3
|
)
|
38.9
|
|
302.2
|
|
4.4
|
|
36.3
|
|
|||||||||||
|
Rx
|
267.4
|
|
77.9
|
|
30.7
|
|
260.3
|
|
91.0
|
|
18.6
|
|
|||||||||||
|
Specialty Sciences
|
93.4
|
|
23.3
|
|
72.8
|
|
84.5
|
|
9.0
|
|
72.8
|
|
|||||||||||
|
Other
|
21.0
|
|
(1.6
|
)
|
0.5
|
|
22.5
|
|
6.2
|
|
0.5
|
|
|||||||||||
|
Unallocated
|
—
|
|
(30.6
|
)
|
—
|
|
—
|
|
(39.3
|
)
|
—
|
|
|||||||||||
|
Total
|
$
|
1,354.9
|
|
$
|
(1,515.2
|
)
|
$
|
162.1
|
|
$
|
1,344.7
|
|
$
|
188.6
|
|
$
|
147.6
|
|
|||||
|
Nine Months Ended
|
|||||||||||||||||||||||
|
October 1, 2016
|
September 26, 2015
|
||||||||||||||||||||||
|
Net Sales
|
Operating Income (Loss)
|
Intangible Asset Amortization
|
Net Sales
|
Operating Income (Loss)
|
Intangible Asset Amortization
|
||||||||||||||||||
|
CHC
|
$
|
2,055.6
|
|
$
|
313.6
|
|
$
|
58.1
|
|
$
|
2,106.4
|
|
$
|
364.8
|
|
$
|
52.1
|
|
|||||
|
BCH*
|
1,015.3
|
|
(2,128.7
|
)
|
113.9
|
|
703.4
|
|
31.0
|
|
70.5
|
|
|||||||||||
|
Rx
|
817.4
|
|
262.1
|
|
90.1
|
|
790.1
|
|
290.4
|
|
55.5
|
|
|||||||||||
|
Specialty Sciences
|
271.3
|
|
49.7
|
|
218.3
|
|
250.1
|
|
21.0
|
|
218.4
|
|
|||||||||||
|
Other
|
59.5
|
|
2.6
|
|
1.4
|
|
75.4
|
|
18.6
|
|
1.4
|
|
|||||||||||
|
Unallocated
|
—
|
|
(80.0
|
)
|
—
|
|
—
|
|
(111.1
|
)
|
—
|
|
|||||||||||
|
Total*
|
$
|
4,219.1
|
|
$
|
(1,580.7
|
)
|
$
|
481.8
|
|
$
|
3,925.4
|
|
$
|
614.7
|
|
$
|
397.9
|
|
|||||
|
*
|
The BCH segment was created on March 30, 2015 as a result of the Omega acquisition, thus data for the
nine months ended
September 26, 2015
includes only six months of results from operations attributable to Omega.
|
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements included in this Form 10-Q and our Form 10-KT for the transition period from June 28, 2015 to December 31, 2015. These historical financial statements may not be indicative of our future performance. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks referred to under “Risk Factors” in Item 1A of our Form 10-KT for the transition period from June 28, 2015 to December 31, 2015 and Part II, Item 1A of this Form 10-Q.
34
Perrigo Company plc
- Item 2
Executive Overview
Perrigo Company plc was incorporated under the laws of Ireland on June 28, 2013 and became the successor registrant of Perrigo Company, a Michigan corporation, on December 18, 2013 in connection with the acquisition of Elan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo," the "Company," "we," "our," "us," and similar pronouns used herein refer to Perrigo Company plc, its subsidiaries, and all predecessors of Perrigo Company plc and its subsidiaries.
We are a leading global over-the-counter ("OTC") consumer goods and specialty pharmaceutical company, offering patients and customers high quality products at affordable prices. From our beginning in 1887 as a packager of home remedies, we have grown to become the world's largest manufacturer of OTC healthcare products and supplier of infant formulas for the store brand market. We are also a leading provider of generic extended topical prescription products, and we receive royalties from sales of the multiple sclerosis drug Tysabri.
®
We provide “Quality Affordable Healthcare Products
®
” across a wide variety of product categories and geographies, primarily in North America, Europe, and Australia, as well as in other markets, including Israel, China, and Latin America.
Our reporting segments are as follows:
|
•
|
Consumer Healthcare
(
"CHC"
) is focused primarily on the global sale of OTC store brand products including cough, cold, allergy and sinus, analgesic, gastrointestinal, smoking cessation, infant formula and food, animal health, and diagnostic products.
|
|
•
|
Branded Consumer Healthcare
(
"BCH"
) develops, manufactures, markets and distributes many well-known European OTC brands in the natural health and vitamins, cough, cold and allergy, smoking cessation, personal care and derma-therapeutics, lifestyle, and anti-parasite categories.
|
|
•
|
Prescription Pharmaceuticals
(
"Rx"
) develops, manufactures and markets a portfolio of generic and specialty pharmaceutical prescription drugs primarily for the U.S. and U.K. markets.
|
|
•
|
Specialty Sciences
is comprised primarily of royalties received from assets focused on the management of multiple sclerosis (Tysabri
®
).
|
We also have an "Other" segment comprised of our active pharmaceutical ingredients ("API") business, which develops, manufactures, and markets active API used worldwide by both generic and branded pharmaceutical companies. For results by segment, see "Segment Results" below and
Item 1. Note 17
.
Leadership Changes
On August 29, 2016, Jim Michaud joined the Company as Executive Vice President, Chief Human Resources Officer.
On November 8, 2016, we appointed John Wesolowski the General Manager, Rx Pharmaceuticals. Mr. Wesolowski served as Acting General Manager, Rx Pharmaceuticals following the resignation of Doug Boothe on July 20, 2016.
On April 27, 2016, Sharon Kochan's role as Executive Vice President and General Manager, International, was expanded to lead the BCH segment following the resignation of Marc Coucke as Executive Vice President and General Manager of the BCH segment.
On April 24, 2016, we named Laurie Brlas as Chairman of the Board of Directors, promoted John T. Hendrickson from President to Chief Executive Officer, and accepted the resignation of Joseph C. Papa as Chairman and Chief Executive Officer.
Interim Impairment Testing
In connection with the preparation of our financial statements for the three-month period ended April 2, 2016, we identified indicators of goodwill impairment in our BCH - rest of world (“BCH - ROW”) reporting unit, which
35
Perrigo Company plc
- Item 2
Executive Overview
comprises primarily operations attributable to the Omega acquisition in all geographic regions except for Belgium. The primary impairment indicators included the decline in our 2016 performance expectations and a reduction in our long-range revenue growth forecast. Step one of the goodwill impairment test involved determining the fair value of the reporting unit using a discounted cash flow technique and comparing it to the reporting unit’s carrying value. The main assumptions supporting the cash flow projections used to determine the reporting unit’s fair value included revenue growth based on product line extensions, product life cycle strategies, and geographical expansion within the markets in which the reporting unit distributes products, gross margins consistent with historical trends, and advertising and promotion investments largely consistent with the reporting unit's growth plans. The BCH-ROW reporting unit did not pass step one of goodwill impairment testing. The change in fair value from previous estimates was due primarily to the changes in the market and performance of certain brands such that the evaluation of brand prioritization and product extensions or launches in new regions are being more focused to maximize the potential of all brands in the segment's portfolio.
The second step of the goodwill impairment test required that we determine the implied fair value of the BCH - ROW reporting unit’s goodwill, which involved determining the value of the reporting unit’s individual assets and liabilities. Due to the complex and time-consuming nature of step two, based on our evaluation and initial estimates of the fair values of the assets and liabilities and the deficit of the fair value when compared to the related book value, we recorded an estimated impairment charge of
$193.6 million
for the three months ended April 2, 2016. We finalized the step two fair value calculation during the three months ended July 2, 2016, which resulted in a
$30.3 million
reduction to the estimated impairment charge recorded during the three months ended April 2, 2016
,
In connection with the preparation of our financial statements for the three months ended October 1, 2016, we identified additional indicators of goodwill impairment in both our BCH - ROW and our BCH - Belgium reporting units. With respect to both reporting units, the primary impairment indicators included an additional decline in our 2016 performance expectations for the remainder of the year and a reduction in our long-range revenue growth and margin forecasts due to the factors outlined below. Step one of the goodwill impairment test involved determining the fair value of the reporting units using a discounted cash flow technique and comparing it to the respective reporting units' carrying value. The main assumptions supporting the cash flow projections used to determine each reporting unit’s fair value included revenue growth based on product line extensions, product life cycle strategies, and geographical expansion within the markets in which the reporting unit distributes products, gross margins consistent with historical trends and including supply chain cost improvement plans, and advertising and promotion investments largely consistent with the reporting unit's growth plans. Both the BCH - ROW and the BCH - Belgium reporting units did not pass step one of goodwill impairment testing. As it relates to the BCH - ROW reporting unit, the changes in fair value from previous estimates were due primarily to (1) changes in the market and performance of certain brands due to moderated new product launch assumptions, (2) execution of certain key product strategies falling short of expectations causing a reduction to baseline forecast models in France, Germany and Italy, (3) certain macro-economic factors having continued to impact the business more than expected in France, Russia and Turkey in addition to unfavorable foreign currency impacts experienced primarily in the UK related to Brexit. As it relates to BCH - Belgium reporting unit, the changes in fair value from previous estimates due to change in the forecast as a result of a reduction in volume with a major wholesaler due to factors consistent with those outlined for BCH - ROW.
The second step of the goodwill impairment test required that we determine the implied fair value of both the BCH - ROW and BCH - Belgium reporting units' goodwill, which involved determining the value of each reporting unit’s individual assets and liabilities. Based on our evaluation and initial estimates of the fair values of the assets and liabilities and the deficit of the fair value when compared to the related book value, we recorded an estimated impairment charge of
$734.7 million
related to the BCH - ROW reporting unit and
$69.4 million
related to the BCH - Belgium reporting unit for the three months ended October 1, 2016. Both charges were recorded in Impairment charges on the Condensed Consolidated Statements of Operations within our BCH segment. Due to the complex and time-consuming nature of step two we expect to finalize the fair value calculation during the fourth quarter of 2016, which could result in an adjustment to the estimated impairment charge. As of October 1, 2016,
$1.0 billion
and
$70.2 million
of goodwill remains in the BCH - ROW and BCH - Belgium reporting units, respectively.
In connection with the preparation of our financial statements for the three-month period ended April 2, 2016, we identified indicators of impairment associated with certain indefinite-lived intangible assets acquired in conjunction with the Omega acquisition. The primary impairment indicators included the decline in our 2016
36
Perrigo Company plc
- Item 2
Executive Overview
performance expectations and a reduction in our long-range revenue growth forecast. The assessment utilized the excess earnings method to determine fair value and resulted in an impairment charge of
$273.4 million
in
Impairment charges
on the Condensed Consolidated Statements of Operations within our BCH segment, which represented the difference between the carrying amount of the intangible assets and their estimated fair value. The change in fair value from previous estimates was due primarily to the changes in the market and performance of the brands such that the evaluation of brand prioritization and product extensions or launches in new regions are being more focused to maximize the potential of all brands in the segment's portfolio. The main assumptions supporting the fair value of these assets and cash flow projections included revenue growth based on product line extensions, product life cycle strategies, and geographical expansion within the markets in which the BCH segment distributes products, gross margins consistent with historical trends, and advertising and promotion investments largely consistent with the segment's growth plans.
In connection with the preparation of our financial statements for the three months ended
October 1, 2016
, we identified additional indicators of impairment associated with certain indefinite-lived and definite-lived intangible brand category assets acquired in conjunction with the Omega acquisition. The primary impairment indicators are discussed above in goodwill. The assessment of the indefinite-lived assets utilized the excess earnings method to determine fair value and resulted in an impairment charge of
$575.7 million
for the three months ended
October 1, 2016
. With regards to the definite-lived asset, it was determined that the carrying value of the asset group was not recoverable based on an assessment of the undiscounted future cash flows expected to be generated by the asset group. Given this, the excess earnings method was utilized to determine fair value of the definite-lived asset and resulted in an impairment charge of
$290.2 million
for the
three months ended
October 1, 2016
. Both charges, which represented the difference between the carrying amount of the intangible assets and their estimated fair value, were recorded in Impairment charges on the Condensed Consolidated Statements of Operations within our BCH segment. The main assumptions supporting the fair value of these assets and cash flow projections are included in the goodwill discussions above.
The carrying value for certain intangible assets and goodwill equals estimated and implied fair values, respectively, and as a result, any further deterioration in those assets' fair value would lead to a further impairment charge. Future performance different from the assumptions utilized in our quantitative analyses may result in additional changes in the fair value. We will continue to monitor and assess these assets for potential impairment should further impairment indicators arise. We will complete our required annual impairment testing during the fourth quarter of 2016.
In addition, given the additional change in performance expectations for our remaining impaired cough/cold/allergy, anti-parasite, personal care and natural health brands previously recorded as indefinite-lived assets, we reclassified the remaining asset balance of
$672.4 million
related to these four assets to definite-lived assets with a 20-year useful life and began amortizing the assets as of October 2, 2016.
See
Item 1. Note 3
for more information.
37
Perrigo Company plc
- Item 2
Executive Overview
2016 Year-to-Date Highlights
|
•
|
Consistent with previously announced actions, we added a number of positions and processes to our Dublin headquarters across a range of corporate functions, including supply chain/global operations, procurement, enterprise risk management, and corporate finance, leveraging the strength of our global platform;
|
|
•
|
We continued restructuring associated primarily with actions we took to streamline our organization as announced on October 22, 2015;
|
|
•
|
We issued $1.2 billion of senior notes and repaid borrowings under revolving credit facilities;
|
|
•
|
We prepaid
$500.0 million
outstanding under our 1.300% Senior Notes due 2016 ("1.300% 2016 Notes") on September 29, 2016;
|
|
•
|
We completed several strategic acquisitions within our CHC and Rx segments that expanded our portfolio of products; and
|
|
•
|
We completed the sale of our U.S. Vitamins, Minerals, and Supplements ("VMS") business to International Vitamins Corporation ("IVC") on August 5, 2016.
|
RESULTS OF OPERATIONS
CONSOLIDATED
Recent Trends and Developments
|
•
|
We have experienced a reduction in pricing expectations during 2016 in comparison to historical patterns in our U.S. businesses, in particular in our Rx segment, due to industry and competitive pressures in the sector. The reduced pricing is attributable to a variety of factors including increased focus from customers to capture supply chain productivity savings, low raw material commodity pricing, competition in specific product categories, the loss of exclusivity on certain products, and consolidation of certain customers in the Rx segment. We have seen year-over-year pricing in the third quarter of 2016 moderate from the levels experienced in the first half of 2016. We expect this pricing environment to continue to impact the Company for the foreseeable future.
|
|
•
|
Our expectations for the BCH segment continue to be impacted by market dynamics in key countries such as Belgium, France, Germany and Italy. Factors impacting these countries include softness in certain leading brand categories primarily due to lower sell-through during the current year due to the re-staging launch timing of certain products, changes in timing of certain advertising and promotional campaigns compared to the prior year, and macro-economic factors, including unfavorable foreign currency impacts experienced primarily in the UK related to Brexit. The BCH segment has established a brand prioritization strategy to address these market dynamics, with an objective to balance the cost of advertising and promotion investments with expected contributions from category sales. The segment has further impacted in Belgium by a change in the forecasts with a major wholesaler, as management implements improved supply chain efficiencies in this market.
|
|
•
|
Our expectations for 2016 new product sales are consistent with those communicated in our Form 10-Q for the three months ended April 2, 2016, but continue to remain lower than we anticipated as of December 31, 2015. Several new product launches have been delayed due to the regulatory approval process for certain new products in the U.S. and modifications to market share penetration and timing assumptions for new products in our Rx and BCH segments.
|
|
•
|
On November 10, 2016, we announced the following strategic actions: (1) we are exploring strategic alternatives for the potential sale our Tysabri® asset, which is reported in our Specialty Sciences segment; (2) as part of the Company’s portfolio review process, we are conducting a comprehensive internal evaluation of the Rx pharmaceuticals segments’ market position, growth opportunities and interdependencies with other Company manufacturing and shared service operations to determine if
|
38
Perrigo Company plc
- Item 2
Consolidated
strategic alternatives should be explored; and (3) we are conducting a review of segment and corporate cost structures to align with existing and future expected market dynamics. We expect to complete these evaluations and reviews by the end of March 2017.
Consolidated Results
|
|
Three Months Ended
|
% Change
|
Nine Months Ended
|
% Change
|
|||||||||||||||||
|
($ in millions)
|
September 26,
2015 |
October 1,
2016 |
September 26,
2015 |
October 1,
2016 |
|||||||||||||||||
|
Net sales
|
$
|
1,344.7
|
|
$
|
1,354.9
|
|
1
|
%
|
$
|
3,925.4
|
|
$
|
4,219.1
|
|
7
|
%
|
|||||
|
Gross profit
|
$
|
548.8
|
|
$
|
506.3
|
|
(8
|
)%
|
$
|
1,555.7
|
|
$
|
1,596.4
|
|
3
|
%
|
|||||
|
Gross profit %
|
40.8
|
%
|
37.4
|
%
|
39.6
|
%
|
37.8
|
%
|
|||||||||||||
|
Operating expenses
|
$
|
360.2
|
|
$
|
2,021.5
|
|
461
|
%
|
$
|
941.0
|
|
$
|
3,177.1
|
|
238
|
%
|
|||||
|
Operating expenses %
|
26.8
|
%
|
149.2
|
%
|
24.0
|
%
|
75.3
|
%
|
|||||||||||||
|
Operating income (loss)
|
$
|
188.6
|
|
$
|
(1,515.2
|
)
|
(904
|
)%
|
$
|
614.7
|
|
$
|
(1,580.7
|
)
|
(357
|
)%
|
|||||
|
Operating income (loss) %
|
14.0
|
%
|
(111.8
|
)%
|
15.7
|
%
|
(37.5
|
)%
|
|||||||||||||
|
Interest and other, net
|
$
|
56.4
|
|
$
|
56.3
|
|
—
|
%
|
$
|
427.8
|
|
$
|
198.4
|
|
(54
|
)%
|
|||||
|
Income tax expense (benefit)
|
$
|
19.6
|
|
$
|
(316.3
|
)
|
(1,719
|
)%
|
$
|
112.7
|
|
$
|
(383.7
|
)
|
(440
|
)%
|
|||||
|
Net income (loss)
|
$
|
112.6
|
|
$
|
(1,255.2
|
)
|
(1,215
|
)%
|
$
|
74.2
|
|
$
|
(1,395.4
|
)
|
(1,981
|
)%
|
|||||
The increase in consolidated sales for the
three months ended
October 1, 2016
as compared to the prior year period was primarily due to higher sales in the Rx segment attributable to contributions from acquisitions and new products and in the Specialty Sciences segment as a result of increased royalties from sales of Tysabri
®
. These increases were offset partially by lower sales in the CHC segment due to the sale of the U.S. VMS business in August 2016 and lower sales in the cough/cold and analgesics categories. Consolidated operating income for the
three months ended
October 1, 2016
decreased from the prior year period due primarily to lower gross profit margin flow through primarily as a result of reduced pricing in the Rx segment and product mix in the BCH segment.
The most significant change in our consolidated nine-month year-over-year results was the addition of Omega Pharma Invest N.V. ("Omega"). Omega was acquired on March 30, 2015; thus, results for the nine-months ended
September 26, 2015
included only six months of operations attributable to Omega. The net loss for the
nine months ended
October 1, 2016
was due primarily to the recording of goodwill and intangible asset impairment charges totaling
$2.1 billion
, as described above under "Interim Impairment Testing" and in
Item 1. Note 3
. Net income in the prior year period included a
$259.8 million
loss on derivatives we used to economically hedge fluctuations in the euro-denominated purchase price of the Omega acquisition as described in
Item 1. Note 8
.
Further details and analysis of our financial results for the
three and nine months ended
October 1, 2016
and
September 26, 2015
are provided below by reporting segment and line item.
39
Perrigo Company plc
- Item 2
CHC
CONSUMER HEALTHCARE
Recent Trends and Developments
|
•
|
On
August 5, 2016
, we completed the sale of our U.S. VMS business to IVC for
$61.8 million
inclusive of an estimated working capital adjustment. Sales attributable to the U.S. VMS business totaled
$21.0 million
and
$40.9 million
for the
three months ended
October 1, 2016
and
September 26, 2015
, respectively, and
$110.1 million
and
$118.0 million
for the
nine months ended
October 1, 2016
and
September 26, 2015
, respectively.
|
|
•
|
We have experienced a reduction in pricing expectations, primarily in the cough/cold, animal health and analgesics categories within our CHC segment in 2016 due to various factors, including increased focus from customers to capture supply chain productivity savings, low raw material commodity pricing, and competition in specific product categories. We expect this pricing environment to continue to impact our CHC segment for the foreseeable future.
|
Segment Results
Three Month Comparison
|
|
Three Months Ended
|
||||||
|
($ in millions)
|
September 26, 2015
|
October 1,
2016 |
|||||
|
Net sales
|
$
|
675.2
|
|
$
|
669.1
|
|
|
|
Gross profit
|
$
|
231.0
|
|
$
|
216.8
|
|
|
|
Gross profit %
|
34.2
|
%
|
32.4
|
%
|
|||
|
Operating income
|
$
|
117.3
|
|
$
|
100.1
|
|
|
|
Operating income %
|
17.4
|
%
|
15.0
|
%
|
|||
Three Months Ended
October 1, 2016
vs.
Three Months Ended
September 26, 2015
Net sales
decreased
$6.1 million
, or
1%
, over the prior year period due to:
|
•
|
Lower year-over-year sales of
$19.9 million
attributable to the U.S. VMS business, which was sold in August 2016;
|
|
•
|
A net decrease in sales of existing products of
$12.3 million
due to:
|
|
•
|
Strong sales in our infant nutrition and smoking cessation categories; more than offset by
|
|
•
|
Pricing pressure primarily in the cough/cold, animal health, and analgesics categories;
|
|
•
|
A milder allergy season, which impacted sales in the cough/cold category; and
|
|
•
|
Lower sales in the antacids category; and
|
|
•
|
Discontinued products of
$5.6 million
; and
|
|
•
|
Unfavorable foreign currency movement of
$7.0 million
; offset partially by
|
|
•
|
New product sales of
$33.1 million
related primarily to the launches of fluticasone nasal spray (store brand equivalent to Flonase
®
), the guaifenesin family of products (store brand equivalent to Mucinex
®
), and several new infant formula and food products; and
|
|
•
|
Incremental net sales of
$5.6 million
from acquisitions (primarily the ScarAway
®
acquisition).
|
40
Perrigo Company plc
- Item 2
CHC
Operating income
decreased
$17.2 million
, or
15%
, as a result of:
|
•
|
A decrease
of
$14.2 million
in gross profit due to:
|
|
•
|
Pricing pressure as noted above; and
|
|
•
|
Increased intangible asset amortization expense associated primarily with the ScarAway
®
acquisition; offset partially by
|
|
•
|
Margin contributions from new products and strong performance in the infant health and smoking cessation categories; and
|
|
•
|
Continued manufacturing and supply chain efficiencies.
|
|
•
|
An increase of
$3.0 million
in operating expenses due to:
|
|
•
|
Increased research and development investments of
$1.1 million
due to timing of clinical trials;
|
|
•
|
Increased restructuring expenses of $3.2 million related primarily to the sale of our U.S. VMS business; and
|
|
•
|
A
$3.4 million
impairment charge recorded on the held-for-sale assets associated with our Animal Health pet treats plant; offset partially by
|
|
•
|
Decreased administrative expenses of $4.3 million due to cost containment.
|
Nine
Month Comparison
|
|
|||||||
|
Nine Months Ended
|
|||||||
|
($ in millions)
|
September 26,
2015 |
October 1,
2016 |
|||||
|
Net sales
|
$
|
2,106.4
|
|
$
|
2,055.6
|
|
|
|
Gross profit
|
$
|
701.1
|
|
$
|
660.8
|
|
|
|
Gross profit %
|
33.3
|
%
|
32.1
|
%
|
|||
|
Operating income
|
$
|
364.8
|
|
$
|
313.6
|
|
|
|
Operating income %
|
17.3
|
%
|
15.3
|
%
|
|||
Nine Months Ended
October 1, 2016
vs.
Nine Months Ended
September 26, 2015
Net sales
decreased
$50.8 million
, or
2%
, over the prior year period due to:
|
•
|
A net
$94.4 million
decrease in existing product sales as a result of:
|
|
•
|
Strong sales in our infant nutrition and smoking cessation categories; more than offset by
|
|
•
|
A milder cold and flu season in the first and second quarters of 2016, which led to weaker sales in the cough/cold and analgesics categories;
|
|
•
|
Pricing pressure, which particularly impacted sales in the cough/cold, analgesics, and animal health categories;
|
|
•
|
Lower sales in the antacids category; and
|
|
•
|
Timing of promotions in the second and third quarters of 2015 and a milder allergy season in the third quarter of 2016, which impacted current year sales in the cough/cold category; and
|
|
•
|
Discontinued products of
$55.0 million
related primarily to a label refresh within the infant formula category;
|
|
•
|
Lower year-over-year sales of
$7.9 million
attributable to the U.S. VMS business, which was sold in August 2016; and
|
|
•
|
Unfavorable foreign currency movement of
$19.6 million
; offset partially by
|
|
•
|
New product sales of
$96.3 million
related primarily to the launches of fluticasone nasal spray (store brand equivalent to Flonase
®
), the guaifenesin family of products (store brand equivalent to Mucinex
®
), several new infant formula and food products, and new animal health products; and
|
|
•
|
Incremental net sales of
$29.8 million
due primarily to the Gelcaps Exportadora de Mexico, S.A. de C.V. ("Gelcaps") and the ScarAway
®
acquisitions.
|
41
Perrigo Company plc
- Item 2
CHC
Operating income
decreased
$51.2 million
, or
14%
, as a result of:
|
•
|
A decrease
of
$40.3 million
in gross profit due to:
|
|
•
|
Pricing pressure as noted above; and
|
|
•
|
Increased intangible asset amortization expense associated primarily with the Gelcaps and ScarAway
®
acquisitions; offset partially by
|
|
•
|
Margin contributions from new products and strong performance in the infant nutrition and smoking cessation categories; and
|
|
•
|
Continued manufacturing and supply chain efficiencies.
|
|
•
|
An increase
of
$10.9 million
in operating expenses due to:
|
|
•
|
A
$6.2 million
impairment charge related to the sale of the U.S. VMS business;
|
|
•
|
A
$3.4 million
impairment charge recorded on the held-for-sale assets associated with our Animal Health Pet treats plant;
|
|
•
|
Increased restructuring expenses of $5.0 million related primarily to the sale of the U.S. VMS business; and
|
|
•
|
Increased research and development investments due to timing of clinical trials; offset partially by
|
|
•
|
Decreased administrative expenses due to cost containment.
|
Recent Trends and Developments
|
•
|
Our expectations for the BCH segment continue to be impacted by market dynamics in key countries such as Belgium, France, Germany and Italy. Factors impacting these countries include softness in certain leading brand categories primarily due to lower sell-through during the current year due to the re-staging launch timing of certain products, changes in timing of certain advertising and promotional campaigns compared to the prior year, and macro-economic factors, including unfavorable foreign currency impacts experienced primarily in the UK related to Brexit. The BCH segment has established a brand prioritization strategy to address these market dynamics, with an objective to balance the cost of advertising and promotion investments with expected contributions from category sales. The segment has further impacted in Belgium by a change in the forecasts with a major wholesaler, as management implements improved supply chain efficiencies in this market.
|
|
•
|
Our expectations for 2016 new product sales are consistent with those communicated in our Form 10-Q for the three months ended April 2, 2016, but continue to remain lower than anticipated as of December 31, 2015. Several new product launches have been delayed due to modifications to market share penetration and timing assumptions for new products in Europe.
|
|
•
|
We continue to make progress on our previously announced restructuring plans to right-size the BCH business due to the impact of market dynamics on sales volumes. In addition, we made several strategic leadership changes during the three months ended October 1, 2016, including new leaders for Belgium, France and Germany. Management continues to evaluate the overall cost structure relative to current and expected market dynamics.
|
|
•
|
Management continues to evaluate the most effective business model for each country and has announced strategic evaluations for Russia, South Africa, and Argentina.
|
42
Perrigo Company plc
- Item 2
BCH
Segment Results
Three Month Comparison
|
|
Three Months Ended
|
||||||
|
($ in millions)
|
September 26,
2015 |
October 1,
2016 |
|||||
|
Net sales
|
$
|
302.2
|
|
$
|
304.0
|
|
|
|
Gross profit
|
$
|
164.3
|
|
$
|
131.6
|
|
|
|
Gross profit %
|
54.4
|
%
|
43.3
|
%
|
|||
|
Operating income (loss)
|
$
|
4.4
|
|
$
|
(1,684.3
|
)
|
|
|
Operating income (loss) %
|
1.4
|
%
|
(554.1
|
)%
|
|||
Three Months Ended
October 1, 2016
vs.
Three Months Ended
September 26, 2015
Net sales
increased
$1.8 million
, or
1%
, over the prior year period due to:
|
•
|
New product sales of
$25.8 million
; and
|
|
•
|
Incremental net sales of
$17.5 million
from the Naturwohl Pharma GmbH ("Naturwohl") and GlaxoSmithKline
Consumer Healthcare Product Portfolio ("GSK Products") acquisitions; offset by
|
|
•
|
Decreased sales volumes of existing products totaling
$32.1 million
due primarily to weaker current year sales in the lifestyle category attributable in large part to a product launch in the prior year period and the natural health/vitamins category due primarily to timing of promotional activities and the planned divestment of the Etixx
®
brand;
|
|
•
|
Unfavorable foreign currency movement of
$5.5 million
; and
|
|
•
|
Discontinued products of
$4.1 million
.
|
Operating income
decreased
$1.7 billion
, as a result of:
|
•
|
A decrease
of
$32.7 million
in gross profit due to:
|
|
•
|
Decreased sales of existing products in the higher-margin lifestyle and natural health/vitamins categories as noted above;
|
|
•
|
Weaker performance in Belgium;
|
|
•
|
Higher inventory obsolescence realized primarily from prior year product levels; and
|
|
•
|
Unfavorable foreign currency effect; offset partially by
|
|
•
|
An increase
of
$1.7 billion
in operating expenses due primarily to intangible asset and goodwill impairment charges totaling
$1.7 billion
, as described above under "Interim Impairment Testing"; and
|
|
•
|
A decrease of advertising and promotional spending due to previously announced strategic initiatives to better align promotional investments with sales.
|
Nine
Month Comparison*
* The BCH segment was created on March 30, 2015 as a result of the Omega acquisition, thus comparative prior year data for the
nine months ended
September 26, 2015
includes only six months of results from operations.
43
Perrigo Company plc
- Item 2
BCH
|
Nine Months Ended
|
|||||||
|
($ in millions)
|
September 26, 2015*
|
October 1,
2016 |
|||||
|
Net sales
|
$
|
703.4
|
|
$
|
1,015.3
|
|
|
|
Gross profit
|
$
|
354.5
|
|
$
|
461.2
|
|
|
|
Gross profit %
|
50.4
|
%
|
45.4
|
%
|
|||
|
Operating income (loss)
|
$
|
31.0
|
|
$
|
(2,128.7
|
)
|
|
|
Operating income (loss) %
|
4.4
|
%
|
(209.7
|
)%
|
|||
Nine Months Ended
October 1, 2016
vs.
Nine Months Ended
September 26, 2015
Net sales
increased
$311.9 million
, or
44%
, over the prior year period due to:
|
•
|
An additional three months of results from operations attributable to Omega;
|
|
•
|
New products totaling
$85.3 million
; and
|
|
•
|
Sales from the Naturwohl and GSK Products acquisitions totaling
$84.2 million
; offset partially by
|
|
•
|
Decreased sales volumes of existing products due primarily to weaker current year sales in the lifestyle category due in part to a product launch in the prior year period and the natural health/vitamins category due primarily to timing of promotional activities and the planned divestment of the Etixx
®
brand;
|
|
•
|
Unfavorable foreign currency movement of
$5.0 million
; and
|
|
•
|
Discontinued products of
$5.6 million
.
|
Operating income
decreased
$2.2 billion
due to:
|
•
|
A
$106.7 million
increase in gross profit due to an additional three months of operations attributable to Omega; more than offset by
|
|
•
|
Decreased sales of existing products in the higher-margin lifestyle and natural health/vitamins categories noted above,
|
|
•
|
Weaker performance in Belgium,
|
|
•
|
Higher inventory obsolescence realized primarily from a prior year product levels, and
|
|
•
|
Unfavorable foreign currency effect; more than offset by
|
|
•
|
An increase
of
$2.3 billion
in operating expenses due primarily to:
|
|
•
|
Intangible asset and goodwill impairment charges totaling
$2.1 billion
, as described above under "Interim Impairment Testing";
|
|
•
|
An additional three months of operations; and
|
|
•
|
Restructuring charges totaling
$8.3 million
related to strategic organizational enhancements; offset partially by
|
|
•
|
Cost control measures employed to mitigate lower forecasted sales and operating income.
|
44
Perrigo Company plc
- Item 2
Rx
PRESCRIPTION PHARMACEUTICALS
Recent Trends and Developments
|
•
|
We continue to experience a significant reduction in pricing expectations in our Rx segment due to industry and competitive pressures in the sector. This softness in pricing is attributed to various factors, including increased focus from customers to capture supply chain productivity savings, low raw material commodity pricing, competition in specific products, and consolidation of certain customers. We expect this softness to continue to impact the segment for the foreseeable future.
|
|
•
|
On January 22, 2016, we acquired a portfolio of generic dosage forms and strengths of Retin-A
®
(tretinoin), a topical prescription acne treatment, from Matawan Pharmaceuticals, LLC, for
$416.4 million
in cash ("Tretinoin Products").
|
|
•
|
On March 1, 2016, we completed the acquisition of two development-stage specialty Rx products to further invest in our specialty Rx portfolio.
|
|
•
|
On August 22, 2016, we purchased the remaining 60.9% ownership right to a generic Benzaclin
TM
product ("Generic Benzaclin
TM
"), which we developed and marketed in collaboration with Barr Laboratories. As a result of this transaction, we are now entitled to 100% of income from sales of the product.
|
Segment Results
Three Month Comparison
|
|
Three Months Ended
|
||||||
|
($ in millions)
|
September 26, 2015
|
October 1,
2016 |
|||||
|
Net sales
|
$
|
260.3
|
|
$
|
267.4
|
|
|
|
Gross profit
|
$
|
130.4
|
|
$
|
128.1
|
|
|
|
Gross profit %
|
50.1
|
%
|
47.9
|
%
|
|||
|
Operating income
|
$
|
91.0
|
|
$
|
77.9
|
|
|
|
Operating income %
|
34.9
|
%
|
29.1
|
%
|
|||
Three Months Ended
October 1, 2016
vs.
Three Months Ended
September 26, 2015
Net sales
increased
$7.1 million
, or
3%
, due to:
|
•
|
Sales attributable to the Entocort
®
and Tretinoin Products acquisitions totaling
$32.2 million
; and
|
|
•
|
New product sales of
$18.3 million
due primarily to sales of benzoyl peroxide 5%-clindamycin 1% gel (a generic version of Benzaclin™); offset partially by
|
|
•
|
Decreased sales of existing products of
$40.7 million
due to lower sales volume of certain products, pricing pressure across the portfolio, and the lack of exclusive market position for two key products versus the prior year; and
|
|
•
|
Unfavorable foreign exchange movement of
$2.8 million
.
|
Segment operating income
decreased
$13.1 million
, or
14%
, as a result of:
|
•
|
A decrease
of
$2.3 million
in gross profit due primarily to the pricing pressure noted above as well as higher amortization expense from the Entocort
®
and Tretinoin Products acquisitions, offset largely by an increase
|
45
Perrigo Company plc
- Item 2
Rx
in gross profit attributable to product acquisitions, new product sales, and increased manufacturing productivity.
|
•
|
An increase
of
$10.8 million
in operating expenses due primarily to increased research and development investments of
$5.7 million
as a result of the timing of clinical trials and a $4.9 million fair value adjustment on contingent consideration related to the two development-stage specialty Rx products that we acquired on March 1, 2016.
|
Nine
Month Comparison
|
|
|||||||
|
Nine Months Ended
|
|||||||
|
($ in millions)
|
September 26,
2015 |
October 1,
2016 |
|||||
|
Net sales
|
$
|
790.1
|
|
$
|
817.4
|
|
|
|
Gross profit
|
$
|
433.4
|
|
$
|
394.7
|
|
|
|
Gross profit %
|
54.8
|
%
|
48.3
|
%
|
|||
|
Operating income
|
$
|
290.4
|
|
$
|
262.1
|
|
|
|
Operating income %
|
36.7
|
%
|
32.1
|
%
|
|||
Nine Months Ended
October 1, 2016
vs.
Nine Months Ended
September 26, 2015
Net sales
increased
$27.3 million
, or
3%
, due to:
|
•
|
Net sales attributable to the Entocort
®
and Tretinoin Products acquisitions totaling
$121.5 million
; and
|
|
•
|
New product sales of
$55.1 million
due primarily to sales of benzoyl peroxide 5%-clindamycin 1% gel (a generic version of Benzaclin™); offset partially by
|
|
•
|
Decreased sales of existing products of
$140.9 million
due to declined sales volume of certain products, pricing pressure across the portfolio, and the lack of exclusive market position for two key products versus the prior year;
|
|
•
|
Discontinued products of
$3.6 million
; and
|
|
•
|
Unfavorable foreign exchange movement of
$4.8 million
.
|
Segment operating income
decreased
$28.3 million
, or
10%
, as a result of:
|
•
|
A decrease
of
$38.7 million
in gross profit due primarily to the pricing pressure noted above, as well as higher amortization expense from the Entocort
®
and Tretinoin Products acquisitions; offset partially by
|
|
•
|
A decrease
of
$10.4 million
in operating expenses due primarily to:
|
|
•
|
The absence of an
$18.0 million
research and development payment made in connection with a research and development contractual arrangement in the prior year; offset by
|
|
•
|
Increased selling and administration expenses of $4.1 million; and
|
|
•
|
Increased research and development investments of $3.2 million due to timing of clinical trials.
|
46
Perrigo Company plc
- Item 2
Specialty Sciences
SPECIALTY SCIENCES
Recent Trends and Developments
|
•
|
In February 2016, a competitor's pipeline product, Ocrevus
®
, received breakthrough therapy designation from the FDA and could potentially be approved in 2016. The product would compete with Tysabri
®
and could have a significant negative impact on the royalty we receive from Biogen Idec, Inc. ("Biogen") and the performance of the Specialty Sciences segment. We continue to monitor the progress of all potential competing products.
|
|
•
|
On November 10, 2016, we announced that we are exploring strategic alternatives for our Tysabri
®
asset, which is reported in our Specialty Sciences segment.
|
Segment Results
Three Month Comparison
|
|
Three Months Ended
|
||||||
|
($ in millions)
|
September 26, 2015
|
October 1,
2016 |
|||||
|
Net sales
|
$
|
84.5
|
|
$
|
93.4
|
|
|
|
Gross profit
|
$
|
12.0
|
|
$
|
20.6
|
|
|
|
Gross profit %
|
14.2
|
%
|
22.1
|
%
|
|||
|
Operating income
|
$
|
9.0
|
|
$
|
23.3
|
|
|
|
Operating income %
|
10.7
|
%
|
25.0
|
%
|
|||
Three Months Ended
October 1, 2016
vs.
Three Months Ended
September 26, 2015
Net sales
increased
$8.9 million
due to an increase in royalties received from Biogen's sales of Tysabri
®
, inclusive of a one-time favorable adjustment Biogen made to their discounts and allowances. Based on the current royalty percentage that we receive, the effect of this benefit was approximately $3.6 million. Operating income
increased
$14.3 million
due to the increased royalties as well a
$5.7 million
reduction in operating expenses due to lower legal costs in the current year.
Nine
Month Comparison
|
|
|||||||
|
Nine Months Ended
|
|||||||
|
($ in millions)
|
September 26,
2015 |
October 1,
2016 |
|||||
|
Net sales
|
$
|
250.1
|
|
$
|
271.3
|
|
|
|
Gross profit
|
$
|
32.5
|
|
$
|
53.0
|
|
|
|
Gross profit %
|
13.0
|
%
|
19.5
|
%
|
|||
|
Operating income
|
$
|
21.0
|
|
$
|
49.7
|
|
|
|
Operating income %
|
8.4
|
%
|
18.3
|
%
|
|||
47
Perrigo Company plc
- Item 2
Specialty Sciences
Nine Months Ended
October 1, 2016
vs.
Nine Months Ended
September 26, 2015
Net sales
increased
$21.2 million
due to an increase in royalties received from Biogen's sales of Tysabri
®
, inclusive of a one-time favorable adjustment Biogen made to their discounts and allowances. Based on the current royalty percentage that we receive, the effect of this benefit was approximately $3.6 million in the three months ended October 1, 2016. This increase was offset partially by
$1.4 million
of unfavorable foreign currency movement. Operating income
increased
$28.7 million
due to the increased royalties as well a
$8.2 million
reduction in operating expenses due primarily to lower legal costs in the current year.
OTHER
Recent Trends and Developments
We are pursuing the sale of our API business based in India and expect the sale to take place in the next 12 months. On
October 1, 2016
, the net assets of the India API business were classified as "held for sale" as discussed in
Item 1. Note 9.
Segment Results
Three Month Comparison
|
|
Three Months Ended
|
||||||
|
($ in millions)
|
September 26, 2015
|
October 1,
2016 |
|||||
|
Net sales
|
$
|
22.5
|
|
$
|
21.0
|
|
|
|
Gross profit
|
$
|
11.1
|
|
$
|
9.3
|
|
|
|
Gross profit %
|
49.5
|
%
|
44.5
|
%
|
|||
|
Operating income (loss)
|
$
|
6.2
|
|
$
|
(1.6
|
)
|
|
|
Operating income (loss) %
|
27.5
|
%
|
(7.4
|
)%
|
|||
Three Months Ended
October 1, 2016
vs.
Three Months Ended
September 26, 2015
Net sales decreased
$1.5 million
due primarily to increased competition on certain products, in particular, U.S. sales of Temozolomide. The operating loss in the current year period was due primarily to a
$6.5 million
impairment charge recorded on the India API held-for-sale business, offset partially by reduced operating expenses.
Nine
Month Comparison
48
Perrigo Company plc
- Item 2
Other
|
|
|||||||
|
Nine Months Ended
|
|||||||
|
($ in millions)
|
September 26,
2015 |
October 1,
2016 |
|||||
|
Net sales
|
$
|
75.4
|
|
$
|
59.5
|
|
|
|
Gross profit
|
$
|
34.2
|
|
$
|
26.8
|
|
|
|
Gross profit %
|
45.4
|
%
|
45.0
|
%
|
|||
|
Operating income
|
$
|
18.6
|
|
$
|
2.6
|
|
|
|
Operating income %
|
24.6
|
%
|
4.4
|
%
|
|||
Nine Months Ended
October 1, 2016
vs.
Nine Months Ended
September 26, 2015
Net sales
decreased
$15.9 million
due primarily to competition on certain products, in particular, U.S. sales of Temozolomide. Operating income
decreased
$16.0 million
due primarily to a
$7.4 million
decrease in gross profit due to increased competition and a
$10.8 million
impairment charge recorded on the India API held-for-sale business, offset partially by a reduction in operating expenses.
Unallocated Expenses
Unallocated expenses are comprised of certain corporate expenses not allocated to the segments and are recorded in operating income. Unallocated expenses were
$30.5 million
for the
three months ended
October 1, 2016
, compared to
$39.3 million
for the
three months ended
September 26, 2015
,
a decrease
of
$8.8 million
. The reduction in unallocated expenses was due primarily to fees of
$15.6 million
related to our defense against the hostile takeover bid by Mylan N.V. ("Mylan") incurred in the prior-year period, offset partially by a
$7.4 million
increase in legal and professional fees in the current period.
Unallocated expenses were
$79.9 million
for the
nine months ended
October 1, 2016
compared to
$111.1 million
for the prior year period, a
decrease
of
$31.2 million
. The reduction in unallocated expense was due primarily to
$18.1 million
of Omega acquisition-related fees and
$29.0 million
of legal and professional fees related to our defense against the hostile takeover bid by Mylan, both of which were incurred only in the prior-year period. We also experienced a
$14.9 million
reduction in share-based compensation in the current year period due primarily to the resignation of Joseph C. Papa. These decreases were offset partially by a
$20.2 million
increase in legal and professional fees in the current period.
Interest and Other (Consolidated)
Interest Expense, Net
Interest expense, net was
$54.6 million
for the
three months ended
October 1, 2016
, compared to
$43.4 million
for the prior year period. The
$11.2 million
increase
was due to interest incurred in the current year on the
$1.2 billion
senior notes issued on March 7, 2016.
Interest expense, net was
$163.2 million
for the
nine months ended
October 1, 2016
, compared to
$132.7 million
for the prior year period. The
$30.5 million
increase
was due to interest incurred on the debt assumed in the Omega acquisition, borrowings on our revolving credit agreements during the
nine months ended
October 1, 2016
, and the issuance of
$1.2 billion
of senior notes on March 7, 2016. See the "
Borrowings and Capital Resources
" section below and
Item 1. Note 10
for more information.
Other Expense, Net
Other expense, net
, was
$1.0 million
for the
three months ended
October 1, 2016
, compared to
$13.0 million
in the prior year period. The
$12.0 million
decrease was due primarily to the absence of a
$4.2 million
49
Perrigo Company plc
- Item 2
Unallocated, Interest, Other, and Taxes
loss on equity methods investments and a
$4.8 million
loss associated with an acquisition-related derivative recorded in the prior year. See
Item 1. Notes 7
and
8
, for more information on the derivative losses and equity method investment losses, respectively.
Other expense, net
, was
$34.1 million
for the
nine months ended
October 1, 2016
, compared to
$294.2 million
in the prior year period. The
$260.1 million
decrease was due primarily to the absence of the
$259.8 million
loss incurred in the prior year period on the derivatives we used to economically hedge fluctuations in the euro-denominated purchase price of the Omega and GSK Products acquisitions. The losses on the derivatives due to the changes in the EUR/USD exchange rate prior to their settlement economically offset the final settlement of the euro-denominated Omega purchase price paid on March 30, 2015.
Income Taxes (Consolidated)
The effective tax rate for the
three months ended
October 1, 2016
was
20.1%
on a net loss compared to
14.8%
on net income for the
three months ended
September 26, 2015
. The effective tax rate for the
nine months ended
October 1, 2016
was
21.6%
on a net loss reported in the period compared to
60.3%
on net income for the
nine months ended
September 26, 2015
. For the three and nine months ended
October 1, 2016
, we have estimated income taxes using the annual effective tax rate method.
Income taxes recorded through July 2, 2016 were estimated using the discrete method. For the
three and nine months ended
October 1, 2016
, we had significant changes to our estimates related to additional asset impairments recognized in the third quarter and therefore determined that estimating income taxes using the annual effective tax rate method was the more appropriate method for the period ending
October 1, 2016
.
Our tax rate is subject to adjustment over the balance of the fiscal year due to, among other things: income tax rate changes by governments; the jurisdictions in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various tax returns; adjustments based on differing interpretations of the applicable transfer pricing standards; changes in available tax credits, grants and other incentives; changes in stock-based compensation expense; changes in tax laws or the interpretation of such tax laws (for example, proposals for fundamental U.S. international tax reform); changes in U.S. GAAP; expiration of or the inability to renew tax rulings or tax holiday incentives; and the repatriation of earnings with respect to which we have not previously provided for taxes.
Although we believe that the tax estimates are reasonable and that we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audit and any related litigation could be materially different from estimates or from historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.
The IRS audit of our fiscal years ended June 27, 2009 and June 26, 2010 had previously concluded with the issuance of a statutory notice of deficiency on August 27, 2014. While we had previously agreed on certain adjustments and made associated payments of
$8.0 million
(inclusive of interest) in November 2014, the statutory notice of deficiency asserted various additional adjustments, including transfer pricing adjustments. The statutory notice of deficiency's adjustments for fiscal years 2009 and 2010 asserted an incremental tax obligation of approximately
$68.9 million
, inclusive of interest and penalties. We disagree with the IRS’s positions asserted in the statutory notice of deficiency. To contest the IRS's adjustments, in January 2015 we paid the incremental tax obligation (a prerequisite to contesting the proposed adjustments in U.S. district court), and in June 2015, we filed an administrative request for a refund with the IRS. The payment was recorded during the three months ended March 28, 2015 as a deferred charge on the balance sheet given our anticipated action to recover this amount. The IRS subsequently denied our request for a refund. We anticipate filing a complaint in U.S. district court claiming a refund of the paid amounts prior to August 2017. An unfavorable resolution of this matter could have a material impact on our consolidated financial statements in future periods.
We have ongoing audits in multiple jurisdictions the resolution of which remains uncertain. These jurisdictions include, but are not limited to, the United States and Belgium. The IRS is auditing our fiscal years ended June 25, 2011 and June 30, 2012, and may make adjustments consistent with the adjustments made in the
50
Perrigo Company plc
- Item 2
Unallocated, Interest, Other, and Taxes
statutory notice of deficiency for fiscal years 2009 and 2010. In February 2016, the Belgium Tax Authority notified us that all Belgium locations will be audited for the years ended December 31, 2013 and December 31, 2014. At this time, we cannot predict the outcome of any audit or related litigation.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Cash and Cash Equivalents
*
Working capital represents current assets less current liabilities, excluding cash and cash equivalents, and current indebtedness.
Cash, cash equivalents, and cash flows from operations are expected to be sufficient to finance our known and/or foreseeable liquidity and capital expenditures. In addition, we have the ability to borrow under our credit facilities. Although our lenders have made commitments to make funds available to us in a timely fashion under our revolving credit agreements and overdraft facilities, if economic conditions worsen or new information becomes publicly available impacting the institutions’ credit rating or capital ratios, these lenders may be unable or unwilling to lend money pursuant to our existing credit facilities.
Operating Activities
|
Nine Months Ended
|
|||||||||||
|
|
September 26,
2015 |
October 1,
2016 |
Increase/(Decrease)
|
||||||||
|
Cash Flows From (For) Operating Activities
|
|||||||||||
|
Net income (loss)
|
$
|
74.2
|
|
$
|
(1,395.4
|
)
|
$
|
(1,469.6
|
)
|
||
|
Non-cash adjustments
|
827.1
|
|
2,245.8
|
|
1,418.7
|
|
|||||
|
Subtotal
|
901.3
|
|
850.4
|
|
(50.9
|
)
|
|||||
|
Increase (decrease) in cash due to:
|
|||||||||||
|
Accounts receivable
|
(30.9
|
)
|
113.6
|
|
144.5
|
|
|||||
|
Inventories
|
(28.6
|
)
|
(29.9
|
)
|
(1.3
|
)
|
|||||
|
Accounts payable
|
(6.5
|
)
|
(51.8
|
)
|
(45.3
|
)
|
|||||
|
Payroll and related taxes
|
(26.6
|
)
|
(40.0
|
)
|
(13.4
|
)
|
|||||
|
Accrued customer programs
|
17.7
|
|
(74.7
|
)
|
(92.4
|
)
|
|||||
|
Accrued liabilities
|
46.7
|
|
(42.8
|
)
|
(89.5
|
)
|
|||||
|
Accrued income taxes
|
0.3
|
|
9.7
|
|
9.4
|
|
|||||
|
Other
|
(6.7
|
)
|
(31.0
|
)
|
(24.3
|
)
|
|||||
|
Subtotal
|
$
|
(34.6
|
)
|
$
|
(146.9
|
)
|
$
|
(112.3
|
)
|
||
|
Net cash from (for) operating activities
|
$
|
866.7
|
|
|
$
|
703.5
|
|
|
$
|
(163.2
|
)
|
51
Perrigo Company plc
- Item 2
Financial Condition, Liquidity and Capital Resources
We generated
$703.5 million
of cash from operating activities during the
nine months ended
October 1, 2016
, a
$163.2 million
decrease
over the comparable prior year period, due primarily to increased working capital, as noted above, as a result of the following:
|
•
|
Decreased net earnings after adjusting for non-cash items such as impairment charges and depreciation and amortization;
|
|
•
|
Changes in accounts payable due to changes to the Omega accounts payable structure as discussed below;
|
|
•
|
Changes in accrued customer-related programs due to the pricing dynamics in the Rx segment;
|
|
•
|
Changes in accounts receivable due to increased sales volumes and timing of collections, offset partially by a reduction of factoring in the current period; and
|
|
•
|
Changes in accrued liabilities due primarily to lower legal expenses.
|
Our operating cash flow for the current year period was unfavorably impacted by actions we took to establish a more normalized cash flow pattern within our BCH segment. Generally our BCH segment has seasonally stronger sales and cash flow inflows in the second and fourth quarters and stronger cash outflows in the first and third quarters. In the past, accounts payable terms with suppliers were structured to take account of this seasonality. This payment structure had a favorable impact on operating cash flow during the prior year period as only the second quarter inflow from these payment structures was included. In order to establish a more sustainable cash flow pattern during the year, we changed these payment structures during the
nine months ended
October 1, 2016
, which had a one-time unfavorable impact on operating cash flow.
Investing Activities
Cash used for investing activities totaled
$524.3 million
for the
nine months ended
October 1, 2016
, compared to
$2.9 billion
in the prior year period. The cash used in the current year was due primarily to the Tretinoin Products and Generic Benzaclin™ acquisitions, which used
$478.4 million
in cash. In the comparable prior year period, cash used for investing activities consisted primarily of a
$2.5 billion
outflow for business acquisitions, mainly attributable to Omega, as well as a
$304.8 million
outflow related to the cash settlement of the non-designated foreign currency derivatives we used to hedge the euro-denominated Omega and GSK Products purchase prices. Cash used for capital expenditures totaled
$84.6 million
during
nine months ended
October 1, 2016
compared to
$127.6 million
in the prior period year. The decrease in cash used for capital expenditures over the prior year period was due primarily to several large infrastructure projects nearing completion.
52
Perrigo Company plc
- Item 2
Financial Condition, Liquidity and Capital Resources
Financing Activities
Cash used for financing activities totaled
$234.1 million
for the
nine months ended
October 1, 2016
, compared to
$941.5 million
for the comparable prior year period. In the current year period, cash used for financing included
$803.6 million
to repay balances outstanding under our revolving credit agreements and other short-term financing and $500.0 million used to prepay our 1.300% 2016 Notes. These payments were offset by the borrowing of
$1.2 billion
of long-term debt. In the prior year period, the cash used for financing activities was due primarily to payments of
$903.3 million
on long-term debt, which included the repayment of debt assumed from Omega and a $300.0 million legacy Perrigo term loan. For more information see "Borrowings and Capital Resources" below and
Item 1. Note 10
.
The declaration and payment of dividends, if any, is subject to the discretion of our Board of Directors and will depend on our earnings, financial condition, availability of distributable reserves, capital and surplus requirements, and other factors our Board of Directors may consider relevant.
In October 2015, the Board of Directors approved a share repurchase plan of up to $2.0 billion, of which $1.5 billion is still available to be repurchased through December 31, 2018. We did not repurchase any shares under the share repurchase plan during the
nine months ended
October 1, 2016
. The timing and amount of future repurchases, if any, will depend upon several factors, including market and business conditions, the trading price of our ordinary shares, available cash flow, and other investment opportunities.
Borrowings and Capital Resources
53
Perrigo Company plc
- Item 2
Financial Condition, Liquidity and Capital Resources
Overdraft Facilities
Our BCH segment uses overdraft facilities to increase the efficiency of its cash utilization and meet its short-term liquidity needs. We repaid the balance outstanding under the overdraft facilities during the
nine months ended
October 1, 2016
, but retain the ability to use the facilities in our day-to-day cash operations. The balance outstanding under the overdraft facilities was
$82.9 million
at
December 31, 2015
.
Accounts Receivable Factoring
We have multiple accounts receivable factoring arrangements with non-related third-party financial institutions (the “Factors”). Pursuant to the terms of the arrangements, we sell to the Factors certain of our accounts receivable balances on a non-recourse basis for credit approved accounts. An administrative fee ranging from
0.14%
to
0.15%
per invoice is charged on the gross amount of accounts receivables assigned to the Factors, plus interest is calculated at the applicable EUR LIBOR rate plus 70 basis points. The total amount factored and excluded from accounts receivable on the Condensed Consolidated Balance Sheets was
$36.4 million
and
$106.7 million
at
October 1, 2016
and
December 31, 2015
, respectively.
Revolving Credit Agreements
On December 9, 2015, our 100% owned finance subsidiary, Perrigo Finance Unlimited Company (formerly Perrigo Finance plc) ("Perrigo Finance"), entered into a
$750.0 million
revolving credit agreement (the "2015 Revolver"). At December 31, 2015,
$380.0 million
was outstanding under the 2015 Revolver. On March 15, 2016, we used the proceeds of the debt issuance described below under "Long-Term Debt" to repay the
$750.0 million
then outstanding under the 2015 Revolver and terminated the facility.
On
December 5, 2014
, Perrigo Finance entered into a
$600.0 million
revolving credit agreement, which we increased to
$1.0 billion
on March 30, 2015 (the "2014 Revolver"). At December 31, 2015,
$300.0 million
was outstanding under the 2014 Revolver. On March 15, 2016, we used the proceeds of the debt issuance described below under "Long-Term Debt" to repay the
$435.0 million
then outstanding under the 2014 Revolver. There were no borrowings outstanding under the 2014 Revolver as of
October 1, 2016
.
Long-Term Debt
On March 7, 2016, Perrigo Finance issued
$500.0 million
in aggregate principal amount of
3.500%
senior notes due 2021 and
$700.0 million
in aggregate principal amount of
4.375%
senior notes due 2026 (together, the "2016 Notes") and received net proceeds of
$1.2 billion
after fees and market discount, which were used to repay the amounts outstanding under the 2015 Revolver and 2014 Revolver mentioned above.
We had
$5.4 billion
and
$4.7 billion
outstanding under our notes and bonds, and
$463.8 million
and
$488.8 million
outstanding under our term loan, as of
October 1, 2016
and
December 31, 2015
, respectively. On September 29, 2016, we repaid the
$500.0 million
outstanding under the 1.300% 2016 Notes.
We were in compliance with all covenants under our debt agreements as of
October 1, 2016
.
See
Item 1. Note 10
for more information on all of the above debt facilities.
Credit Ratings
Our credit ratings on
October 1, 2016
were Baa3 (negative) and BBB- (stable) by Moody's Investors Service and Standard and Poor's ("S&P") Global Ratings, respectively.
Credit rating agencies review their ratings periodically and, therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether current credit ratings will remain as disclosed above. Factors that can affect our credit ratings include changes in operating performance, the economic environment, our financial position, and changes in business strategy. If changes in our credit ratings were to occur, they could impact, among other things, future borrowing costs, access to capital markets, and vendor financing terms.
54
Perrigo Company plc
- Item 2
Financial Condition, Liquidity and Capital Resources
Contractual Obligations and Commitments
Other than the obligations related to the changes to our debt structure in relation to the 2016 Notes, as discussed in
Note 10
of the Notes to the Condensed Consolidated Financial Statements, there were no material changes in contractual obligations as of
October 1, 2016
from those provided in our Transition Report on Form
10-KT for the transition period from June 28, 2015 to December 31, 2015. See below for a revised schedule of our enforceable and legally binding obligations as of
October 1, 2016
related to our short and long-term debt arrangements.
|
|
Payment Due by Period (in millions)
|
||||||||||||||||||
|
2016
(1)
|
2017 - 2018
|
2019 - 2020
|
After 2020
|
Total
|
|||||||||||||||
|
Short and long-term debt
(2)
|
$
|
77.7
|
|
$
|
1,691.1
|
|
$
|
817.0
|
|
$
|
5,510.1
|
|
$
|
8,095.9
|
|
||||
(1)
Reflects remaining three months of 2016.
|
(2)
|
Short and long-term debt includes interest payments, which were calculated using the effective interest rate at
October 1, 2016
.
|
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our quantitative or qualitative disclosures found in Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of our Transition Report on Form 10-KT for the transition period from
June 28, 2015
to
December 31, 2015
.
ITEM 4.
CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) as of
October 1, 2016
. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of
October 1, 2016
because of the material weakness in our internal control over financial reporting described below.
All systems of internal control, no matter how well designed, have inherent limitations. Therefore, even those systems deemed to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In connection with the preparation of our financial statements for the quarter ended April 2, 2016, management determined that we did not design and maintain effective management review controls that operated at a sufficient level of precision to ensure interim income taxes were properly recorded and disclosed in our consolidated financial statements in connection with the recording of an indefinite-lived intangible asset impairment and an estimated goodwill impairment. These control deficiencies resulted in a material misstatement in income taxes in the preliminary financial statements for the quarter ended April 2, 2016. The material misstatement in interim income taxes was corrected prior to the filing of the Form 10-Q for the quarter ended April 2, 2016. These control deficiencies did not result in a misstatement of the consolidated financial statements for the transition period from June 28, 2015 to December 31, 2015, and would have no effect on the accounting for income taxes for the fiscal year ending December 31, 2016. However, these control deficiencies created a reasonable possibility that a material misstatement to the interim consolidated financial statements would not be prevented or detected on a timely basis. Accordingly, management concluded that these control deficiencies represented a material weakness.
55
Perrigo Company plc
- Item 4
Controls and Procedures
Remediation Plan for the Material Weakness
To remediate the material weakness in internal control over financial reporting described above, with oversight from the Audit Committee, we have:
|
•
|
Reviewed the processes and controls in place to measure and record income taxes to enhance the efficiency and effectiveness of the design and operation of those controls;
|
|
•
|
Enhanced monitoring activities related to income taxes by adding additional internal controls and checklists; and
|
|
•
|
Evaluated and enhanced the level of precision in the management review controls related to income taxes by adding additional levels of review.
|
We are in the process of testing and evaluating the design and operating effectiveness of the control procedures and are assessing the effectiveness of the remediation plan, which we began implementing during the three months ended July 2, 2016 and are continuing to implement. Until the remediation actions are fully implemented and the operational effectiveness of related internal controls is validated through testing, the material weakness described above will continue to exist. We are committed to achieving and maintaining a strong internal control environment and believe the remediation measures will strengthen our internal control over financial reporting and remediate the material weakness identified. We will continue to monitor the effectiveness of these remediation measures and will make any changes and take such other actions that we deem appropriate given the circumstances.
Changes in Internal Control over Financial Reporting
As discussed above under the heading entitled "Remediation Plan for the Material Weakness," there were changes in our internal control over financial reporting during the three months ended
October 1, 2016
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1.
LEGAL PROCEEDINGS
Refer to
Part I, Item 1. Note 14
to the Condensed Consolidated Financial Statements.
.00ITEM 1A.
RISK FACTORS
Our Transition Report on Form 10-KT for the transition period from
June 28, 2015
to
December 31, 2015
includes a detailed discussion of our risk factors. At the time of this filing, there have been no material changes to the risk factors that were included in the Form 10-KT other than those described below.
As part of our ongoing strategic portfolio review, we are considering alternatives that could result in certain asset divestitures, which may impact our future operations and financial position.
On November 10, 2016, as part of our ongoing strategic portfolio review, we announced the following strategic actions: (1) exploring strategic alternatives for the potential sale our Tysabri
®
royalty asset, which is reported in our Specialty Sciences segment; (2) conducting a comprehensive internal evaluation of our businesses, including the Rx pharmaceuticals segments’ market position, growth opportunities and interdependencies with our other manufacturing and shared service operations to determine if strategic alternatives should be explored; and (3) conducting a review of segment and corporate cost structures to align with existing and future expected market dynamics. If we determine that we will pursue a strategic divestiture as a result of this portfolio review, our future business, prospects, financial condition, liquidity and operating results could be significantly different than those in historical periods or projected by our management, which may in turn have a material adverse effect on the market value of our ordinary shares or credit ratings. We cannot provide any commitment regarding if or when any such divestiture would occur.
We are dependent on the services of certain key executive and scientific employees. This year, we replaced our chief executive officer and the general managers of both our BCH and Rx segments. Our inability to successfully manage the transition with respect to these key executives, or the failure to attract and retain
56
Perrigo Company plc
- Item 1A
Risk Factors
other key executive and scientific employees, may have a material adverse impact on our results of operations.
As previously disclosed in the "Risk Factors" section of our Form 10-KT, we are dependent on the services of certain key employees, and our future success will depend in large part upon our ability to attract and retain highly skilled employees.
|
•
|
In April 2016, we announced that our former Chairman and Chief Executive Officer, Joseph C. Papa, resigned from the Company and that John T. Hendrickson, formerly our President, was appointed to serve as our new Chief Executive Officer. Mr. Hendrickson was later appointed to serve as a member of our Board of Directors.
|
|
•
|
In April 2016, we announced that the former Executive Vice President and General Manager of our BCH segment, Marc Coucke, resigned from the Company and that our current Executive Vice President and General Manager, International, Sharon Kochan, would undertake expanded responsibilities that include providing leadership and strategic direction to our BCH segment.
|
|
•
|
On November 8, 2016, we appointed John Wesolowski the General Manager, Rx Pharmaceuticals. Mr. Wesolowski served as Acting General Manager, Rx Pharmaceuticals following the resignation of Doug Boothe on July 20, 2016.
|
If this management transition is not successful, or if we are unable to attract or retain other key qualified employees, our future operating results may be adversely impacted.
Publishing earnings guidance subjects us to risks, including increased stock volatility that could lead to potential lawsuits by investors.
Because we publish earnings guidance, we are subject to a number of risks. For a variety of reasons discussed under “Cautionary Note Regarding Forward-Looking Statements”, this Item 1A, and Item 1A of our Transition Report on Form 10-KT for the transition period from
June 28, 2015
to
December 31, 2015
, actual results may vary from the guidance we provide investors from time to time, such that our stock price may decline following, among other things, any earnings releases or guidance that do not meet market expectations.
On February 18, 2016, we announced our results for the fourth quarter and calendar year ended December 31, 2015, as well as our updated guidance for calendar year 2016, and on April 25, 2016 we announced our preliminary financial results for the first quarter ended April 2, 2016, as well as our updated guidance for calendar year 2016. Our stock price declined following each such announcement, resulting in a decrease in our market capitalization. Additionally, we announced updated guidance on August 10, 2016. It has become increasingly commonplace for investors to file lawsuits against companies following a rapid decrease in market capitalization. These types of lawsuits can be costly and divert management attention and other resources away from our business, regardless of their merits, and could result in adverse settlements or judgments.
We are or may become involved in shareholder class action lawsuits and may experience unfavorable outcomes of such proceedings.
We are a defendant to a securities lawsuit in which the complaint alleges violations of Securities Exchange Act sections 10(b) (and Rule 10b‑5) and 14(e) against both Perrigo and our former Chief Executive Officer, Joseph C. Papa, and 20(a) control person liability against Mr. Papa. In general, the allegations concern the actions taken by the Company and former executive to defend against the hostile takeover bid by Mylan in the period April 21, 2015 through November 13, 2015. The plaintiff also alleges that we provided inadequate disclosure concerning alleged integration problems as a result of the Omega acquisition in the period April 21, 2015 through May 11, 2016. Another securities class action case was also filed in the same court making essentially the same claims on behalf of a class of persons who sold put options in Perrigo shares during the same class period. There is a motion pending to consolidate the two actions.
We along with certain of our current and former executive officers and board members are also defendants in a securities class action suit where the plaintiff allege violations of Israeli law in the District Court of Tel Aviv-Jaffa
.
57
Perrigo Company plc
- Item 1A
Risk Factors
On June 15, 2016, Perrigo filed a motion to stay the case pending the outcome of the securities class action pending in the New Jersey federal court. The plaintiffs did not oppose the motion. The Israeli court granted the motion on the same day, and the action is stayed.
We intend to vigorously defend against these lawsuits, however, we cannot predict how the cases will be resolved. Adverse results in the cases could result in substantial monetary judgments. See
Part I. Item 1. Note 14
for more information on the above mentioned lawsuits.
We may not be able to improve operating results in our business segments.
|
•
|
We have experienced a reduction in pricing expectations during 2016 in comparison to historical patterns in our U.S. businesses, in particular in our Rx segment, due to industry and competitive pressures in the sector. The reduced pricing is attributable to a variety of factors including increased focus from customers to capture supply chain productivity savings, low raw material commodity pricing, competition in specific product categories, the loss of exclusivity on certain products, and consolidation of certain customers in the Rx segment. We have seen year-over-year pricing in the third quarter of 2016 moderate from the levels experienced in the first half of 2016. We expect this pricing environment to continue to impact the Company for the foreseeable future.
|
|
•
|
Our expectations for the BCH segment continue to be impacted by market dynamics in key countries such as Belgium, France, Germany and Italy. Factors impacting these countries include softness in certain leading brand categories primarily due to lower sell-through during the current year due to the re-staging launch timing of certain products, changes in timing of certain advertising and promotional campaigns compared to the prior year, and macro-economic factors, including unfavorable foreign currency impacts experienced primarily in the UK related to Brexit. The BCH segment has established a brand prioritization strategy to address these market dynamics, with an objective to balance the cost of advertising and promotion investments with expected contributions from category sales. The segment has further impacted in Belgium by a change in the forecasts with a major wholesaler, as management implements improved supply chain efficiencies in this market.
|
|
•
|
Our expectations for 2016 new product sales are consistent with those communicated in our Form 10-Q for the three months ended April 2, 2016, but continue to remain lower than we anticipated as of December 31, 2015. Several new product launches have been delayed due to the regulatory approval process for certain new products in the U.S. and modifications to market share penetration and timing assumptions for new products in our Rx and BCH segments.
|
There can be no assurance that we will not continue to experience challenges related to our segments, and these challenges could have a material impact on our business, cash flows, and results of operations or result in impairment charges, and the market value of our ordinary shares and/or debt securities
may decline.
We have acquired significant intangible assets and goodwill that could become impaired or subject us to losses and may result in an adverse impact on our results of operations.
We have recorded significant intangible assets and goodwill on our balance sheet as a result of previous acquisitions, which could become impaired and lead to material charges in the future. We regularly review our intangible assets and goodwill for impairment. Goodwill and indefinite-lived intangible assets are subject to impairment review on an annual basis and whenever impairment indicators are present.
In connection with the preparation of our financial statements for the three-month period ended April 2, 2016, we identified indicators of goodwill impairment in our BCH - rest of world (“BCH - ROW”) reporting unit, which comprises primarily operations attributable to the Omega acquisition in all geographic regions except for Belgium. The primary impairment indicators included the decline in our 2016 performance expectations and a reduction in our long-range revenue growth forecast. Step one of the goodwill impairment test involved determining the fair value of the reporting unit using a discounted cash flow technique and comparing it to the reporting unit’s carrying value. The main assumptions supporting the cash flow projections used to determine the reporting unit’s fair value included revenue growth based on product line extensions, product life cycle strategies, and geographical expansion within the markets in which the reporting unit distributes products, gross margins consistent with historical trends, and
58
Perrigo Company plc
- Item 1A
Risk Factors
advertising and promotion investments largely consistent with the reporting unit's growth plans. The BCH-ROW reporting unit did not pass step one of goodwill impairment testing. The change in fair value from previous estimates was due primarily to the changes in the market and performance of certain brands such that the evaluation of brand prioritization and product extensions or launches in new regions are being more focused to maximize the potential of all brands in the segment's portfolio.
The second step of the goodwill impairment test required that we determine the implied fair value of the BCH - ROW reporting unit’s goodwill, which involved determining the value of the reporting unit’s individual assets and liabilities. Due to the complex and time-consuming nature of step two, based on our evaluation and initial estimates of the fair values of the assets and liabilities and the deficit of the fair value when compared to the related book value, we recorded an estimated impairment charge of
$193.6 million
for the three months ended April 2, 2016. We finalized the step two fair value calculation during the three months ended July 2, 2016, which resulted in a
$30.3 million
reduction to the estimated impairment charge recorded during the three months ended April 2, 2016
,
In connection with the preparation of our financial statements for the three months ended October 1, 2016, we identified additional indicators of goodwill impairment in both our BCH - ROW and our BCH - Belgium reporting units. With respect to both reporting units, the primary impairment indicators included an additional decline in our 2016 performance expectations for the remainder of the year and a reduction in our long-range revenue growth and margin forecasts due to the factors outlined below. Step one of the goodwill impairment test involved determining the fair value of the reporting units using a discounted cash flow technique and comparing it to the respective reporting units' carrying value. The main assumptions supporting the cash flow projections used to determine each reporting unit’s fair value included revenue growth based on product line extensions, product life cycle strategies, and geographical expansion within the markets in which the reporting unit distributes products, gross margins consistent with historical trends and including supply chain cost improvement plans, and advertising and promotion investments largely consistent with the reporting unit's growth plans. Both the BCH - ROW and the BCH - Belgium reporting units did not pass step one of goodwill impairment testing. As it relates to the BCH - ROW reporting unit, the changes in fair value from previous estimates were due primarily to (1) changes in the market and performance of certain brands due to moderated new product launch assumptions, (2) execution of certain key product strategies falling short of expectations causing a reduction to baseline forecast models in France, Germany and Italy, (3) certain macro-economic factors having continued to impact the business more than expected in France, Russia and Turkey in addition to unfavorable foreign currency impacts experienced primarily in the UK related to Brexit. As it relates to BCH - Belgium reporting unit, the changes in fair value from previous estimates due to change in the forecast as a result of a reduction in volume with a major wholesaler due to factors consistent with those outlined for BCH - ROW.
The second step of the goodwill impairment test required that we determine the implied fair value of both the BCH - ROW and BCH - Belgium reporting units' goodwill, which involved determining the value of each reporting unit’s individual assets and liabilities. Based on our evaluation and initial estimates of the fair values of the assets and liabilities and the deficit of the fair value when compared to the related book value, we recorded an estimated impairment charge of
$734.7 million
related to the BCH - ROW reporting unit and
$69.4 million
related to the BCH - Belgium reporting unit for the three months ended October 1, 2016. Both charges were recorded in Impairment charges on the Condensed Consolidated Statements of Operations within our BCH segment. Due to the complex and time-consuming nature of step two, we expect to finalize the fair value calculation during the fourth quarter of 2016, which could result in an adjustment to the estimated impairment charge. As of October 1, 2016,
$1.0 billion
and
$70.2 million
of goodwill remains in the BCH - ROW and BCH - Belgium reporting units, respectively.
While no impairment charges were recorded as a result of the goodwill impairment testing for the transition period of
June 28, 2015
to
December 31, 2015
, our Specialty Sciences reporting unit's fair value exceeded the carrying value by less than 10%. Management evaluated the primary source of cash flow in this segment, the Tysabri
®
royalty stream, based on a combination of factors including independent external research, information provided from our royalty partner, and internal estimates. Based on this information, management’s assessment of future cash flow from this royalty stream has been reduced primarily due to anticipated new competitors entering the market and unfavorable currency exchange effects. Future performance different from the assumptions utilized in our quantitative analysis may further reduce the fair value of the reporting unit, which may result in the fair value no longer exceeding the carrying value. In February 2016, a competitor's pipeline product, Ocrevus
®
, received breakthrough therapy designation from the FDA and could potentially be approved in 2016. The product would
59
Perrigo Company plc
- Item 1A
Risk Factors
compete with Tysabri
®
and could have a significant negative impact on the royalty we receive from Biogen Idec Inc. ("Biogen") and the performance of the Specialty Sciences segment. We continue to monitor the progress of all potential competing products and assess the reporting unit for potential impairment should impairment indicators arise, as applicable, and at least annually during our fourth quarter impairment testing.
In connection with the preparation of our financial statements for the three-month period ended April 2, 2016, we identified indicators of impairment associated with certain indefinite-lived intangible assets acquired in conjunction with the Omega acquisition. The primary impairment indicators included the decline in our 2016 performance expectations and a reduction in our long-range revenue growth forecast. The assessment utilized the excess earnings method to determine fair value and resulted in an impairment charge of
$273.4 million
in
Impairment charges
on the Condensed Consolidated Statements of Operations within our BCH segment, which represented the difference between the carrying amount of the intangible assets and their estimated fair value. The change in fair value from previous estimates was due primarily to the changes in the market and performance of the brands such that the evaluation of brand prioritization and product extensions or launches in new regions are being more focused to maximize the potential of all brands in the segment's portfolio. The main assumptions supporting the fair value of these assets and cash flow projections included revenue growth based on product line extensions, product life cycle strategies, and geographical expansion within the markets in which the BCH segment distributes products, gross margins consistent with historical trends, and advertising and promotion investments largely consistent with the segment's growth plans.
In connection with the preparation of our financial statements for the three months ended October 1, 2016, we identified additional indicators of impairment associated with certain indefinite-lived and definite-lived intangible brand category assets acquired in conjunction with the Omega acquisition. The primary impairment indicators are discussed above in goodwill. The assessment of the indefinite-lived assets utilized the excess earnings method to determine fair value and resulted in an impairment charge of
$575.7 million
for the three months ended October 1, 2016. With regards to the definite-lived asset, it was determined that the carrying value of the asset group was not recoverable based on an assessment of the undiscounted future cash flows expected to be generated by the asset group. Given this, the excess earnings method was utilized to determine fair value of the definite-lived asset and resulted in an impairment charge of
$290.2 million
for the
three months ended
October 1, 2016
. Both charges, which represented the difference between the carrying amount of the intangible assets and their estimated fair value, were recorded in Impairment charges on the Condensed Consolidated Statements of Operations within our BCH segment. The main assumptions supporting the fair value of these assets and cash flow projections are included in the goodwill discussions above.
The carrying value for certain intangible assets and goodwill equals estimated and implied fair values, respectively, and as a result, any further deterioration in those assets' fair value would lead to a further impairment charge. Future performance different from the assumptions utilized in our quantitative analyses may result in additional changes in the fair value. We will continue to monitor and assess these assets for potential impairment should further impairment indicators arise. We will complete our required annual impairment testing during the fourth quarter of 2016.
In addition, given the additional change in performance expectations for our remaining impaired cough/cold/allergy, anti-parasite, personal care and natural health brands previously recorded as indefinite-lived assets, we reclassified the remaining asset balance of
$672.4 million
related to these four assets to definite-lived assets with a 20-year useful life and began amortizing the assets as of October 2, 2016.
See
Part I. Item 1. Note 3
for more information on the above impairment charges.
We identified a material weakness in our internal controls over financial reporting; failure to remediate the material weakness could negatively impact our business and the price of our ordinary shares.
In connection with the preparation of our financial statements for the three-month period ended April 2, 2016, we concluded that a material weakness existed in our internal controls over financial reporting, as described under
Item 4. “Controls and Procedures
.” More specifically, we did not design and maintain effective management review controls that operated at a sufficient level of precision to ensure interim income taxes are properly recorded and disclosed in our consolidated financial statements in connection with the recording of an indefinite-lived intangible asset impairment and an estimated goodwill impairment for the three months ended April 2, 2016. In
60
Perrigo Company plc
- Item 1A
Risk Factors
response to the identified material weakness, and with oversight from our Audit Committee, we are focused on improving our internal controls over financial reporting and remedying the identified material weakness.
To remediate the material weakness in internal control over financial reporting described above, with oversight from the Audit Committee, we have:
|
•
|
Reviewed the processes and controls in place to measure and record income taxes to enhance the efficiency and effectiveness of the design and operation of those controls;
|
|
•
|
Enhanced monitoring activities related to income taxes by adding additional internal controls and checklists; and
|
|
•
|
Evaluated and enhanced the level of precision in the management review controls related to income taxes by adding additional levels of review.
|
We are in the process of testing and evaluating the design and operating effectiveness of the control procedures and are assessing the effectiveness of the remediation plan, which we began implementing during the three months ended July 2, 2016 and are continuing to implement. Until the remediation actions are fully implemented and the operational effectiveness of related internal controls is validated through testing, the material weakness described above will continue to exist. We will continue to monitor the effectiveness of these remediation measures and will make any changes and take such other actions that we deem appropriate given the circumstances. We cannot assure you that we will be able to remediate this material weakness on a timely basis or at all. Failure to remediate this material weakness or difficulties encountered during implementation of these remediation efforts could result in material misstatements in or a future restatement of our financial statements, a failure to meet our reporting obligations, or the loss of investor confidence in our reported financial information, any of which could negatively impact our business and the price of our ordinary shares.
Our global operations could be negatively impacted by the economic and political instability caused by the United Kingdom ("UK") vote to leave the European Union ("EU").
The UK held a referendum on June 23, 2016 on its membership in the EU. A majority of UK voters voted to exit the EU (“Brexit”), and negotiations will commence to determine the future terms of the UK’s relationship with the EU, subject to a negotiation period that could last up to two years after the UK government formally initiates the withdraw process, including the terms of trade between the UK and the EU. Brexit has created significant instability and volatility in the global financial markets, has led to significant weakening of the British pound compared to the U.S. dollar and other currencies, and could adversely affect European or worldwide economic or market conditions. Although it is unknown what those terms will be, they may impair the ability of our operations in the EU to transact business in the future in the UK, and similarly the ability of our UK operations to transact business in the future in the EU. Specifically, it is possible that there will be greater restrictions on imports and exports between the UK and EU countries and increased regulatory complexities. These changes may adversely affect our operations and financial results. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or replicate. Further, among other things, Brexit could reduce consumer spending in the UK and the EU, which could result in decreased demand for our products. Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, business opportunities, results of operations, financial condition and cash flows.
I
TEM 5.
OTHER INFORMATION
Director Appointments
On November 7, 2016, the Board of Directors appointed each of Geoffrey M. Parker and Theodore R. Samuels as members of the Board, effective November 7, 2016 and January 4, 2017, respectively. Each of Messrs. Parker and Samuels will serve as directors until the Company’s 2017 annual meeting of shareholders or until their successors are duly elected and qualified. Mr. Parker will serve on the Board’s Audit Committee. In connection with their appointment and service to the Board, Messrs. Parker and Samuels will receive, on a prorated basis, the same director compensation that our non-employee directors are eligible to receive, as previously disclosed in the Company’s definitive proxy statement on Schedule 14A filed with the SEC on March 17, 2016.
61
Perrigo Company plc
- Item 1A
Risk Factors
There are no arrangements or understandings between either of Messrs. Parker and Samuels and any other person in connection with their respective appointments to the Board. There are no transactions in which either Messrs. Parker or Samuels, or any member of their immediate family, has an interest that would require disclosure under Item 404(a) of Regulation S-K.
Directors Not Standing for Re-election
On November 7, 2016, Michael Jandernoa and Gary Kunkle advised the Board that they will not stand for re-election as directors of the Company at the 2017 annual meeting of shareholders. Messrs. Jandernoa and Kunkle will continue to serve as directors until the Company’s 2017 annual meeting of shareholders. Mr. Kunkle has served as a director since 2002 and held the position of Lead Independent Director of the Company between August 2009 and April 2016. In addition, Mr. Kunkle served on the Board’s Audit Committee and Remuneration Committee. Mr. Jandernoa has served as a director since 1981, and was the Company’s Chief Executive Officer from 1988 to 2000 and Chairman of the Board from 1991 to 2003. Each of Messrs. Kunkle and Jandernoa advised the Board that he has determined to retire from the Board after many years of distinguished service and that his decision not to stand for re-election at the 2017 annual meeting of shareholders is not the result of any disagreement with the other Board members or with the Company on any matters involving the Company’s operations, policies or practices.
62
Perrigo Company plc
- Part II - Item 6
Exhibits
ITEM 6.
EXHIBITS
|
Exhibit
Number
|
Description
|
|
|
3.1
|
Certificate of Incorporation of Perrigo Company plc (formerly known as Perrigo Company Limited) (incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed on December 19, 2013).
|
|
|
3.2
|
Memorandum and Articles of Association of Perrigo Company plc, as amended (incorporated by reference from Exhibit 3.2 to the Company's Transition Report on Form 10-KT filed on February 25, 2016).
|
|
|
10.1
|
Employment Agreement, dated as of August 3, 2016, by and among the Company, Perrigo Management Company and John T. Hendrickson (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 5, 2016).
|
|
|
10.2
|
Amendment No. 2, dated September 9, 2016, to the Revolving Credit Agreement by and among Perrigo Finance Unlimited Company, the Company, JPMorgan Chase Bank, N.A. and the other lenders party thereto, dated as of December 5, 2014, as amended by Amendment No. 1, dated as of February 26, 2016 (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 9, 2016).
|
|
|
10.3
|
Amendment No. 2, dated September 9, 2016, to the Term Loan Credit Agreement by and among Perrigo Finance Unlimited Company, the Company, JPMorgan Chase Bank, N.A. and the other lenders party thereto, dated as of December 5, 2014, as amended by Amendment No. 1, dated as of February 26, 2016 (incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 9, 2016).
|
|
|
31.1
|
Rule 13a-14(a) Certification by John T. Hendrickson, Chief Executive Officer (filed herewith).
|
|
|
31.2
|
Rule 13a-14(a) Certification by Judy L. Brown, Executive Vice President, Business Operations and Chief Financial Officer (filed herewith).
|
|
|
32
|
Certification Pursuant to 18 United States Code 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934 (furnished herewith).
|
|
|
101.INS
|
XBRL Instance Document.
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document.
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document.
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document.
|
|
63
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
PERRIGO COMPANY PLC
|
|||
|
(Registrant)
|
|||
|
Date:
|
November 10, 2016
|
By: /s/ John T. Hendrickson
|
|
|
John T. Hendrickson
|
|||
|
Chief Executive Officer
|
|||
|
(Principal Executive Officer)
|
|||
|
Date:
|
November 10, 2016
|
By: /s/ Judy L. Brown
|
|
|
Judy L. Brown
|
|||
|
Executive Vice President, Business Operations and Chief Financial Officer
|
|||
|
(Principal Accounting and Financial Officer)
|
|||
64
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial Statements (unaudited)Note 1 Summary Of Significant Accounting PoliciesNote 2 Acquisitions and DivestituresNote 3 Goodwill and Other Intangible AssetsNote 4 - Accounts Receivable FactoringNote 5 InventoriesNote 6 Fair Value MeasurementsNote 7 InvestmentsNote 8 Derivative Instruments and Hedging ActivitiesNote 9 Assets Held For SaleNote 10 IndebtednessNote 11 Earnings Per Share and Shareholders' EquityNote 12 Accumulated Other Comprehensive Income (loss)Note 13 Income TaxesNote 14 Commitments and ContingenciesNote 15 Collaboration Agreements and Other Contractual ArrangementsNote 16 Restructuring ChargesNote 17 Segment InformationItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationPart IIItem 1. Legal ProceedingsItem 5. Other InformationItem 6. Exhibits