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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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[X]
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Accelerated filer
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[ ]
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Non-accelerated filer
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[ ]
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Smaller reporting company
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[ ]
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Emerging growth company
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[ ]
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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[ ]
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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
May 26, 2017
, there were
143,397,295
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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18
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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-K for the year ended December 31, 2016 for a discussion of certain important risk factors that relate to forward-looking statements contained in this report and Part II, Item 1A of this Form 10-Q. 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 any share repurchases; future impairment charges; customer acceptance of new products; competition from other industry participants, some of whom have greater marketing resources or larger market shares in certain product categories than we do; pricing pressures from customers and consumers; potential third-party claims and litigation, including litigation relating to our restatement of previously-filed financial information; potential impacts of ongoing or future government investigations and regulatory initiatives; general economic conditions; fluctuations in currency exchange rates and interest rates; the consummation of announced acquisitions or dispositions, and our ability to realize the desired benefits thereof; and the ability to execute and achieve the desired benefits of announced cost-reduction efforts and other initiatives. In addition, we may identify and be unable to remediate one or more material weaknesses in our internal control over financial reporting or may be unable to regain compliance with the NYSE continued listing rules. Furthermore, we and/or our subsidiaries may incur additional tax liabilities in respect of 2016 and prior years as a result of any restatement or may be found to have breached certain provisions of Irish company legislation in respect of prior financial statements and if so may incur additional expenses and penalties. These and other important factors, including those discussed in our Form 10-K for the year ended December 31, 2016 and in this report 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, TRADE NAMES 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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||||||
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April 1,
2017 |
April 2,
2016 |
|||||
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Net sales
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$
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1,194.0
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$
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1,347.3
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Cost of sales
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729.6
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814.2
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Gross profit
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464.4
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533.1
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Operating expenses
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|||||||
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Distribution
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21.1
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21.8
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|||
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Research and development
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39.8
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45.3
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Selling
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155.0
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180.8
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Administration
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105.4
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107.5
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Impairment charges
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12.2
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403.9
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Restructuring
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38.7
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5.4
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Other operating income
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(36.3
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)
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—
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Total operating expenses
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335.9
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764.7
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Operating income (loss)
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128.5
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(231.6
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)
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Tysabri
®
royalty stream
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(17.1
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)
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204.4
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Interest expense, net
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53.3
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51.2
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Other (income) expense, net
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(3.5
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)
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2.5
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Loss on extinguishment of debt
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—
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0.4
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Income (loss) before income taxes
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95.8
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(490.1
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)
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Income tax expense
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24.2
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39.1
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Net income (loss)
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$
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71.6
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$
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(529.2
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)
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Earnings (loss) per share
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Basic
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$
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0.50
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$
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(3.70
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)
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Diluted
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$
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0.50
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$
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(3.70
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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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143.4
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143.2
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Diluted
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143.6
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143.2
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Dividends declared per share
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$
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0.160
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$
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0.145
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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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|||||||
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April 1,
2017 |
April 2,
2016 |
||||||
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Net income (loss)
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$
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71.6
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$
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(529.2
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)
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Other comprehensive income:
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|||||||
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Foreign currency translation adjustments
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65.4
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151.4
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Change in fair value of derivative financial instruments, net of tax
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1.6
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(5.7
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)
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Change in fair value of investment securities, net of tax
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(11.4
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)
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6.2
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Change in post-retirement and pension liability adjustments, net of tax
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(0.1
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)
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0.8
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Other comprehensive income, net of tax
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55.5
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152.7
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Comprehensive income (loss)
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$
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127.1
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$
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(376.5
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)
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See accompanying Notes to the Condensed Consolidated Financial Statements
3
Perrigo Company plc
- Item 1
PERRIGO COMPANY PLC
(in millions, except share and per share amounts)
(unaudited)
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April 1,
2017 |
December 31,
2016 |
||||||
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Assets
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Cash and cash equivalents
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$
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3,077.8
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$
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622.3
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Accounts receivable, net of allowance for doubtful accounts of $6.0 million and $6.3 million, respectively
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1,050.2
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1,176.0
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Inventories
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800.2
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795.0
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Prepaid expenses and other current assets
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185.2
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212.0
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Total current assets
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5,113.4
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2,805.3
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Property, plant and equipment, net
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875.3
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870.1
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Tysabri
®
royalty stream
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—
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2,350.0
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Goodwill and other indefinite-lived intangible assets
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4,178.0
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4,163.9
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Other intangible assets, net
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3,341.4
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3,396.8
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|||
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Non-current deferred income taxes
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76.4
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72.1
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|||
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Other non-current assets
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394.9
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211.9
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|||
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Total non-current assets
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8,866.0
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11,064.8
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Total assets
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$
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13,979.4
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$
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13,870.1
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Liabilities and Shareholders’ Equity
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|||||||
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Accounts payable
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$
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476.3
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$
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471.7
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Payroll and related taxes
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146.0
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115.8
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|
|||
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Accrued customer programs
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348.2
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380.3
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|
|||
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Accrued liabilities
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281.6
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263.3
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|
|||
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Accrued income taxes
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57.7
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32.4
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|
|||
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Current indebtedness
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1,175.4
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572.8
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|
|||
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Total current liabilities
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2,485.2
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1,836.3
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|
|||
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Long-term debt, less current portion
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4,618.9
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5,224.5
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|
|||
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Non-current deferred income taxes
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349.4
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389.9
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|
|||
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Other non-current liabilities
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458.6
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461.8
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|
|||
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Total non-current liabilities
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5,426.9
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6,076.2
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|
|||
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Total liabilities
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7,912.1
|
|
7,912.5
|
|
|||
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Commitments and contingencies - Note 14
|
|||||||
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Shareholders’ equity
|
|||||||
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Controlling interest:
|
|||||||
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Preferred shares, $0.0001 par value, 10 million shares authorized
|
—
|
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—
|
|
|||
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Ordinary shares, €0.001 par value, 10 billion shares authorized
|
8,118.1
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8,135.0
|
|
|||
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Accumulated other comprehensive (loss)
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(26.3
|
)
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(81.8
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)
|
|||
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Retained earnings (accumulated deficit)
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(2,024.0
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)
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(2,095.1
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)
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Total controlling interest
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6,067.8
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5,958.1
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Noncontrolling interest
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(0.5
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)
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(0.5
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)
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|||
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Total shareholders’ equity
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6,067.3
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5,957.6
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|||
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Total liabilities and shareholders' equity
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$
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13,979.4
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$
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13,870.1
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Supplemental Disclosures of Balance Sheet Information
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|||||||
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Ordinary shares, issued and outstanding
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143.4
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143.4
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|
|||
See accompanying Notes to the Condensed Consolidated Financial Statements
4
Perrigo Company plc
- Item 1
PERRIGO COMPANY PLC
(in millions)
(unaudited)
|
Three Months Ended
|
|||||||
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April 1,
2017 |
April 2,
2016 |
|||||
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Cash Flows From (For) Operating Activities
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|||||||
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Net income (loss)
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$
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71.6
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$
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(529.2
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)
|
|
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Adjustments to derive cash flows
|
|||||||
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Depreciation and amortization
|
109.4
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109.7
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|
|||
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Share-based compensation
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6.1
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15.8
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|
|||
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Impairment charges
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12.2
|
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403.9
|
|
|||
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Tysabri
®
royalty stream
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(17.1
|
)
|
204.4
|
|
|||
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Loss on extinguishment of debt
|
—
|
|
0.4
|
|
|||
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Restructuring charges
|
38.7
|
|
5.4
|
|
|||
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Deferred income taxes
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(46.0
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)
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(178.3
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)
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|||
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Amortization of debt discount (premium)
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(6.4
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)
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(6.7
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)
|
|||
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Other non-cash adjustments
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(1.1
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)
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1.6
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|
|||
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Subtotal
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167.4
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|
27.0
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|
|||
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Increase (decrease) in cash due to:
|
|||||||
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Accounts receivable
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50.1
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17.3
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|
|||
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Inventories
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0.5
|
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4.4
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|
|||
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Accounts payable
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2.5
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(3.2
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)
|
|||
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Payroll and related taxes
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(10.1
|
)
|
(37.4
|
)
|
|||
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Accrued customer programs
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(32.7
|
)
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(81.7
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)
|
|||
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Accrued liabilities
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2.3
|
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(12.8
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)
|
|||
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Accrued income taxes
|
41.4
|
|
185.7
|
|
|||
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Other
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(26.9
|
)
|
(0.8
|
)
|
|||
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Subtotal
|
27.1
|
|
71.5
|
|
|||
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Net cash from (for) operating activities
|
194.5
|
|
98.5
|
|
|||
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Cash Flows From (For) Investing Activities
|
|||||||
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Proceeds from royalty rights - at fair value
|
85.3
|
|
83.4
|
|
|||
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Acquisitions of businesses, net of cash acquired
|
—
|
|
(416.4
|
)
|
|||
|
Additions to property and equipment
|
(22.0
|
)
|
(34.7
|
)
|
|||
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Proceeds from sale of business and other assets
|
25.3
|
|
—
|
|
|||
|
Proceeds from sale of the Tysabri
®
royalty stream
|
2,200.0
|
|
—
|
|
|||
|
Other investing
|
(0.8
|
)
|
(1.0
|
)
|
|||
|
Net cash from (for) investing activities
|
2,287.8
|
|
(368.7
|
)
|
|||
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Cash Flows From (For) Financing Activities
|
|||||||
|
Issuances of long-term debt
|
—
|
|
1,190.3
|
|
|||
|
Payments on long-term debt
|
(13.6
|
)
|
(14.3
|
)
|
|||
|
Borrowings (repayments) of revolving credit agreements and other financing, net
|
0.3
|
|
(715.9
|
)
|
|||
|
Deferred financing fees
|
(0.4
|
)
|
(1.5
|
)
|
|||
|
Issuance of ordinary shares
|
—
|
|
3.1
|
|
|||
|
Cash dividends
|
(23.0
|
)
|
(20.8
|
)
|
|||
|
Other financing
|
(0.5
|
)
|
(3.5
|
)
|
|||
|
Net cash from (for) financing activities
|
(37.2
|
)
|
437.4
|
|
|||
|
Effect of exchange rate changes on cash and cash equivalents
|
10.4
|
|
3.9
|
|
|||
|
Net increase in cash and cash equivalents
|
2,455.5
|
|
171.1
|
|
|||
|
Cash and cash equivalents, beginning of period
|
622.3
|
|
417.8
|
|
|||
|
Cash and cash equivalents, end of period
|
$
|
3,077.8
|
|
$
|
588.9
|
|
|
See accompanying Notes to the Condensed Consolidated Financial Statements
5
Perrigo Company plc
- Item 1
Note 1
NOTE 1 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 healthcare company, delivering value to our customers and consumers by providing Quality Affordable Healthcare Products
®
. Founded in 1887 as a packager of home remedies, we have built a unique business model that is best described as the convergence of a fast-moving consumer goods company, a high-quality pharmaceutical manufacturing organization and a world-class supply chain network. We are the world's largest manufacturer of over-the-counter (“OTC”) healthcare products and supplier of infant formulas for the store brand market. We also are a leading provider of branded OTC products throughout Europe and the U.S., as well as a leading producer of generic standard topical products such as creams, lotions, gels, as well as inhalants and injections ("extended topical") prescription drugs. We are headquartered in Ireland, and sell our products primarily in North America and Europe, as well as in other markets, including Australia, Israel and China.
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 Annual Report on Form 10-K for the year ended
December 31, 2016
. In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation of the unaudited Condensed Consolidated Financial Statements have been included and include our accounts and the accounts of all majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
6
Perrigo Company plc
- Item 1
Note 1
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 Adopted
|
||||||
|
Standard
|
Description
|
Date of adoption
|
Effect on the Financial Statements or Other Significant Matters
|
|||
|
Clarifying the Definition of a Business
|
This update clarifies the definition of a business and addresses whether transactions should be accounted for as asset acquisitions or business combinations (or divestitures). The guidance includes an initial threshold that an acquired set of assets will not be considered a business if substantially all of the fair value of the assets acquired is concentrated in a single tangible or identifiable intangible asset (or group of similar assets). If the acquired set does not pass the initial threshold, then the guidance requires that, to be a business, the set must include an input and a substantive process that together significantly contribute to the ability to create outputs. Different factors are considered to determine whether the set includes a substantive process, such as the inclusion of an organized workforce. Further, the guidance removes language stating that a business need not include all of the inputs and processes that the seller used in operating the business.
|
January 1, 2017
|
We early adopted this new standard and will apply it prospectively when determining whether transactions should be accounted for as asset acquisitions or business combinations (divestitures). During the three months ended April 1, 2017, we applied the new guidance when determining whether certain product divestitures represented sales of assets or businesses. In each case, we determined that the assets sold did not meet the definition of a business under the new rules.
|
|||
|
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.
|
January 1, 2017
|
We adopted this standard as of January 1, 2017. We elected to estimate the number of awards expected to be forfeited and adjust the estimate when it is likely to change, consistent with past practice. We did not change the amounts that we withhold to cover income taxes on awards. As the requirement to record all income tax effects of vested or settled awards through the income statement is prospective in nature, there was no cumulative effect of adopting the standard on our balance sheet.
|
|||
7
Perrigo Company plc
- Item 1
Note 1
|
Recently Issued Accounting Standards Not Yet Adopted
|
||||||
|
Standard
|
Description
|
Effective Date
|
Effect on the Financial Statements or Other Significant Matters
|
|||
|
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.
|
January 1, 2018
|
We continue to evaluate the implications of adoption of the new revenue standard on our consolidated financial statements. We have completed an initial assessment of the adoption and are in the process of completing a detailed review of our various customer contracts. Based on our initial analysis, we do not expect there to be a material impact on our revenue recognition practices. We plan to adopt the new revenue standard effective January 1, 2018 using the modified retrospective approach.
|
|||
|
Intra-Entity Asset Transfers of Assets Other Than Inventory
|
Under the new guidance, the tax impact to the seller on the profit from the transfers and the buyer’s deferred tax benefit on the increased tax basis would be recognized when the transfers occur, resulting in the recognition of expense sooner than under historical guidance. The guidance excludes intra-entity transfers of inventory. For intra-entity transfers of inventory, the FASB decided to retain current GAAP, which requires an entity to recognize the income tax consequences when the inventory has been sold to an outside party.
|
January 1, 2018
|
We are currently evaluating the implications of adoption on our consolidated financial statements and considering whether to early adopt the standard.
|
|||
|
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.
|
|||
8
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.
|
|||
|
Intangibles - Goodwill and Other Simplifying the Test for Goodwill
|
The objective of this update is to reduce the cost and complexity of subsequent goodwill accounting by simplifying the impairment test by removing the Step 2 requirement to perform a hypothetical purchase price allocation when the carrying value of a reporting unit exceeds its fair value. If a reporting unit’s carrying value exceeds its fair value, an entity would record an impairment charge based on that difference, limited to the amount of goodwill attributed to that reporting unit. The proposal would not change the guidance on completing Step 1 of the goodwill impairment test. The proposed guidance would be applied prospectively with an effective date for Perrigo of January 1, 2020, with early adoption permitted as of January 1, 2017.
|
January 1, 2020
|
We are currently evaluating the implications of adoption on our consolidated financial statements 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 and liabilities assumed, as well as asset lives, can materially impact our results of operations.
The effects of all of the acquisitions described below were 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.
9
Perrigo Company plc
- Item 1
Note 2
Prior 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 rights 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 standard topical products such as creams, lotions, and gels, as well as our inhalants and injections ("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.
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 "prescription only" ("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 are also 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 In Process Research and Development ("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
.
10
Perrigo Company plc
- Item 1
Note 2
Purchase Price Allocation of Prior Year Acquisitions
The Tretinoin Products, Development-Stage Rx Products and four small product acquisitions (included in "All Other" in the table below) are final.
The below table indicates the purchase price allocation for acquisitions completed during the year ended December 31, 2016 (in millions):
|
Tretinoin Products
|
Development-Stage Rx Products
|
All Other
(1)
|
|||||||||
|
Purchase price paid
|
$
|
416.4
|
|
$
|
—
|
|
$
|
17.1
|
|
||
|
Contingent consideration
|
—
|
|
24.9
|
|
26.2
|
|
|||||
|
Total purchase consideration
|
$
|
416.4
|
|
$
|
24.9
|
|
$
|
43.3
|
|
||
|
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
|
|
—
|
|
—
|
|
|||||
|
Definite-lived intangibles
:
|
|||||||||||
|
Distribution and license agreements, supply agreements
|
—
|
|
—
|
|
1.8
|
|
|||||
|
Developed product technology, formulations, and product rights
|
411.0
|
|
—
|
|
18.0
|
|
|||||
|
Customer relationships and distribution networks
|
—
|
|
—
|
|
8.2
|
|
|||||
|
Non-compete agreements
|
2.3
|
|
—
|
|
—
|
|
|||||
|
Indefinite-lived intangibles
:
|
|||||||||||
|
In-process research and development
|
—
|
|
24.9
|
|
4.9
|
|
|||||
|
Total intangible assets
|
$
|
413.3
|
|
$
|
24.9
|
|
$
|
32.9
|
|
||
|
Total assets
|
$
|
416.4
|
|
$
|
24.9
|
|
$
|
50.0
|
|
||
|
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
|
|
$
|
43.3
|
|
||
|
(1)
|
Consists of
four
product acquisitions in our Consumer Healthcare Americas ("
CHCA
"), Consumer Healthcare International ("
CHCI
") and
RX
segments
|
Current Year Divestitures
On
February 1, 2017
, we completed the sale of the Animal Health pet treats plant fixed assets, which were previously classified as held-for sale, and received
$7.7 million
in proceeds.
11
Perrigo Company plc
- Item 1
Note 2
On
January 3, 2017
, we sold certain Abbreviated New Drug Applications ("ANDAs") for
$15.0 million
to a third party, which was recorded in
Other operating income
on the Condensed Consolidated Statement of Operations.
Prior Year Divestitures
On
August 5, 2016
, we completed the sale of our U.S. Vitamins, Minerals, and Supplements ("VMS") business within our
CHCA
segment to International Vitamins Corporation ("IVC") for
$61.8 million
inclusive of an estimated working capital adjustment. 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 year ended December 31, 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, 2016
|
Currency translation adjustment
|
April 1,
2017 |
|||||||||
|
CHCA
|
$
|
1,810.6
|
|
$
|
2.3
|
|
$
|
1,812.9
|
|
|||
|
CHCI
|
1,070.8
|
|
14.8
|
|
1,085.6
|
|
||||||
|
RX
|
1,086.6
|
|
4.5
|
|
1,091.1
|
|
||||||
|
Other
|
81.4
|
|
5.1
|
|
86.5
|
|
||||||
|
Total goodwill
|
$
|
4,049.4
|
|
$
|
26.7
|
|
$
|
4,076.1
|
|
|||
In connection with the preparation of our financial statements for the three-month period ending April 2, 2016, we identified indicators of goodwill impairment for certain of our reporting units, which required us to complete interim goodwill impairment testing. Step one of the goodwill impairment test involves 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 units’ fair value include 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. If a reporting unit does not pass step one of the goodwill impairment test, step two is completed. The second step of the goodwill impairment test requires that we determine the implied fair value of the reporting unit’s goodwill, which involves determining the value of the reporting unit’s individual assets and liabilities. If the implied fair value of the reporting unit’s goodwill is less than the carrying value of the reporting unit’s goodwill, an impairment charge is recorded to adjust the goodwill carrying value to the implied fair value.
In connection with the preparation of our financial statements for the three months ended April 2, 2016, we identified indicators of impairment for our Branded Consumer Healthcare - Rest of World ("BCH-ROW") reporting unit, which comprises primarily operations attributable to the Omega Pharma Invest N.V. ("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. BCH-ROW 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 the brands such that the evaluation of brand prioritization and product extensions or launches in new regions is being more focused to maximize the potential of all brands in the segment's portfolio. Based on our evaluation and 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
$130.5 million
in impairment charges for the three months ended April 2, 2016 within our CHCI segment.
12
Perrigo Company plc
- Item 1
Note 3
Intangible Assets
Other intangible assets and related accumulated amortization consisted of the following (in millions):
|
|
April 1, 2017
|
December 31, 2016
|
|||||||||||||
|
|
Gross
|
Accumulated Amortization
|
Gross
|
Accumulated Amortization
|
|||||||||||
|
Definite-lived intangibles
:
|
|||||||||||||||
|
Distribution and license agreements, supply agreements
|
$
|
307.6
|
|
$
|
132.5
|
|
$
|
305.6
|
|
$
|
120.4
|
|
|||
|
Developed product technology, formulations, and product rights
|
1,428.2
|
|
562.5
|
|
1,418.1
|
|
526.0
|
|
|||||||
|
Customer relationships and distribution networks
|
1,505.7
|
|
339.8
|
|
1,489.9
|
|
307.5
|
|
|||||||
|
Trademarks, trade names, and brands
|
1,203.4
|
|
71.5
|
|
1,189.3
|
|
55.3
|
|
|||||||
|
Non-compete agreements
|
14.5
|
|
11.7
|
|
14.3
|
|
11.2
|
|
|||||||
|
Total definite-lived intangibles
|
$
|
4,459.4
|
|
$
|
1,118.0
|
|
$
|
4,417.2
|
|
$
|
1,020.4
|
|
|||
|
Indefinite-lived intangibles
:
|
|||||||||||||||
|
Trademarks, trade names, and brands
|
$
|
50.8
|
|
$
|
—
|
|
$
|
50.5
|
|
$
|
—
|
|
|||
|
In-process research and development
|
51.1
|
|
—
|
|
64.0
|
|
—
|
|
|||||||
|
Total indefinite-lived intangibles
|
101.9
|
|
—
|
|
114.5
|
|
—
|
|
|||||||
|
Total other intangible assets
|
$
|
4,561.3
|
|
$
|
1,118.0
|
|
$
|
4,531.7
|
|
$
|
1,020.4
|
|
|||
Certain intangible assets are denominated in currencies other than the U.S. dollar; therefore, their gross and accumulated amortization balances are subject to foreign currency movements.
We recorded amortization expense of
$85.5 million
and
$85.3 million
for the
three months ended
April 1, 2017
and
April 2, 2016
, respectively.
We recorded an impairment charge of
$12.2 million
on certain IPR&D assets during the three months ended
April 1, 2017
due to changes in the projected development and regulatory timelines for various projects. During the three months ended April 1, 2017, we recorded a decrease in the contingent consideration liability associated with certain IPR&D assets in
Other operating income
on the Condensed Consolidated Statement of Operations. Refer to
Note 6
for additional information.
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
CHCI
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 is 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
CHCI
segment distributes products, gross margins consistent with historical trends, and advertising and promotion investments largely consistent with the segment's growth plans.
In addition, due to reprioritization of certain brands in the
CHCI
segment and change in performance expectations for the cough/cold/allergy, anti-parasite, personal care, lifestyle, and natural health brands, on April 3, 2016, we reclassified
$364.5 million
of indefinite-lived assets to definite-lived assets with a useful life of
20
years. We began amortizing the assets in the second quarter of 2016.
13
Perrigo Company plc
- Item 1
Note 4
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, and interest is calculated at the applicable EUR LIBOR rate plus 70 basis points. The total amount factored on a non-recourse basis and excluded from accounts receivable was
$19.3 million
and
$50.7 million
at
April 1, 2017
and
December 31, 2016
, respectively.
NOTE 5 –
INVENTORIES
Major components of inventory were as follows (in millions):
|
April 1,
2017 |
December 31,
2016 |
||||||
|
Finished goods
|
$
|
449.3
|
|
$
|
431.1
|
|
|
|
Work in process
|
151.7
|
|
165.7
|
|
|||
|
Raw materials
|
199.2
|
|
198.2
|
|
|||
|
Total inventories
|
$
|
800.2
|
|
$
|
795.0
|
|
|
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.
|
14
Perrigo Company plc
- Item 1
Note 6
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
|
April 1,
2017 |
December 31,
2016 |
||||||||
|
Measured at fair value on a recurring basis:
|
||||||||||
|
Assets:
|
||||||||||
|
Investment securities
|
Level 1
|
$
|
22.8
|
|
$
|
38.2
|
|
|||
|
Foreign currency forward contracts
|
Level 2
|
$
|
6.5
|
|
$
|
3.8
|
|
|||
|
Funds associated with Israeli severance liability
|
Level 2
|
17.1
|
|
15.9
|
|
|||||
|
Total level 2 assets
|
$
|
23.6
|
|
$
|
19.7
|
|
||||
|
Royalty Pharma contingent milestone payments
|
Level 3
|
$
|
184.5
|
|
$
|
—
|
|
|||
|
Tysabri
®
royalty stream
|
Level 3
|
—
|
|
2,350.0
|
|
|||||
|
Total level 3 assets
|
$
|
184.5
|
|
$
|
2,350.0
|
|
||||
|
Liabilities:
|
||||||||||
|
Foreign currency forward contracts
|
Level 2
|
$
|
2.5
|
|
$
|
5.0
|
|
|||
|
Contingent consideration
|
Level 3
|
$
|
52.0
|
|
$
|
69.9
|
|
|||
|
Measured at fair value on a non-recurring basis:
|
||||||||||
|
Assets:
|
||||||||||
|
Goodwill
(1)
|
Level 3
|
$
|
—
|
|
$
|
1,148.4
|
|
|||
|
Indefinite-lived intangible assets
(2)
|
Level 3
|
13.8
|
|
0.3
|
|
|||||
|
Definite-lived intangible assets
(3)
|
Level 3
|
—
|
|
758.0
|
|
|||||
|
Assets held for sale, net
|
Level 3
|
11.0
|
|
18.2
|
|
|||||
|
Total level 3 assets
|
$
|
24.8
|
|
$
|
1,924.9
|
|
||||
|
(1)
|
As of December 31, 2016, goodwill with a carrying amount of
$2.2 billion
was written down to its implied fair value of
$1.1 billion
.
|
|
(2)
|
As of April 1, 2017, indefinite-lived intangible assets with a carrying amount of
$26.0 million
were written down to a fair value of
$13.8 million
, resulting in a total impairment charge of
$12.2 million
. As of December 31, 2016, indefinite-lived intangible assets with a carrying amount of
$0.7 million
were written down to a fair value of
$0.3 million
.
|
|
(3)
|
As of December 31, 2016, definite-lived intangible assets with a carrying amount of
$2.3 billion
were written down to a fair value of
$758.0 million
resulting in a total impairment charge of
$1.5 billion
. Included in this balance are indefinite-lived intangible assets with fair value of
$364.5 million
and
$674.2 million
that were reclassified to definite-lived assets at April 3, 2016 and October 2, 2016, respectively.
|
There were no transfers among Level 1, 2, and 3 during the
three months ended
April 1, 2017
or the year ended
December 31, 2016
. 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.
Foreign currency forward contracts
The fair value of foreign currency forward contracts is determined using a market approach, which utilizes values for comparable derivative instruments.
15
Perrigo Company plc
- Item 1
Note 6
Funds Associated with Israel Severance Liability
Israeli labor laws and agreements require us to pay benefits to employees dismissed or retiring under certain circumstances. Severance pay is calculated on the basis of the most recent employee salary levels and the length of employee service. Our Israeli subsidiaries also provide retirement bonuses to certain managerial employees. We make regular deposits to retirement funds and purchase insurance policies to partially fund these liabilities. The funds are determined using prices for recently traded financial instruments with similar underlying terms, as well as directly or indirectly observable inputs, such as interest rates and yield curves, that are observable at commonly quoted intervals.
Tysabri
®
Royalty Stream
On
December 18, 2013
, we acquired Elan, which had
a royalty agreement with Biogen Idec Inc. ("Biogen"),
whereby Biogen conveyed the right to receive royalties that are typically payable on sales revenue generated by the sale, distribution or other use of the drug Tysabri
®
. Pursuant to the royalty agreement, we were entitled to royalty payments from Biogen based on its Tysabri
®
sales in all indications and geographies. We received royalties of
12%
on worldwide Biogen sales of Tysabri
®
from December 18, 2013 through April 30, 2014. From May 1, 2014, we received royalties of
18%
on annual worldwide Biogen sales of Tysabri
®
up to
$2.0 billion
and
25%
on annual sales above
$2.0 billion
.
We accounted for the Tysabri
®
royalty stream as a financial asset and had elected to use the fair value option model. We made the election to account for the Tysabri
®
financial asset using the fair value option as we believed this method was most appropriate for an asset that did not have a par value, a stated interest stream, or a termination date.
The financial asset acquired represented a single unit of accounting. The fair value of the financial asset acquired was determined by using a discounted cash flow analysis related to the expected probability weighted future cash flows to be generated by the royalty stream. The financial asset was classified as a Level 3 asset within the fair value hierarchy, as our valuation utilized significant unobservable inputs,
including industry analyst estimates for global Tysabri
®
sales, probability weighted as to the timing and amount of future cash flows along with certain discount rate assumptions. Cash flow forecasts included the estimated effect and timing of future competition, considering patents in effect for Tysabri
®
through 2024 and contractual rights to receive cash flows into perpetuity. The discounted cash flows were based upon the expected royalty stream forecasted into perpetuity using a
20
-year discrete period with a declining rate terminal value.
In the first quarter of 2016, a competitor's pipeline product, Ocrevus
®
, received breakthrough therapy designation from the FDA.
Breakthrough therapy designation is granted when a drug intended alone or in combination with one or more other drugs to treat a serious or life threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.
In June 2016, the FDA granted priority review with a target action date in December 2016. A
priority review is a
designation when the FDA will direct overall attention and resources to the evaluation of applications for drugs that, if approved, would be significant improvements in the safety or effectiveness of the treatment, diagnosis, or prevention of serious conditions when compared to standard applications. The product was approved in the first quarter of 2017.
The product is expected to compete with Tysabri
®
, and we expected it to have a significant negative impact on the Tysabri
®
royalty stream. Although the product has not launched, industry analysts believe that, based on released clinical study information, Ocrevus
®
will compete favorably against Tysabri
®
in the relapsing, remitting multiple sclerosis market segment due to its high efficacy and convenient dosage form.
Given the new market information for Ocrevus
®
, using industry analyst estimates we reduced our first ten year growth forecasts from an average of growth of approximately
3.4%
in the fourth calendar quarter of 2015 to an average decline of approximately minus
2.0%
in the third and fourth calendar quarters of 2016. In November 2016, we announced we were evaluating strategic alternatives for the Tysabri
®
asset. As of December 31, 2016, the financial asset was adjusted based on the strategic review and sale process. These effects, combined with the change in discount rate each quarter, led to a reduction in fair value of
$204.4 million
,
$910.8 million
,
$377.4 million
and
$1.1 billion
in the first, second, third and fourth quarters of 2016, respectively.
16
Perrigo Company plc
- Item 1
Note 6
On
March 27, 2017
, we announced the completed divestment of our Tysabri
®
royalty stream to Royalty Pharma for up to
$2.85 billion
, which consists of
$2.2 billion
in cash and up to
$250.0 million
and
$400.0 million
in milestone payments if the royalties on global net sales of Tysabri
®
that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we transferred the entire financial asset to Royalty Pharma and recorded a
$17.1 million
gain during the three months ended
April 1, 2017
. We elected the fair value option for the contingent milestone payments, and these were recorded at an estimated fair value of
$184.5 million
as of
April 1, 2017
. We elected to account for the Royalty Pharma contingent milestone payments using the fair value option as we believe that this will provide investors with the expected value we could potentially receive under the two contingent milestones receivable which would help them understand the potential future cash flows we might receive in future periods. We valued the contingent milestone payments using a modified Black-Scholes Option Pricing Model ("BSOPM"). Key inputs in the BSOPM are the estimated volatility and rate of return of royalties on global net sales of Tysabri
®
that are received by Royalty Pharma over time until payment of the contingent milestone payments is completed. Volatility and the estimated fair value of the milestones have a positive relationship such that higher volatility translates to a higher estimated fair value of the contingent milestone payments. We assumed volatility of
30.0%
and a rate of return of
8.05%
in the valuation of contingent milestone payments performed as of
April 1, 2017
. We will reassess volatility and rate of return inputs quarterly by analyzing certain market volatility benchmarks and the risk associated with Royalty Pharma achieving the underlying projected royalties.
In addition, included in our accounts receivable balance at December 31, 2016 was
$84.4 million
related to the Tysabri
®
royalty stream.
Interest Rate Swaps
The fair values of interest rate swaps are determined using a market approach, which utilizes values for comparable swap instruments.
Contingent Consideration
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. Purchases or additions for the three months ended April 2, 2016 included contingent consideration associated with one transaction. We reduced a contingent consideration liability associated with certain IPR&D assets, and recorded a corresponding gain of
$16.5 million
in the three months ended April 1, 2017. The liability decrease relates to a reduction of the probability of achievement assumptions and anticipated cash flows. Refer to
Note 3
for additional information. This gain was offset by net realized losses of
$2.1 million
.
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 (gains) losses in the table were recorded in
Other (income) expense, net
.
|
Three Months Ended
|
|||||||
|
April 1,
2017 |
April 2,
2016 |
||||||
|
Contingent Consideration
|
|||||||
|
Beginning balance
|
$
|
69.9
|
|
$
|
17.9
|
|
|
|
Net realized (gains) losses
|
(14.4
|
)
|
0.3
|
|
|||
|
Purchases or additions
|
—
|
|
29.5
|
|
|||
|
Foreign currency effect
|
(0.1
|
)
|
0.3
|
|
|||
|
Settlements
|
(3.4
|
)
|
—
|
|
|||
|
Ending balance
|
$
|
52.0
|
|
$
|
48.0
|
|
|
17
Perrigo Company plc
- Item 1
Note 6
Non-recurring fair value measurements
The non-recurring fair values 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.
Goodwill and Indefinite Lived Intangible Assets
We have
seven
reporting units for which we assess the goodwill for impairment. We utilize a comparable company market approach, weighted equally with a discounted cash flow analysis, to determine the fair value of the reporting units
.
We utilize either a relief from royalty method or a multi-period excess earnings method ("MPEEM") to value our indefinite-lived intangible assets. We use a consistent set of projected financial information for the goodwill and indefinite-lived asset impairment tests. The discounted cash flow analysis that we prepared for goodwill impairment testing purposes for the
year ended
December 31, 2016
included long-term growth rates ranging from
2.0%
to
3.0%
. We also utilized discount rates ranging from
7.0%
to
14.5%
, which were deemed to be commensurate with the required investment return and risk involved in realizing the projected free cash flows of each reporting unit. In addition, we burdened projected free cash flows with the capital spending deemed necessary to support the cash flows of each reporting unit, and applied the tax rates that were applicable to the jurisdictions represented within each reporting unit. We recorded
Impairment charges
on the Condensed Consolidated Statements of Operations related to Goodwill and indefinite lived intangible assets of
$130.5 million
and
$273.4 million
, respectively, for the three months ended
April 2, 2016
. See
Note 3
for additional detail on impaired goodwill and indefinite-lived intangible assets.
Definite Lived Intangible Assets
When assessing our definite-lived assets for impairment, we utilize either a multi-period excess earnings method or a relief from royalty method to determine the fair value of the asset and use the forecasts that are consistent with those used in the reporting unit analysis. Below is a summary of the various metrics used in our valuations:
|
Year Ended
|
|||||||||
|
December 31, 2016
|
|||||||||
|
Omega - Lifestyle
|
Omega - XLS
|
Entocort
®
- Branded Products
|
Entocort
®
- AG Products
|
Herron Trade names and Trademarks
|
|||||
|
5-year average growth rate
|
2.5%
|
3.2%
|
(31.7)%
|
(30.4)%
|
4.6%
|
||||
|
Long-term growth rates
|
2.0%
|
NA
|
(10.0)%
|
(4.7)%
|
2.5%
|
||||
|
Discount rate
|
9.3%
|
9.5%
|
13.0%
|
10.5%
|
10.8%
|
||||
|
Royalty rate
|
NA
|
4.0%
|
NA
|
NA
|
11.0%
|
||||
|
Valuation method
|
MPEEM
|
Relief from Royalty
|
MPEEM
|
MPEEM
|
Relief from Royalty
|
||||
Assets Held for sale
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. See
Note 9
for additional information on the impaired assets held for sale, net.
Fixed Rate Long-term Debt
As of
April 1, 2017
and
December 31, 2016
, our fixed rate long-term debt consisted of public bonds, a private placement notes, and retail bonds. As of
April 1, 2017
, the public bonds and private placement note had a carrying value and a fair value of
$4.6 billion
, based on quoted market prices (Level 1). As of
December 31, 2016
, the public bonds and private placement notes had a carrying value and fair value of
$4.6 billion
, based on quoted market prices (Level 1). As of
April 1, 2017
, our retail bonds and private placement notes had a carrying value of
$783.2 million
(excluding a premium of
$43.4 million
) and a fair value of
$833.0 million
. As of
December 31, 2016
, our retail bonds and private placement notes had a carrying value of
$773.1 million
(excluding a premium of
$49.8
18
Perrigo Company plc
- Item 1
Note 6
million
) and a fair value of
$825.0 million
. The fair value of our retail 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.
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):
|
April 1,
2017 |
December 31, 2016
|
||||||
|
Equity securities, at cost less impairments
|
$
|
15.5
|
|
$
|
16.5
|
|
|
|
Gross unrealized gains
|
7.3
|
|
21.7
|
|
|||
|
Estimated fair value of equity securities
|
$
|
22.8
|
|
$
|
38.2
|
|
|
The factors affecting the assessment of impairments include both general financial market conditions and factors specific to a particular company. During the year ended
December 31, 2016
, we recorded an impairment charge of
$1.8 million
, related to other-than-temporary impairments of marketable equity securities due to prolonged losses incurred on each of the investments.
During the three months ended
April 1, 2017
and the year ended
December 31, 2016
, we sold a number of our investment securities and recorded gains of
$1.6 million
and
$1.0 million
, respectively. The gains were reclassified out of Accumulated Other Comprehensive Income (loss) ("AOCI") and into earnings.
Cost Method Investments
Our cost method investments totaled
$6.9 million
at
April 1, 2017
, and
December 31, 2016
, and are included in
Other non-current assets
.
Equity Method Investments
Our equity method investments totaled
$4.8 million
and
$4.6 million
at
April 1, 2017
and
December 31, 2016
, respectively, and are included in
Other non-current assets
. We recorded a net gain of
$0.1 million
and a net
loss
of
$2.4 million
during the
three months ended
April 1, 2017
and
April 2, 2016
, respectively, for our proportionate share of the equity method investment earnings or losses. The gains and losses were recorded in Other expense, net.
During the
three months ended
April 2, 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").
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.
19
Perrigo Company plc
- Item 1
Note 8
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.
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
April 1, 2017
and
December 31, 2016
. 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
three months ended
April 2, 2016.
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
18
months. The total notional amount for these contracts was
$469.3 million
and
$533.5 million
as of
April 1, 2017
and
December 31, 2016
, respectively.
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.
20
Perrigo Company plc
- Item 1
Note 8
The balance sheet location and gross fair value of our outstanding derivative instruments were as follows:
|
Asset Derivatives
|
|||||||||
|
Balance Sheet Location
|
Fair Value
|
||||||||
|
|
April 1,
2017 |
December 31, 2016
|
|||||||
|
Designated derivatives:
|
|||||||||
|
Foreign currency forward contracts
|
Other current assets
|
$
|
3.0
|
|
$
|
3.1
|
|
||
|
Non-designated derivatives:
|
|||||||||
|
Foreign currency forward contracts
|
Other current assets
|
$
|
3.5
|
|
$
|
0.7
|
|
||
|
Liability Derivatives
|
|||||||||
|
Balance Sheet Location
|
Fair Value
|
||||||||
|
|
April 1,
2017 |
December 31, 2016
|
|||||||
|
Designated derivatives:
|
|||||||||
|
Foreign currency forward contracts
|
Accrued liabilities
|
$
|
1.9
|
|
$
|
3.0
|
|
||
|
Non-designated derivatives:
|
|||||||||
|
Foreign currency forward contracts
|
Accrued liabilities
|
$
|
0.6
|
|
$
|
2.0
|
|
||
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
|
||||||||
|
Designated Cash Flow Hedges
|
April 1,
2017 |
April 2,
2016 |
||||||
|
Interest rate swap agreements
|
$
|
—
|
|
$
|
(9.0
|
)
|
||
|
Foreign currency forward contracts
|
2.5
|
|
1.6
|
|
||||
|
Total
|
$
|
2.5
|
|
$
|
(7.4
|
)
|
||
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
|
||||||||||
|
Designated Cash Flow Hedges
|
Income Statement Location
|
April 1,
2017 |
April 2,
2016 |
|||||||
|
Interest rate swap agreements
|
Interest expense, net
|
$
|
(0.6
|
)
|
$
|
(0.5
|
)
|
|||
|
Foreign currency forward contracts
|
Net sales
|
0.2
|
|
0.5
|
|
|||||
|
Cost of sales
|
0.7
|
|
0.3
|
|
||||||
|
Interest expense, net
|
(0.6
|
)
|
(0.4
|
)
|
||||||
|
Other (income) expense, net
|
(0.5
|
)
|
0.2
|
|
||||||
|
Total
|
$
|
(0.8
|
)
|
$
|
0.1
|
|
||||
21
Perrigo Company plc
- Item 1
Note 8
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
|
||||||||||
|
Designated Cash Flow Hedges
|
Income Statement
Location
|
April 1,
2017 |
April 2,
2016 |
|||||||
|
Interest rate swap agreements
|
Other (income) expense, net
|
$
|
—
|
|
$
|
(0.1
|
)
|
|||
|
Foreign currency forward contracts
|
Net sales
|
—
|
|
(0.1
|
)
|
|||||
|
Cost of sales
|
—
|
|
0.1
|
|
||||||
|
Other (income) expense, net
|
0.9
|
|
—
|
|
||||||
|
Total
|
$
|
0.9
|
|
$
|
(0.1
|
)
|
||||
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
|
||||||||||
|
Non-Designated Derivatives
|
Income Statement Location
|
April 1,
2017 |
April 2,
2016 |
|||||||
|
Foreign currency forward contracts
|
Other (income) expense, net
|
$
|
(8.9
|
)
|
$
|
(6.9
|
)
|
|||
|
Interest expense, net
|
(0.4
|
)
|
0.1
|
|
||||||
|
Total
|
$
|
(9.3
|
)
|
$
|
(6.8
|
)
|
||||
NOTE 9 –
ASSETS HELD FOR SALE
During the
six months ended
December 31, 2015
, management committed to a plan to sell our India Active Pharmaceutical Ingredients ("API") businesses. As a result, the net assets attributable to the business were classified as held-for-sale beginning at December 31, 2015. As described in
Note 18
, we completed the sale of our India API business on April 6, 2017.
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
$29.0 million
. We recorded additional impairment charges totaling
$6.3 million
during the year ended December 31, 2016. The API business is reported primarily in our Other segment.
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. As described in
Note 2
,
on
February 1, 2017
, we completed the sale of the Animal Health pet treats plant fixed assets.
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. We recorded impairment charges totaling
$3.7 million
during the
year ended
December 31, 2016. The assets associated with our Animal Health pet treats plant are reported in our
CHCA
segment.
22
Perrigo Company plc
- Item 1
Note 9
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):
|
April 1,
2017 |
December 31,
2016 |
||||||||||||||
|
CHCA
|
Other
|
CHCA
|
Other
|
||||||||||||
|
Assets held for sale
|
|||||||||||||||
|
Current assets
|
$
|
—
|
|
$
|
4.2
|
|
$
|
—
|
|
$
|
5.1
|
|
|||
|
Goodwill
|
—
|
|
5.5
|
|
—
|
|
5.5
|
|
|||||||
|
Property, plant and equipment
|
2.7
|
|
33.0
|
|
13.5
|
|
33.2
|
|
|||||||
|
Other assets
|
—
|
|
3.2
|
|
—
|
|
3.8
|
|
|||||||
|
Less: impairment reserves
|
—
|
|
(34.5
|
)
|
(3.7
|
)
|
(35.3
|
)
|
|||||||
|
Total assets held for sale
|
$
|
2.7
|
|
$
|
11.4
|
|
$
|
9.8
|
|
$
|
12.3
|
|
|||
|
Liabilities held for sale
|
|||||||||||||||
|
Current liabilities
|
$
|
0.1
|
|
$
|
1.0
|
|
$
|
0.1
|
|
$
|
1.9
|
|
|||
|
Other liabilities
|
—
|
|
2.0
|
|
—
|
|
1.9
|
|
|||||||
|
Total liabilities held for sale
|
$
|
0.1
|
|
$
|
3.0
|
|
$
|
0.1
|
|
$
|
3.8
|
|
|||
NOTE 10 –
INDEBTEDNESS
Total borrowings outstanding are summarized as follows (in millions):
|
April 1,
2017 |
December 31,
2016 |
||||||||||
|
Term loans
|
|||||||||||
|
*
|
2014 Term loan due December 5, 2019
|
$
|
412.9
|
|
$
|
420.7
|
|
||||
|
Notes and Bonds
|
|||||||||||
|
Coupon
|
Due
|
||||||||||
|
*
|
4.500%
|
May 23, 2017
|
(3)
|
191.8
|
|
189.3
|
|
||||
|
*
|
5.125%
|
December 12, 2017
|
(3)
|
319.7
|
|
315.6
|
|
||||
|
2.300%
|
November 8, 2018
|
(2)(5)
|
600.0
|
|
600.0
|
|
|||||
|
*
|
5.000%
|
May 23, 2019
|
(3)
|
127.9
|
|
126.2
|
|
||||
|
3.500%
|
March 15, 2021
|
(4)
|
500.0
|
|
500.0
|
|
|||||
|
3.500%
|
December 15, 2021
|
(1)
|
500.0
|
|
500.0
|
|
|||||
|
*
|
5.105%
|
July 19, 2023
|
(3)
|
143.8
|
|
142.0
|
|
||||
|
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
|
|
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
|
5,383.2
|
|
5,373.1
|
|
|||||||
|
Other financing
|
3.1
|
|
3.6
|
|
|||||||
|
Unamortized premium (discount), net
|
27.1
|
|
33.0
|
|
|||||||
|
Deferred financing fees
|
(32.0
|
)
|
(33.1
|
)
|
|||||||
|
Total borrowings outstanding
|
5,794.3
|
|
5,797.3
|
|
|||||||
|
Current indebtedness
|
(1,175.4
|
)
|
(572.8
|
)
|
|||||||
|
Total long-term debt less current portion
|
$
|
4,618.9
|
|
$
|
5,224.5
|
|
|||||
|
(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."
|
|
(5)
|
Inclusive of
$600.0 million
, in aggregate principal amount of 2.300% 2018 Notes, which were repaid May 8, 2017.
|
|
*
|
Debt denominated in Euros subject to fluctuations in the euro-to-U.S. dollar exchange rate.
|
23
Perrigo Company plc
- Item 1
Note 10
We entered into amendments to the 2014 Revolver and the 2014 Term Loan providing for additional time to deliver certain financial statements, as well as the modification of certain financial and other covenants. We entered into additional amendments to the 2014 Revolver and the 2014 Term Loan to modify provisions of such agreements necessary as a result of the correction in accounting related to the Tysabri
®
royalty stream, as well as waivers of any default or event of default that may arise from any restatement of or deficiencies in our financial statements for the periods specified in such amendments and waivers. No default or event of default existed prior to entering into these amendments and waivers. We are in compliance with all covenants under the 2014 Revolver and the 2014 Term Loan as of the date of this Quarterly Report on Form 10-Q.
As a result of the filing of this Quarterly Report on Form 10-Q, as of the filing date we are in compliance with all covenants, including the financial statement delivery obligations, under the 2013 Indenture and 2014 Indenture.
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
December 5, 2014
, Perrigo Finance entered into a
$600.0 million
revolving credit agreement, which 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
April 1, 2017
.
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
three months ended
April 1, 2017
, we made
$13.3 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. 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 Notes.
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
|
24
Perrigo Company plc
- Item 1
Note 10
€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 is being amortized as a reduction of interest expense over the remaining term of the respective debt instruments. The adjustment does not affect cash interest payments.
On May 23, 2017, we repaid the
€180.0 million
(
$196.0 million
)
4.500%
retail bonds. Refer to
Note 18
for additional detail.
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. 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. 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 Notes.
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. On May 8, 2017, we redeemed all of the 2018 Notes. Refer to
Note 18
for additional detail.
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
We may use overdraft facilities to increase the efficiency of our cash utilization and to meet our short-term liquidity needs. We report any balances outstanding in the above table under "Other Financing." We repaid the balances outstanding under our overdraft facilities during the
year ended
December 31, 2016, but retain the ability to use the facilities in our day-to-day cash operations. There were no balances outstanding under the facilities at
April 1, 2017
and
December 31, 2016
.
25
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
|
||||||
|
|
April 1,
2017 |
April 2,
2016 |
|||||
|
Numerator:
|
|||||||
|
Net income (loss)
|
$
|
71.6
|
|
$
|
(529.2
|
)
|
|
|
Denominator:
|
|||||||
|
Weighted average shares outstanding for basic EPS
|
143.4
|
|
143.2
|
|
|||
|
Dilutive effect of share-based awards*
|
0.2
|
|
—
|
|
|||
|
Weighted average shares outstanding for diluted EPS
|
143.6
|
|
143.2
|
|
|||
|
Anti-dilutive share-based awards excluded from computation of diluted EPS*
|
1.0
|
|
—
|
|
|||
* 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
|
||||
|
April 1,
2017 |
April 2,
2016 |
|||
|
14,400
|
|
79,000
|
|
|
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
three months ended
April 1, 2017
.
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, 2016
|
$
|
(67.9
|
)
|
$
|
(19.5
|
)
|
$
|
15.1
|
|
$
|
(9.5
|
)
|
$
|
(81.8
|
)
|
||||
|
OCI before reclassifications
|
65.4
|
|
1.5
|
|
(13.0
|
)
|
(0.1
|
)
|
53.8
|
|
|||||||||
|
Amounts reclassified from AOCI
|
—
|
|
0.1
|
|
1.6
|
|
—
|
|
1.7
|
|
|||||||||
|
Other comprehensive income (loss)
|
65.4
|
|
1.6
|
|
(11.4
|
)
|
(0.1
|
)
|
55.5
|
|
|||||||||
|
Balance at April 1, 2017
|
$
|
(2.5
|
)
|
$
|
(17.9
|
)
|
$
|
3.7
|
|
$
|
(9.6
|
)
|
$
|
(26.3
|
)
|
||||
26
Perrigo Company plc
- Item 1
Note 13
NOTE 13 –
INCOME TAXES
The effective tax rate for the
three months ended
April 1, 2017
was
25.3%
on net income reported in the period compared to
8.0%
on a net loss for the
three months ended
April 2, 2016
. The tax rate for the
three months ended
April 2, 2016
was impacted by the effects of the jurisdictional mix of income estimated in future periods used in the annual effective tax rate computation. The result of net income in jurisdictions with lower tax rates in future periods creates an estimated annual effective tax benefit compared to estimated annual net income, thereby creating a negative tax rate.
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.
The total liability for uncertain tax positions was
$407.8 million
and
$398.0 million
as of
April 1, 2017
and
December 31, 2016
, 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
$67.1 million
and
$63.5 million
as of
April 1, 2017
and
December 31, 2016
, 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 United States, 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.
In the United States, the Internal Revenue Service ("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.
The IRS issued a statutory notice of deficiency on April 20, 2017 for the IRS audits of our fiscal years ended June 25, 2011 and June 30, 2012. While we agreed to certain adjustments with respect to these years in October 2016 and made minimal associated payments, the statutory notice of deficiency asserted various additional adjustments, including transfer pricing adjustments. The statutory notice of deficiency for fiscal years 2011 and 2012 asserted an incremental tax obligation of approximately
$74.2 million
, inclusive of interest and penalties. We disagree with the IRS's positions asserted in this notice. In anticipation of contesting the IRS's adjustments, in May 2017 we paid the incremental tax obligation (a prerequisite to contesting the proposed adjustments in U.S. District Court) and expect to file an administrative request for a refund. The payment will be recorded in the second quarter
27
Perrigo Company plc
- Item 1
Note 13
of the year ending December 31, 2017 as a deferred charge on the balance sheet given our anticipated action to recover this amount.
We received notices of proposed adjustments on December 22, 2016 for the IRS audit of Athena Neurosciences, Inc., a subsidiary of Elan Corporation plc, which Perrigo acquired in December 2013, for the years ended December 31, 2011 and December 31, 2012. We disagree with the IRS’s positions asserted in the notices of proposed adjustments and intend to contest them. Additionally, examination of transfer pricing positions is ongoing.
Unfavorable resolutions of the audit matters discussed above could have a material impact on our consolidated financial statements in future periods.
We have ongoing audits in multiple other jurisdictions the resolution of which remains uncertain. These jurisdictions include, but are not limited to, the United States, Israel and Belgium. The IRS notified us in January 2017, that it will be auditing our fiscal years ended June 29, 2013 and June 28, 2014. The Israel Tax Authority is currently auditing our fiscal years ended June 29, 2013 and June 28, 2014. In the fourth quarter of the year ended December 31, 2016, the Belgium Tax Authority proposed minimal adjustments for the years ending December 31, 2013 and December 31, 2014.
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
April 1, 2017
, 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.
Price-Fixing Lawsuits
Perrigo has been named as a co-defendant with other manufacturers in a number of cases alleging that we and other manufacturers of the same product engaged in anti-competitive behavior to fix or raise the prices of certain drugs starting, in some instances, as early as June 2013. The products in question are Clobetasol, Desonide, and Econazole and one complaint involving Levothyroxine, a product that Perrigo neither made nor sold. At this stage, we cannot reasonably predict the outcome of the liability, if any, associated with these claims.
Securities Litigation
On May 18, 2016, a shareholder filed a securities case against the Company and our former CEO, Joseph Papa, in the U.S. District Court for 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 unsolicited 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. In February 2017, the court selected the lead plaintiffs and the lead counsel to the putative class. In March 2017, the court entered a scheduling order that sets a deadline for the lead plaintiffs to file an amended complaint. That deadline has not yet passed.
On July 19, 2016, a shareholder filed a securities class action against the Company and our former CEO, Joseph Papa, also 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
28
Perrigo Company plc
- Item 1
Note 14
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. On December 8, 2016, the court consolidated Roofers' Pension Fund case and the Wilson case under the Roofers' Pension Fund case number. In February 2017, the court selected the lead plaintiffs and the lead counsel to the putative class. In March 2017, the court entered a scheduling order that sets a deadline for the lead plaintiffs to file an amended complaint. That deadline has not yet passed.
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.
On March 29, 2017, plaintiff Eyal Keinan commenced an action in the District Court of Tel Aviv-Jaffa asserting securities claims against Perrigo and its auditor Ernst & Young LLP ("EY"). The case is styled
Keinan v. Perrigo Company plc, et al.
The action seeks certification of a class of purchasers of Perrigo shares on the Israeli exchange beginning February 6, 2014. The proposed closing date for the class is not clear though it appears to extend into 2017. In general, the plaintiff asserts that Perrigo improperly accounted for its stream of royalty income from two drugs: Tysabri
®
and Prialt. The court filings contend that the alleged improper accounting caused the audited financial results for Perrigo to be incorrect for the year ended December 31, 2016, six months ended December 31, 2015, and the years ended June 27, 2015 and June 28, 2014 and the other financial data released by the Company over those years to also be inaccurate. The plaintiff maintains that the defendants are liable under Israeli securities law or, in the alternative, under U.S. securities law principles. The plaintiff indicates an initial, preliminary class damages estimate of
686.0 million
NIS (approximately
$187.0 million
). The response from Perrigo and EY is not yet due. Perrigo is consulting Israeli counsel about its response to these allegations.
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. The parties are currently engaged in mediation in an attempt to settle the matter. The underlying proceedings have been stayed pending the outcome of the mediation process and, if necessary, a decision on the motion to appeal.
29
Perrigo Company plc
- Item 1
Note 14
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. In April 2017, another case was 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.
Claim Arising from the Omega Acquisition
On December 16, 2016, Perrigo and Perrigo Ireland 2 brought an arbitral claim ("Claim") against Alychlo NV (Alychlo) and Holdco I BE NV ("Holdco") (together the Sellers) in accordance with clause 26.2 of the Share Purchase Agreement dated November 6, 2014 ("SPA") and the rules of the Belgian Centre for Arbitration and Mediation ("CEPANI"). Perrigo’s Claim relates to the accuracy and completeness of information about Omega Pharma Invest N.V. provided by the Sellers as part of the sale process, the withholding of information by the Sellers during that process and breaches of Sellers’ warranties. Perrigo is seeking monetary damages from the Sellers. The Sellers served their respective responses to the Claim on February 20, 2017. In its response, Alychlo has asserted a counterclaim for monetary damages contending that Perrigo breached the duty of good faith in performing the SPA. There can be no assurance that Perrigo’s Claim will be successful, and Sellers deny liability for the Claim. Perrigo denies that Alychlo is entitled to any relief (including monetary relief) under the counterclaim. The arbitration proceedings are confidential as required by the SPA and the rules of the CEPANI.
NOTE 15 –
COLLABORATION AGREEMENTS AND OTHER CONTRACTUAL ARRANGEMENTS
On May 15, 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.
During the year ended December 31, 2016, we added three additional products to the May 15, 2015 development agreement that are subject to similar buy-back terms if the products are approved by the FDA. We did not receive any consideration from the clinical stage development company, nor do we expect to incur any expense related to the development of the additional products. The estimated purchase price for these additional products, based on the initial development budget, is approximately
$126.0 million
. If development costs exceed the initial budgeted amounts, the purchase price will increase, but will not exceed approximately
$174.0 million
. If the products are approved by the FDA and we purchase the products, we estimate that one of the acquisitions will occur in 2019 and two of the acquisitions will occur in 2021. There can be no assurance that any such products will be approved by the FDA on the anticipated schedule or at all.
On May 1, 2015, we entered into an agreement with a clinical stage biotechnology company for the development of two specialty pharmaceutical products. We paid
$18.0 million
for an option to acquire the two products, which we reported in research and development expense. On March 1, 2016, we exercised the purchase option to acquire both products. We will make additional payments if we obtain regulatory approval and achieve certain sales milestones, and these contingent milestone payments could total
$30.0 million
in aggregate. We will also be obligated to make certain royalty payments over periods ranging from seven to ten years from the launch of each product. Refer to the Development-Stage Rx Products acquisition in
Note 2
for additional information regarding the acquisition. In addition, during the three months ended April 1, 2017, we recorded an impairment of these assets and a corresponding reduction in the liability for the contingent milestone payments, which are further discussed in
Notes 3
and
6
, respectively.”
30
Perrigo Company plc
- Item 1
Note 16
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
|
|||||||
|
April 1,
2017 |
April 2,
2016 |
||||||
|
Beginning balance
|
$
|
19.7
|
|
$
|
20.7
|
|
|
|
Additional charges
|
38.7
|
|
5.4
|
|
|||
|
Payments
|
(7.1
|
)
|
(18.2
|
)
|
|||
|
Non-cash adjustments
|
0.2
|
|
5.1
|
|
|||
|
Ending balance
|
$
|
51.5
|
|
$
|
13.0
|
|
|
Restructuring activity includes severance, lease exit costs, and asset impairments. The charges incurred during the
three months ended
April 1, 2017
were primarily associated with actions we took to streamline our organization as announced on February 21, 2017. During the
three months ended
April 1, 2017
,
$38.7 million
of restructuring expenses were recorded. Of this amount,
$23.7 million
was recorded in our CHCA segment. There were no other material restructuring programs that significantly impacted any other reportable segment. All charges are recorded in Restructuring expense. The remaining
$46.9 million
liability for employee severance benefits is expected to be paid within the next year, while the remaining
$4.6 million
liability for lease exit costs is expected to be incurred over the remaining terms of the applicable leases.
NOTE 17 –
SEGMENT INFORMATION
Effective January 1, 2017, in addition to the segment change in the fourth quarter of 2016, we implemented certain changes to our reporting segments following the sale of the Tysabri
®
royalty stream. As a result, beginning in the first quarter of fiscal year 2017, our reporting segments consist of
CHCA
,
CHCI
,
RX
and Other.
Our reporting segments are as follows:
|
•
|
CHCA
,
comprises our U.S., Mexico and Canada consumer healthcare business (OTC, contract, infant formula and animal health categories).
|
|
•
|
CHCI
,
comprises our legacy Branded Consumer Healthcare segment and now includes our consumer focused businesses in the U.K., Australia, and Israel. This segment also includes our U.K. liquid licensed products business.
|
|
•
|
RX
,
comprises our U.S. Prescription Pharmaceuticals business.
|
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.
31
Perrigo Company plc
- Item 1
Note 17
The below tables show select financial measures by reporting segment (in millions):
|
Total Assets
|
April 1,
2017 |
December 31, 2016
|
||||||
|
CHCA
|
$
|
6,295.7
|
|
$
|
3,351.3
|
|
||
|
CHCI
|
4,796.9
|
|
4,795.2
|
|
||||
|
RX
|
2,685.4
|
|
2,646.4
|
|
||||
|
Specialty Sciences
|
—
|
|
2,775.8
|
|
||||
|
Other
|
201.4
|
|
301.4
|
|
||||
|
Total
|
$
|
13,979.4
|
|
$
|
13,870.1
|
|
||
|
Three Months Ended
|
|||||||||||||||||||||||
|
April 1, 2017
|
April 2, 2016
|
||||||||||||||||||||||
|
Net Sales
|
Operating Income (Loss)
|
Intangible Asset Amortization
|
Net Sales
|
Operating Income (Loss)
|
Intangible Asset Amortization
|
||||||||||||||||||
|
CHCA
|
$
|
582.8
|
|
$
|
75.0
|
|
$
|
17.1
|
|
$
|
639.1
|
|
$
|
100.6
|
|
$
|
18.1
|
|
|||||
|
CHCI
|
374.9
|
|
0.2
|
|
45.7
|
|
439.4
|
|
(396.4
|
)
|
41.2
|
|
|||||||||||
|
RX
|
217.4
|
|
88.2
|
|
22.3
|
|
248.2
|
|
91.4
|
|
25.5
|
|
|||||||||||
|
Specialty Sciences
|
—
|
|
—
|
|
—
|
|
—
|
|
(1.4
|
)
|
—
|
|
|||||||||||
|
Other
|
18.9
|
|
5.7
|
|
0.4
|
|
20.6
|
|
5.5
|
|
0.5
|
|
|||||||||||
|
Unallocated
|
—
|
|
(40.6
|
)
|
—
|
|
—
|
|
(31.3
|
)
|
—
|
|
|||||||||||
|
Total
|
$
|
1,194.0
|
|
$
|
128.5
|
|
$
|
85.5
|
|
$
|
1,347.3
|
|
$
|
(231.6
|
)
|
$
|
85.3
|
|
|||||
NOTE 18 –
SUBSEQUENT EVENTS
On
April 6, 2017
, we announced the completed divestment of our India API business to Strides Shasun Limited. Total cash received was
$22.2 million
. The sale is not expected to have a material impact on our operations nor will the transaction result in a significant gain or loss when recorded in the second quarter of 2017.
On April 7, 2017, we issued a notice of redemption to redeem all of the
$600.0 million
in aggregate principal amount of the outstanding 2018 Notes. On May 8, 2017, using proceeds from the sale of the Tysabri
®
royalty stream, we redeemed all of the 2018 Notes.
On May 23, 2017, we repaid the
€180.0 million
(
$196.0 million
)
4.500%
retail bonds with cash from operations.
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-K for the year ended December 31, 2016 (the “2016 Form 10-K”). 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 2016 Form 10-K.
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 healthcare company, who delivers value to our customers and consumers by providing Quality Affordable Healthcare Products
®
. Founded in 1887 as a packager of home remedies, we have
32
Perrigo Company plc
- Item 2
Executive Overview
built a unique business model that is best described as the convergence of a fast-moving consumer goods company, a high-quality pharmaceutical manufacturing organization and a world-class supply chain network. We are the world's largest manufacturer of over-the-counter (“OTC”) healthcare products and supplier of infant formulas for the store brand market. We also are a leading provider of branded OTC products throughout Europe and the U.S., as well as a leading producer of generic standard topical products such as creams, lotions, gels, as well as inhalants and injections ("extended topical") prescription drugs. We are headquartered in Ireland, and sell our products primarily in North America and Europe, as well as in other markets, including Australia, Israel and China.
Effective January 1, 2017, in addition to the segment change in the fourth quarter of 2016, we implemented certain changes to our reporting segments following the sale of the Tysabri
®
royalty stream. As a result, beginning in the first quarter of fiscal year 2017, our reporting segments consist of
CHCA
,
CHCI
,
RX
and Other.
Our reporting segments are as follows:
|
•
|
Consumer Healthcare Americas
(
"CHCA"
), comprises our U.S., Mexico and Canada consumer healthcare business (OTC, contract, infant formula and animal health categories).
|
|
•
|
Consumer Healthcare International
(
"
CHCI
"
),
comprises our legacy Branded Consumer Healthcare segment and now includes our consumer focused businesses in the U.K., Australia, and Israel. This segment also includes our U.K. liquid licensed products business.
|
|
•
|
Prescription Pharmaceuticals
(
"
RX
"
),
comprises our U.S. Prescription Pharmaceuticals business.
|
We also have an "
Other
" reporting segment which comprises our legacy Active Pharmaceutical Ingredients ("API") business,
which does not meet the quantitative threshold required to be a separately reportable segment. For results by segment, see "Segment Results" below and
Item 1. Note 18.
2017 Year-to-Date Highlights
|
•
|
On February 27, 2017, we announced we were exploring strategic alternatives for our Israel API operations.
|
|
•
|
On
March 27, 2017
, we announced the completed divestment of our Tysabri
®
royalty stream, effective January 1, 2017, to Royalty Pharma for up to
$2.85 billion
, which consists of
$2.2 billion
in cash and up to
$250.0 million
and
$400.0 million
in milestone payments to us if the royalties on global net sales of Tysabri
®
that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we derecognized the Tysabri
®
financial asset and recorded a
$17.1 million
gain.
|
|
•
|
On April 6, 2017, we completed the divestment of our India API business to Strides Shasun Limited. As of December 31, 2016, the net assets of our India API business were classified as "held for sale" as discussed in
Item 1. Note 9
. The sale is not expected to have a material impact on our operations or result in a significant gain or (loss) when recorded in the second quarter of 2017.
|
|
•
|
On April 7, 2017, we issued a notice of redemption to redeem all of the
$600.0 million
in aggregate principal amount of the outstanding
2.300%
senior notes due
November 8, 2018
(the “2.300% 2018 Notes”). On May 8, 2017, using proceeds from the sale of the Tysabri
®
royalty stream, we redeemed all of the 2.300% 2018 Notes.
|
|
•
|
On May 23, 2017, we repaid the
€180.0 million
(
$196.0 million
)
4.500%
retail bonds with cash from operations.
|
33
Perrigo Company plc
- Item 2
Consolidated
RESULTS OF OPERATIONS
CONSOLIDATED
Recent Trends and Developments
|
•
|
As discussed above under 2017 Year-to-Date Highlights, on
March 27, 2017
, we announced the completed divestment of our Tysabri
®
royalty stream to Royalty Pharma.
|
|
•
|
We continue to experience a significant reduction in pricing expectations from historical levels in our
RX
segment due to industry and competitive pressures. 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, and we are forecasting a 9% - 11% pricing decline in this segment for year ending December 31, 2017.
|
Restructuring
On February 21, 2017, we approved a workforce reduction plan as part of a larger cost optimization strategy across the Company. We expect to reduce our global workforce by approximately 750 employees, which includes some actions already taken and 235 employees who have elected to participate in a voluntary early retirement program. This represents a reduction of approximately 14% of our global non-production workforce. The changes to our workforce will vary by country, based on legal requirements and required consultations with works councils and other employee representatives, as appropriate.
In connection with this plan, we estimate that we will recognize total pre-tax restructuring charges of approximately $55.0 million to $65.0 million, consisting of one-time termination benefits, severance arrangements, and other termination costs. We expect to incur the majority of the remaining charges in 2017, with the remaining balance to be recognized during the first quarter of the year ending December 31, 2018.
Our cost optimization strategy is expected to yield approximately $130.0 million in savings per annum by mid-2018. This is in addition to the savings that our supply chain organization continues to generate for both our North American and International segments.
Consolidated Results
|
|
Three Months Ended
|
||||||
|
($ in millions)
|
April 2,
2016 |
April 1,
2017 |
|||||
|
Net sales
|
$
|
1,347.3
|
|
$
|
1,194.0
|
|
|
|
Gross profit
|
$
|
533.1
|
|
$
|
464.4
|
|
|
|
Gross profit %
|
39.6%
|
38.9
|
%
|
||||
|
Operating expenses
|
$
|
764.7
|
|
$
|
335.9
|
|
|
|
Operating expenses %
|
56.8
|
%
|
28.1
|
%
|
|||
|
Operating income (loss)
|
$
|
(231.6
|
)
|
$
|
128.5
|
|
|
|
Operating income (loss) %
|
(17.2
|
)%
|
10.8
|
%
|
|||
|
Tysabri
®
royalty stream
|
$
|
204.4
|
|
$
|
(17.1
|
)
|
|
|
Interest and other, net
|
$
|
54.1
|
|
$
|
49.8
|
|
|
|
Income tax expense
|
$
|
39.1
|
|
$
|
24.2
|
|
|
|
Net income (loss)
|
$
|
(529.2
|
)
|
$
|
71.6
|
|
|
34
Perrigo Company plc
- Item 2
Consolidated
The decrease in consolidated net sales for the
three months ended
April 1, 2017
as compared to the prior year period was due to lower sales in the CHCA segment as a result of the sale of the VMS business in August 2016, lower sales in the CHCI segment due to the exit of certain distribution businesses, and lower sales in the RX segment driven by lower net sales of Entocort
®
. Consolidated operating income for the
three months ended
April 1, 2017
increased due primarily to the absence of asset impairment charges in the amount of
$403.9 million
taken in the prior year along with current year Abbreviated New Drug Application ("ANDA") sales within the RX segment, offset partially by restructuring charges discussed above. Further details and analysis of our financial results for the
three months ended
April 1, 2017
and
April 2, 2016
are provided below by reporting segment and line item.
CONSUMER HEALTHCARE AMERICAS
Recent Trends and Developments
|
•
|
We have experienced a reduction in pricing expectations within our
CHCA
segment, primarily in the cough/cold, animal health, and analgesics categories due to various factors, including increased focus from customers to capture supply chain productivity savings and competition in specific product categories. We expect this pricing environment to continue to impact our
CHCA
segment for the foreseeable future.
|
|
•
|
We completed the sale of the Animal Health pet treats plant fixed assets on
February 1, 2017
and received
$7.7 million
in proceeds.
|
Segment Results
Three Month Comparison
|
|
Three Months Ended
|
||||||
|
($ in millions)
|
April 2,
2016 |
April 1,
2017 |
|||||
|
Net sales
|
$
|
639.1
|
|
$
|
582.8
|
|
|
|
Gross profit
|
$
|
196.0
|
|
$
|
188.4
|
|
|
|
Gross profit %
|
30.7
|
%
|
32.3
|
%
|
|||
|
Operating income
|
$
|
100.6
|
|
$
|
75.0
|
|
|
|
Operating income %
|
15.7
|
%
|
12.9
|
%
|
|||
35
Perrigo Company plc
- Item 2
CHCA
Three Months Ended
April 1, 2017
vs.
Three Months Ended
April 2, 2016
Net sales
decreased
$56.3 million
, or
9%
, over the prior year period due to:
|
•
|
New product sales of
$25.3 million
related primarily to the launches of fluticasone nasal spray (store brand equivalent to Flonase
®
) and nicotine replacement gum products; more than offset by
|
|
•
|
Lower year-over-year sales of
$47.1 million
attributable to the U.S. VMS business, which was sold in August 2016;
|
|
•
|
A net decrease in sales of existing products of
$27.7 million
due to:
|
|
•
|
Strong sales in our cough/cold category and contract business; more than offset by
|
|
•
|
Pricing pressures and lower volumes in the antacid and Animal Health categories;
|
|
•
|
Lower volumes in the nicotine replacement and supply constraints in our infant nutrition category;
|
|
•
|
Discontinued products of
$5.0 million
; and
|
|
•
|
Unfavorable foreign currency movement of
$2.0 million
.
|
Operating income
decreased
$25.6 million
, or
25%
, as a result of:
|
•
|
A decrease
of
$7.6 million
in gross profit due to:
|
|
•
|
Sale of the U.S. VMS business; offset partially by
|
|
•
|
Margin contributions from new products and strong performance in the cough/cold category; and
|
|
•
|
Continued manufacturing and supply chain efficiencies.
|
|
•
|
An increase of
$18.0 million
in operating expenses due to:
|
|
•
|
Increased restructuring expenses of $22.2 million related primarily to cost reduction initiatives; offset by
|
|
•
|
Decreased research and development investments of $2.4 million due to timing of clinical trials; and
|
|
•
|
Decreased selling and administrative expenses of $1.9 million.
|
Recent Trends and Developments
|
•
|
As part of our strategic initiatives, management continues to drive improvements and evaluate the overall cost structures within our
CHCI
segment in the following ways:
|
|
•
|
On December 8, 2016, we announced the cancellation of the unprofitable EuroGenerics NV distribution agreement in Belgium. The cancellation, combined with the exit of certain OTC distribution agreements, is expected to reduce net sales by approximately $220.0 million in 2017.
|
|
•
|
We continue to make progress on our previously announced restructuring plans to right-size the
Omega
business due to the impact of market dynamics on sales volumes. Management continues to evaluate the overall cost structure relative to current and expected market dynamics. As of April 1, 2017, we recognized
$2.9 million
of restructuring expense in the
CHCI
segment.
|
|
•
|
Management continues to evaluate the most effective business model for each country and has announced strategic evaluations for Russia and Argentina.
|
|
•
|
The combination of these actions are expected to improve the segment's focus on higher value OTC products, reduce selling costs and improve operating margins in the segment.
|
36
Perrigo Company plc
- Item 2
CHCI
Segment Results
Three Month Comparison
|
|
Three Months Ended
|
||||||
|
($ in millions)
|
April 2,
2016 |
April 1,
2017 |
|||||
|
Net sales
|
$
|
439.4
|
|
$
|
374.9
|
|
|
|
Gross profit
|
$
|
199.3
|
|
$
|
169.5
|
|
|
|
Gross profit %
|
45.4%
|
45.2
|
%
|
||||
|
Operating income (loss)
|
$
|
(396.4
|
)
|
$
|
0.2
|
|
|
|
Operating income (loss) %
|
(90.2
|
)%
|
0.1
|
%
|
|||
Three Months Ended
April 1, 2017
vs.
Three Months Ended
April 2, 2016
Net sales
decreased
$64.5 million
, or
15%
, over the prior year period due to:
|
•
|
New product sales of
$19.6 million
; more than offset by
|
|
•
|
The cancellation of unprofitable distribution contracts with a year-over-year impact of
$38.2 million
;
|
|
•
|
Unfavorable foreign currency movement of
$20.4 million
;
|
|
•
|
Decreased sales volumes of existing products totaling
$18.8 million
due primarily to lower sales in Germany and Belgium; and
|
|
•
|
Discontinued products of
$8.4 million
.
|
Operating income
increased
$396.6 million
, as a result of:
|
•
|
A decrease
of
$29.8 million
in gross profit due to:
|
|
•
|
Weaker performance in Germany and Belgium; and
|
|
•
|
Unfavorable foreign currency effect; more than offset by
|
|
•
|
A decrease
of
$426.4 million
in operating expenses primarily due to:
|
|
•
|
The absence of an intangible asset and goodwill impairment charges totaling $403.9 million recorded in the prior year period, refer to
Item 1. Note 3
for additional information; and
|
|
•
|
A decrease of advertising and promotional spending of $12.2 million due to previously announced strategic initiatives to better align promotional investments with sales.
|
37
Perrigo Company plc
- Item 2
RX
PRESCRIPTION PHARMACEUTICALS
Recent Trends and Developments
|
•
|
We continue to experience a significant reduction in pricing expectations from historical levels in our
RX
segment due to industry and competitive pressures. 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 and we are forecasting a 9% - 11% pricing decline in this segment for year ending December 31, 2017.
|
|
•
|
On November 10, 2016, we announced that as part of our portfolio review process we are conducting a comprehensive internal evaluation of the
RX
segment's market position, growth opportunities, and interdependencies with our manufacturing and shared service operations to determine if strategic alternatives should be explored.
|
|
•
|
During the three months ended December 31, 2016, the U.S. market for our Entocort
®
(Budesonide) capsules, including both brand and authorized generic capsules, experienced significant and unexpected increased competition, reducing our future revenue stream. We expect our 2017 net sales to be negatively effected by approximately $72.0 million.
|
|
•
|
During the three months ended April 1, 2017, we sold various ANDAs for $21.8 million.
|
Segment Results
Three Month Comparison
|
|
Three Months Ended
|
||||||
|
($ in millions)
|
April 2,
2016 |
April 1,
2017 |
|||||
|
Net sales
|
$
|
248.2
|
|
$
|
217.4
|
|
|
|
Gross profit
|
$
|
127.9
|
|
$
|
96.3
|
|
|
|
Gross profit %
|
51.5
|
%
|
44.3
|
%
|
|||
|
Operating income
|
$
|
91.4
|
|
$
|
88.2
|
|
|
|
Operating income %
|
36.8
|
%
|
40.5
|
%
|
|||
Three Months Ended
April 1, 2017
vs.
Three Months Ended
April 2, 2016
Net sales
decreased
$30.8 million
, or
12%
, due to:
|
•
|
New product sales of
$16.5 million
due primarily to Benzoyl Peroxide 5%-Clindamycin 1% gel (a generic version of Benzaclin™); more than offset by
|
|
•
|
Lower Entocort
®
sales of
$25.2 million
; and
|
|
•
|
Decreased sales of other existing products of
$22.0 million
due primarily to price erosion compared to the prior year.
|
Segment operating income
decreased
$3.2 million
, or
4%
, as a result of:
|
•
|
A decrease
of
$31.6 million
in gross profit due primarily to the pricing pressure and lower Entocort
®
sales noted above; offset partially by
|
38
Perrigo Company plc
- Item 2
RX
|
•
|
A decrease
of
$28.4 million
in operating expenses due primarily to sales of certain ANDAs for $21.8 million partially offset by $5.6 million of restructuring expenses related to the specialty pharma sales force.
|
OTHER
Recent Trends and Developments
On February 27, 2017, we announced we were exploring strategic alternatives for our Israel API operations.
On April 6, 2017, we completed the divestment of our India API business to Strides Shasun Limited. As of December 31, 2016, the net assets of our India API business were classified as "held for sale" as discussed in
Item 1. Note 9
. The sale is not expected to have a material impact on our operations or result in a significant gain or (loss) when recorded in the second quarter of 2017.
Segment Results
Three Month Comparison
|
|
Three Months Ended
|
||||||
|
($ in millions)
|
April 2,
2016 |
April 1,
2017 |
|||||
|
Net sales
|
$
|
20.6
|
|
$
|
18.9
|
|
|
|
Gross profit
|
$
|
9.9
|
|
$
|
10.2
|
|
|
|
Gross profit %
|
47.9
|
%
|
54.0
|
%
|
|||
|
Operating income
|
$
|
5.5
|
|
$
|
5.7
|
|
|
|
Operating income %
|
26.3
|
%
|
30.1
|
%
|
|||
Three Months Ended
April 1, 2017
vs.
Three Months Ended
April 2, 2016
Net sales decreased
$1.7 million
due primarily to increased competition on certain products. Operating income increased
$0.2 million
, driven by increased margin due to favorable product mix.
Unallocated Expenses
Unallocated expenses are comprised of certain corporate services not allocated to our reporting segments and are recorded above Operating income on the Condensed Consolidated Statements of Operations. Unallocated expenses were as follows (in millions):
|
Three Months Ended
|
||||||
|
April 2,
2016 |
April 1,
2017 |
|||||
|
$
|
31.3
|
|
$
|
40.6
|
|
|
The increase in unallocated expenses was due to an increase of $13.3 million administrative expenses driven by legal and other professional fees and $5.6 million of restructuring expenses related to our
cost reduction initiatives partially offset by a decrease in share-based compensation expenses of $9.6 million driven by the departure of certain executives. Effective January 1, 2017, due to the sale of the Tysabri
®
financial asset, all legal expenses associated with the former Specialty Sciences segment were moved to unallocated expenses.
39
Perrigo Company plc
- Item 2
Unallocated, Interest, Other, and Taxes
Interest, Other and Tysabri
®
Royalty Stream (Consolidated)
|
Three Months Ended
|
|||||||
|
($ in millions)
|
April 2,
2016 |
April 1,
2017 |
|||||
|
Tysabri
®
royalty stream
|
$
|
204.4
|
|
$
|
(17.1
|
)
|
|
|
Interest expense, net
|
$
|
51.2
|
|
$
|
53.3
|
|
|
|
Other (income) expense, net
|
$
|
2.5
|
|
$
|
(3.5
|
)
|
|
|
Loss on extinguishment of debt
|
$
|
0.4
|
|
$
|
—
|
|
|
Tysabri
®
Royalty Stream
We accounted for the Tysabri
®
royalty stream as a financial asset and had elected to use the fair value option model. We made the election to account for the Tysabri
®
financial asset using the fair value option as we believed this method was most appropriate for an asset that did not have a par value, a stated interest stream, or a termination date.
The financial asset acquired represented a single unit of accounting. The fair value of the financial asset acquired was determined by using a discounted cash flow analysis related to the expected probability weighted future cash flows to be generated by the royalty stream. The financial asset was classified as a Level 3 asset within the fair value hierarchy, as our valuation utilized significant unobservable inputs,
including industry analyst estimates for global Tysabri
®
sales, probability weighted as to the timing and amount of future cash flows along with certain discount rate assumptions. Cash flow forecasts included the estimated effect and timing of future competition, considering patents in effect for Tysabri
®
through 2024 and contractual rights to receive cash flows into perpetuity. The discounted cash flows were based upon the expected royalty stream forecasted into perpetuity using a
20
-year discrete period with a declining rate terminal value.
In the first quarter of 2016, a competitor's pipeline product, Ocrevus
®
, received breakthrough therapy designation from the FDA.
Breakthrough therapy designation is granted when a drug intended alone or in combination with one or more other drugs to treat a serious or life threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.
In June 2016, the FDA granted priority review with a target action date in December 2016. A
priority review is a
designation when the FDA will direct overall attention and resources to the evaluation of applications for drugs that, if approved, would be significant improvements in the safety or effectiveness of the treatment, diagnosis, or prevention of serious conditions when compared to standard applications. The product was approved in the first quarter of 2017.
The product is expected to compete with Tysabri
®
, and we expected it to have a significant negative impact on the Tysabri
®
royalty stream. Although the product has not launched, industry analysts believe that, based on released clinical study information, Ocrevus
®
will compete favorably against Tysabri
®
in the relapsing, remitting multiple sclerosis market segment due to its high efficacy and convenient dosage form.
Given the new market information for Ocrevus
®
, using industry analyst estimates we reduced our first ten year growth forecasts from an average of growth of approximately
3.4%
in the fourth calendar quarter of 2015 to an average decline of approximately minus
2.0%
in the third and fourth calendar quarters of 2016. In November 2016, we announced we were evaluating strategic alternatives for the Tysabri
®
asset. As of December 31, 2016, the financial asset was adjusted based on the strategic review and sale process. These effects, combined with the change in discount rate each quarter, led to a reduction in fair value of
$204.4 million
,
$910.8 million
,
$377.4 million
and
$1.1 billion
in the first, second, third and fourth quarters of 2016, respectively.
On
March 27, 2017
, we announced the completed divestment of our Tysabri
®
royalty stream to Royalty Pharma for up to
$2.85 billion
, which consists of
$2.2 billion
in cash and up to
$250.0 million
and
$400.0 million
in milestone payments if the royalties on global net sales of Tysabri
®
that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we transferred the entire financial asset to Royalty Pharma and recorded a
$17.1 million
gain during the three months ended
April 1, 2017
. We elected the fair value option for the contingent milestone payments, and these were recorded at an estimated fair value of
$184.5 million
as of
April 1, 2017
. We elected to account for the Royalty Pharma contingent milestone payments using the fair value option as we believe that this will provide investors with the expected value we could potentially receive under the two contingent milestones receivable which would help them understand the potential future cash
40
Perrigo Company plc
- Item 2
Unallocated, Interest, Other, and Taxes
flows we might receive in future periods. We valued the contingent milestone payments using a modified Black-Scholes Option Pricing Model ("BSOPM"). Key inputs in the BSOPM are the estimated volatility and rate of return of royalties on global net sales of Tysabri
®
that are received by Royalty Pharma over time until payment of the contingent milestone payments is completed. Volatility and the estimated fair value of the milestones have a positive relationship such that higher volatility translates to a higher estimated fair value of the contingent milestone payments. We assumed volatility of
30.0%
and a rate of return of
8.05%
in the valuation of contingent milestone payments performed as of
April 1, 2017
. We will reassess volatility and rate of return inputs quarterly by analyzing certain market volatility benchmarks and the risk associated with Royalty Pharma achieving the underlying projected royalties. Refer to
Item 1. Note 6
for additional information.
Interest Expense, Net
Interest expense, net
remained relatively flat year over year. See the "
Borrowings and Capital Resources
" section below and
Item 1. Note 10
for more information.
Other (Income) Expense, Net
Other (income) expense, net
was
$3.5 million
of income during the three months ended April 1, 2017, compared to
$2.5 million
of expense for the three months ended April 2, 2016. The
$6.0 million
improvement was due primarily to $2.5 million of favorable changes in cash balances held in foreign currencies and a $2.4 million reduction in equity method losses.
Income Taxes (Consolidated)
The effective tax rate for the
three months ended
April 1, 2017
was
25.3%
on net income reported in the period compared to
8.0%
on a net loss for the
three months ended
April 2, 2016
. The tax rate for the
three months ended
April 2, 2016
was impacted by the effects of the jurisdictional mix of income estimated in future periods used in the annual effective tax rate computation. The result of net income in jurisdictions with lower tax rates in future periods creates an estimated annual effective tax benefit compared to estimated annual net income, thereby creating a negative tax rate.
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.
In the United States, the Internal Revenue Service ("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
41
Perrigo Company plc
- Item 2
Unallocated, Interest, Other, and Taxes
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.
The IRS issued a statutory notice of deficiency on April 20, 2017 for the IRS audits of our fiscal years ended June 25, 2011 and June 30, 2012. While we agreed to certain adjustments with respect to these years in October 2016 and made minimal associated payments, the statutory notice of deficiency asserted various additional adjustments, including transfer pricing adjustments. The statutory notice of deficiency for fiscal years 2011 and 2012 asserted an incremental tax obligation of approximately
$74.2 million
, inclusive of interest and penalties. We disagree with the IRS's positions asserted in this notice. In anticipation of contesting the IRS's adjustments, in May 2017 we paid the incremental tax obligation (a prerequisite to contesting the proposed adjustments in U.S. District Court) and expect to file an administrative request for a refund. The payment will be recorded in the second quarter of the year ending December 31, 2017 as a deferred charge on the balance sheet given our anticipated action to recover this amount.
We received notices of proposed adjustments on December 22, 2016 for the IRS audit of Athena Neurosciences, Inc., a subsidiary of Elan Corporation plc, which Perrigo acquired in December 2013, for the years ended December 31, 2011 and December 31, 2012. We disagree with the IRS’s positions asserted in the notices of proposed adjustments and intend to contest them. Additionally, examination of transfer pricing positions is ongoing.
Unfavorable resolutions of the audit matters discussed above could have a material impact on our consolidated financial statements in future periods.
We have ongoing audits in multiple other jurisdictions the resolution of which remains uncertain. These jurisdictions include, but are not limited to, the United States, Israel and Belgium. The IRS notified us in January 2017, that it will be auditing our fiscal years ended June 29, 2013 and June 28, 2014. The Israel Tax Authority is currently auditing our fiscal years ended June 29, 2013 and June 28, 2014. In the fourth quarter of the year ended December 31, 2016, the Belgium Tax Authority proposed minimal adjustments for the years ending December 31, 2013 and December 31, 2014.
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, cash flows from operations, and borrowings available under our credit facilities are expected to be sufficient to finance the known and/or foreseeable liquidity and capital expenditures. 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
42
Perrigo Company plc
- Item 2
Financial Condition, Liquidity and Capital Resources
impacting the institutions’ credit rating or capital ratios, these lenders may be unable or unwilling to lend money pursuant to our existing credit facilities.
Consistent with our investment grade philosophy, we intend to pay down a portion of our outstanding indebtedness during 2017 using the proceeds from the sale of our Tysabri
®
royalty stream completed on
March 27, 2017
.
Operating Activities
|
Three Months Ended
|
|||||||||||
|
|
April 2,
2016 |
April 1,
2017 |
Increase/(Decrease)
|
||||||||
|
Cash Flows From (For) Operating Activities
|
|||||||||||
|
Net income (loss)
|
$
|
(529.2
|
)
|
$
|
71.6
|
|
$
|
600.8
|
|
||
|
Non-cash adjustments
|
556.2
|
|
95.8
|
|
(460.4
|
)
|
|||||
|
Subtotal
|
27.0
|
|
167.4
|
|
140.4
|
|
|||||
|
Increase (decrease) in cash due to:
|
|||||||||||
|
Accounts receivable
|
17.3
|
|
50.1
|
|
32.8
|
|
|||||
|
Inventories
|
4.4
|
|
0.5
|
|
(3.9
|
)
|
|||||
|
Accounts payable
|
(3.2
|
)
|
2.5
|
|
5.7
|
|
|||||
|
Payroll and related taxes
|
(37.4
|
)
|
(10.1
|
)
|
27.3
|
|
|||||
|
Accrued customer programs
|
(81.7
|
)
|
(32.7
|
)
|
49.0
|
|
|||||
|
Accrued liabilities
|
(12.8
|
)
|
2.3
|
|
15.1
|
|
|||||
|
Accrued income taxes
|
185.7
|
|
41.4
|
|
(144.3
|
)
|
|||||
|
Other
|
(0.8
|
)
|
(26.9
|
)
|
(26.1
|
)
|
|||||
|
Subtotal
|
$
|
71.5
|
|
$
|
27.1
|
|
$
|
(44.4
|
)
|
||
|
Net cash from (for) operating activities
|
$
|
98.5
|
|
$
|
194.5
|
|
|
$
|
96.0
|
|
|
We generated
$194.5 million
of cash from operating activities during the
three months ended
April 1, 2017
, a
$96.0 million
increase
over the prior year period, due primarily to the following:
|
•
|
Increased net earnings after adjustments for items such as deferred income taxes, impairment charges, restructuring charges, changes in the fair value of the Tysabri
®
royalty stream, and depreciation and amortization;
|
|
•
|
Changes in accrued customer-related programs due to the pricing dynamics in the
RX
segment;
|
|
•
|
Changes in accounts receivable due to timing of receipt of payments; and
|
|
•
|
Changes in payroll and related taxes due primarily to the severance expenses related to restructuring activities; offset primarily by
|
|
•
|
Changes in accrued income taxes due primarily to the effects of the annual effective tax rate computation impacts in the current quarte
r.
|
43
Perrigo Company plc
- Item 2
Financial Condition, Liquidity and Capital Resources
Investing Activities
Cash generated from investing activities totaled
$2.3 billion
for the
three months ended
April 1, 2017
, compared to cash used of
$368.7 million
in the prior year period. The inflow in the current year was due primarily to the completed divestment of our Tysabri
®
royalty stream to Royalty Pharma, for which we received
$2.2 billion
in cash at closing. Refer
Item 1. Note 6
for additional details. The outflow in the prior year was due primarily to the Tretinoin Products acquisition, which used
$416.4 million
in cash. Refer to
Item 1. Note 2
for additional details. Cash used for capital expenditures totaled
$22.0 million
during the
three months ended
April 1, 2017
compared to
$34.7 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.
Financing Activities
Cash used for financing activities totaled
$37.2 million
for the
three months ended
April 1, 2017
, compared to
$437.4 million
of cash generated for the comparable prior year period. In the current year period, cash used for financing included
$13.6 million
of repayments on long-term debt, as well as
$23.0 million
paid in dividends. In the prior year period, the cash generated from financing activities was due primarily to borrowings of
$1.2 billion
of long-term debt, offset in part by net repayments on our revolving credit agreements and other short-term financing of
$715.9 million
. 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
three months ended
April 1, 2017
. 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.
44
Perrigo Company plc
- Item 2
Financial Condition, Liquidity and Capital Resources
Borrowings and Capital Resources
Overdraft Facilities
We may use overdraft facilities to increase the efficiency of our cash utilization and to meet our short-term liquidity needs. We repaid the balances outstanding under our overdraft facilities during the
year ended
December 31, 2016, but retain the ability to use the facilities in our day-to-day cash operations. There were no balances outstanding under the facilities at
April 1, 2017
and
December 31, 2016
.
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, and interest is calculated at the applicable EUR LIBOR rate plus 70 basis points. The total amount factored on a non-recourse basis and excluded from accounts receivable were
$19.3 million
and
$50.7 million
at
April 1, 2017
and
December 31, 2016
, 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"). On March 15, 2016, we used the proceeds of the long-term debt issuance described below 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 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 to repay the
$435.0 million
then outstanding under the 2014 Revolver. There were no borrowings outstanding under the 2014 Revolver as of
April 1, 2017
.
Term Loans and 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, which were used to repay the amounts outstanding under the 2015 Revolver and 2014 Revolver mentioned above.
45
Perrigo Company plc
- Item 2
Financial Condition, Liquidity and Capital Resources
We had
$5.4 billion
and
$5.4 billion
outstanding under our notes and bonds, and
$412.9 million
and
$420.7 million
outstanding under our term loan, as of
April 1, 2017
and
December 31, 2016
, respectively. On September 29, 2016, we repaid the
$500.0 million
outstanding under the 1.300% 2016 Notes.
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
three months ended
April 1, 2017
, we made
$13.3 million
in scheduled principal payments on the euro-denominated term loan.
We entered into amendments to the 2014 Revolver and the 2014 Term Loan providing for additional time to deliver certain financial statements, as well as the modification of certain financial and other covenants. We entered into additional amendments to the 2014 Revolver and the 2014 Term Loan to modify provisions of such agreements necessary as a result of the correction in accounting related to the Tysabri
®
royalty stream, as well as waivers of any default or event of default that may arise from any restatement of or deficiencies in our financial statements for the periods specified in such amendments and waivers. No default or event of default existed prior to entering into these amendments and waivers. We are in compliance with all covenants under the 2014 Revolver and the 2014 Term Loan as of the date of this Quarterly Report on Form 10-Q.
As a result of the filing of this Quarterly Report on Form 10-Q, as of the filing date we are in compliance with all covenants, including the financial statement delivery obligations, under the 2013 Indenture and 2014 Indenture. See
Item 1. Note 10
for more information on all of the above debt facilities.
Credit Ratings
Our credit ratings on
April 1, 2017
were Baa3 (negative) and BBB- (stable) by Moody's Investors Service and Standard and Poor's 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.
Contractual Obligations and Commitments
There were no material changes in contractual obligations as of
April 1, 2017
from those provided in our 2016 Form 10-K.
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 Annual Report on Form 10-K for the year ended
December 31, 2016
.
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 April 1, 2017. 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 April 1, 2017 because of the material weaknesses in our internal control over financial reporting described below.
46
Perrigo Company plc
- Item 4
Controls and Procedures
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 the Effectiveness of Internal Control over Financial Reporting
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”).
Tysabri
®
Contingent Payments
We acquired the Tysabri
®
royalty stream in our acquisition of Elan Pharmaceuticals plc (“Elan”) in December 2013, and at the time of the acquisition concluded that the right to receive quarterly royalty payments from Biogen, Inc. should be an intangible asset and such payments recognized as revenue in our financial statements. As discussed in Item 4.02 of our Form 8-K filed on April 25, 2017, during the 2016 year-end close process, and in anticipation of our potential sale of the Tysabri
®
royalty rights and the 2018 adoption of ASC 606
Revenue from Contracts with Customers
, we re-evaluated the historical classification of the Tysabri
®
royalty stream as an intangible asset and concluded that it should have been reflected in the financial statements as a financial asset as of its 2013 acquisition date. As part of this evaluation, management determined that its control over the review of the application of the accounting guidance in ASC 805
Business Combinations
did not operate effectively in the appropriate identification of the assets acquired and liabilities assumed in connection with the Elan acquisition in December 2013.
All of our originally filed financial statements through the filing of the Form 10-Q for the quarter ended October 1, 2016, as originally filed on November 10, 2016, included the disclosure of the Elan acquisition with the Tysabri
®
royalty stream presented as an intangible asset. In addition, due to the fact that the asset was historically classified as an intangible asset, we did not design or implement controls around the fair value accounting for the Tysabri
®
royalty stream as a financial asset, so these controls were not in place at any quarter end subsequent to the acquisition, including the date of the quarterly and annual assessment of internal control. Accordingly, management concluded that these control deficiencies represent material weaknesses.
Income Taxes
Management has determined that we did not design or maintain effective management review controls related to our (1) evaluation of non-routine transactions that impact our effective tax rate on an annual and interim basis and (2) determination of our deferred taxes in connection with business combinations.
During our quarterly and annual fiscal 2016 close processes, management determined that the design and operating effectiveness of our controls around the evaluation of non-routine events did not operate appropriately. As disclosed in our Form 10-Q for the quarterly period ended April 2, 2016, our management review controls did not operate at a sufficient level of precision to ensure interim income taxes were properly recorded and disclosed in our condensed consolidated financial statements in connection with the recording of an indefinite-lived intangible asset impairment and estimated goodwill impairment as part of the Company’s controls to evaluate non-routine events that occur during a quarterly period and the related income tax impacts. These control deficiencies resulted in a material misstatement in income taxes in the preliminary financial statements for the quarter ended April 2, 2016. Additionally, these controls remained unremediated at April 1, 2017, as in February 2017, we identified that these controls did not appropriately evaluate the need for a valuation allowance. ASC 740,
Income Taxes,
requires a company to record a valuation allowance to reduce a deferred tax asset to its net realizable value. Our controls related to consideration of non-routine transactions or events were not designed and did not operate appropriately and identify whether a valuation allowance was needed as they did not identify that we entered into a three year cumulative loss and did not consider the positive and negative evidence in evaluating the potential sources of taxable income in determining whether a valuation allowance was required in the consolidated financial statements.
In February 2017, management identified the existence of tax basis in certain acquired intangible assets (“tax amortization benefits”) that existed at the time of the acquisition of Omega Pharma Invest N.V. (“Omega”) on March 30, 2015. Upon evaluating the tax amortization benefits, management concluded that the purchase
47
Perrigo Company plc
- Item 4
Controls and Procedures
accounting for Omega should have included the tax basis in the intangible assets in calculating the deferred tax liability in the opening balance sheet. This omission of existing tax basis in calculating the deferred tax liability on the acquisition date indicated that management’s review over the opening balance sheet deferred income tax accounts was not designed or operating appropriately.
Accordingly, management concluded that these control deficiencies represent material weaknesses.
Impairment
In connection with our long-lived asset impairment testing, management determined that the controls around the identification of the relevant asset group under ASC 360,
Impairment and Disposal of Long-lived Assets
, did not operate effectively. In determining the level to evaluate the long-lived assets in our Animal Health reporting unit for impairment testing, we inappropriately grouped the assets that constituted the asset group in applying the guidance in ASC 360.
Accordingly, management concluded that this control deficiency represented a material weakness.
Remediation Plan for the Material Weaknesses
We are committed to remediating the control deficiencies that gave rise to the material weaknesses described above. Management is responsible for implementing changes and improvements to internal control over financial reporting and for remediating the control deficiencies that gave rise to the material weaknesses.
To remediate the material weakness in internal control over financial reporting related to the acquisition of the Tysabri
®
royalty rights, we have begun, with oversight from the Audit Committee, to:
|
•
|
Review the processes and controls in place related to our application of ASC 805 to enhance the effectiveness of the design and operation of those controls to identify assets acquired and liabilities assumed; and
|
|
•
|
Evaluate and enhance management review controls related to business acquisitions.
|
In addition, following our identification of misstatements in certain of our previous financial statements, we designed and initiated certain controls around the accounting for the Tysabri
®
royalty stream as a financial asset. These controls that we are implementing include: (1) review procedures related to the fair value estimation process, such as the use of relevant data and key assumptions utilized in the projections of future cash flows and calculation of discount rates and (2) management review controls over key assumptions and methodologies used in the calculations.
Until the remediation actions are fully implemented and the design and operating effectiveness of related internal controls is validated through testing, the material weaknesses described above will continue to exist.
To remediate the material weaknesses in internal control over financial reporting related to income taxes, we plan, with oversight from the Audit Committee, to continue to:
|
•
|
Review the organization structure, resources, processes and controls in place to measure and record income taxes to enhance the effectiveness of the design and operation of those controls;
|
|
•
|
Evaluate the design and operating effectiveness of our controls related to income taxes for business acquisitions and non-routine transactions on an interim and annual basis;
|
|
•
|
Enhance monitoring activities related to income taxes; and
|
|
•
|
Evaluate and enhance the level of precision in the management review controls related to income taxes.
|
We expect to implement the remediation actions in 2017. Until the remediation actions are fully implemented and the operational effectiveness of related internal controls is validated through testing, the material weaknesses described above will continue to exist.
To remediate the material weakness in internal control over financial reporting related to the identification of assets groups as part of our impairment testing, we plan, with oversight from the Audit Committee, to:
48
Perrigo Company plc
- Item 4
Controls and Procedures
|
•
|
Review the design and operation of our controls related to asset group determination in our impairment process on an interim and annual basis; and
|
|
•
|
Evaluate and enhance the management review controls related to impairment
|
We expect to implement the remediation actions in 2017. Until the remediation actions are fully implemented and the operational effectiveness of related internal controls is validated through testing, the material weaknesses 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 weaknesses identified. We intend to review each of the identified material weaknesses and add resources and improve our processes to achieve and maintain a strong control environment. 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
There have been no changes in our internal control over financial reporting during the three months ended April 1, 2017 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.
ITEM 1A.
RISK FACTORS
Our Annual Report on Form 10-K for the year ended December 31, 2016 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-K, other than described below.
We identified material weaknesses 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 our review of certain material misstatements related to the characterization of the Tysabri
®
royalty stream acquired in the Elan transaction, as well as material misstatements related to the calculation of deferred tax liabilities that existed at the time of the acquisition of Omega, and the evaluation of long-lived assets in our Animal Health reporting unit for impairment testing, in each case contained in certain of our historical financial statements, we concluded that there were material weaknesses in our internal control over financial reporting that contributed to those misstatements. As a result of the material weaknesses, which existed at December 31, 2016 and remained at April 1, 2017, we have concluded that we did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2016 or April 1, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The failure to maintain effective control over financial reporting in turn resulted in material deficiencies in our disclosure controls and procedures.
We have identified and begun the implementation of actions, and continue to identify and implement, actions to improve the effectiveness of our internal control over financial reporting and disclosure controls and procedures, but there can be no assurance that such remediation efforts will be successful. We have also incurred and will continue to incur substantial accounting, legal, consulting, and other costs in connection with identifying and remediating the material weaknesses. Failure to remediate the material weaknesses could have a negative impact on our business and the market for our ordinary shares. For more information on our material weaknesses and the status of our remediation efforts, See
Part I, Item 4 - Controls and Procedures
.
49
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
|
Perrigo Company plc Change in Control Severance Policy for U.S. Employees, as amended and restated effective February 5, 2017 (filed herewith).
|
|
|
10.2
|
Perrigo Company plc U.S. Severance Policy, as amended and restated effective February 6, 2017 (filed herewith).
|
|
|
10.3
|
Form of Performance-Based Restricted Sock Unit Award Agreement under the Company's 2013 Long-term Incentive Plan (filed herewith).
|
|
|
31.1
|
Rule 13a-14(a) Certification by John T. Hendrickson, Chief Executive Officer (filed herewith).
|
|
|
31.2
|
Rule 13a-14(a) Certification by Ronald L. Winowiecki, Acting 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.
|
|
50
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:
|
May 30, 2017
|
By: /s/ John T. Hendrickson
|
|
|
John T. Hendrickson
|
|||
|
Chief Executive Officer
|
|||
|
(Principal Executive Officer)
|
|||
|
Date:
|
May 30, 2017
|
By: /s/ Ronald L. Winowiecki
|
|
|
Ronald L. Winowiecki
|
|||
|
Acting Chief Financial Officer
|
|||
|
(Principal Accounting and Financial Officer)
|
|||
51
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 InformationNote 18 Subsequent EventsItem 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 1A. Risk FactorsItem 6. Exhibits