PERRIGO COMPANY PLC
The following Management's Discussion and Analysis ("MD&A") is intended to
provide readers with an understanding of our financial condition, results of
operations, and cash flows by focusing on changes in certain key measures from
year to year. This MD&A is provided as a supplement to, and should be read in
conjunction with, our Consolidated Financial Statements and accompanying Notes
found in Item 8 of this report. See also " Cautionary Note Regarding
Forward-Looking Statements ."
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--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Executive Overview EXECUTIVE OVERVIEWPerrigo Company plc was incorporated under the laws ofIreland onJune 28, 2013 and became the successor registrant ofPerrigo Company , aMichigan corporation, onDecember 18, 2013 in connection with the acquisition ofElan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo ," the "Company," "we," "our," "us," and similar pronouns used herein refer toPerrigo Company plc , its subsidiaries, and all predecessors ofPerrigo Company plc and its subsidiaries. We are dedicated to making lives better by bringing "Quality, Affordable Self-Care Products™" that consumers trust everywhere they are sold. We are a leading provider of over-the-counter ("OTC") health and wellness solutions that enhance individual well-being by empowering consumers to proactively prevent or treat conditions that can be self-managed. We are also a leading producer of generic prescription pharmaceutical topical products such as creams, lotions, gels, and nasal sprays. Our vision is designed to support our shifting focus to our consumer branded and store brand portfolio and our global reach and the opportunities for growth we see ahead of us, while remaining loyal to our heritage. Our vision represents an evolution from healthcare to self-care, which takes advantage of a massive global trend and opens up a large number of adjacent growth opportunities. We define self-care as not just treating disease or helping individuals feel better after taking a product, but also maintaining and enhancing their overall health and wellness. In 2019,Perrigo 's management and Board of Directors launched a three-year strategy to transform the Company into a consumer self-care leader, consistent with our vision. Significant progress was made in the first year of our transformation journey towards achieving the major components of management's transformation strategy, which consists of: reconfiguring the portfolio, delivering on base plans, creating repeatable platforms for growth, driving organizational effectiveness and capabilities, increasing productivity, allocating capital and delivering consistent and sustainable results in line with consumer-packaged goods peers.
Our fiscal year begins on
Our Segments
During the three months endedMarch 30, 2019 , we changed the composition of our operating and reporting segments. We moved our pharmaceuticals and diagnostic businesses inIsrael from theConsumer Self-Care International segment to thePrescription Pharmaceuticals segment and we made certain adjustments to our allocations between segments. These changes were made to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company.
Our new reporting and operating segments are as follows:
• Consumer Self-Care Americas ("CSCA"), formerly Consumer Healthcare
Americas , comprises our consumer self-care business (OTC, contract
manufacturing, infant formula, and oral self-care categories and our
divested animal health category) in the U.S. , Mexico and Canada .
•
International, comprises our branded consumer self-care business primarily
in Europe and Australia , our consumer-focused business in the United
Kingdom and parts of Asia , and our liquid licensed products business in
the United Kingdom .
• Prescription Pharmaceuticals ("RX") comprises our prescription
pharmaceuticals business in the U.S. and our pharmaceuticals and
diagnostic businesses in Israel , which were previously in our CSCI
segment.
Our segments reflect the way in which our management makes operating decisions, allocates resources and manages the growth and profitability of the Company.
For information on each segment, our business environment, and competitive landscape, refer to Item 1. Business . For results by segment and geographic locations see below " Segment Results " and Item 8. Note 2 and Note 20 .
53
--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Executive Overview Strategy Our strategy is to make lives better by bringing "Quality, Affordable Self-Care Products™" that consumers trust everywhere they are sold. We accomplish this by leveraging our global infrastructure to expand our product offerings, thereby providing new innovative products and product line extensions to existing consumers and servicing new consumers through entry into adjacent product categories or new geographies. We accomplish this strategy by investing in and continually improving all aspects of our five strategic pillars:
• High quality;
• Superior customer service;
• Leading innovation; • Best cost; and • Empowered people, while remaining true to our three core values, Integrity - we do what is right; Respect - we demonstrate the value we hold for one another; and Responsibility - we hold ourselves accountable for our actions.
We utilize shared services and Research and Development ("R&D") centers of excellence in order to help ensure consistency in our processes around the world, and to maintain focus on our five strategic pillars.
We continually reinvest in our R&D pipeline and work with partners as necessary to strive to be first-to-market with new products. Our organic growth has been driven by successful new product launches in all our segments and expansion in new channels like e-commerce. Over time, we expect to continue to grow inorganically through expansion into adjacent products, product categories, and channels, as well as potentially through entry into new geographic markets. We evaluate potential acquisition targets using an internally developed 12-point scale, that is weighted towards accretive growth and correlated with shareholder value. Competitive Advantage Our consumer-facing business model combines the unique competencies of a fast-moving consumer goods company and a pharmaceutical manufacturing company with the supply chain breadth necessary to support customers in the markets we serve. These durable business model competencies align with our five strategic pillars and provide us a competitive advantage in the marketplace. We fully integrate quality in our operational systems across all products. Our ability to manage our supply chain complexity across multiple dosage forms, formulations, and stock-keeping units, as well as acquisitions, integrations, and hundreds of global partners provides value to our customers. Product development capacity and life cycle management are at the core of our operational investments. Globally we have 22 manufacturing plants that are all in good regulatory compliance standing and have systems and structures in place to guide our continued success. Our leadership team is fully engaged in aligning all our metrics and objectives around sustainable compliance with industry associations and regulatory agencies.
Among other things, we believe the following give us a competitive advantage and provide value to our customers:
• Leadership in first-to-market product development and product life cycle
management;
• Turn-key regulatory and promotional capabilities;
• Management of supply chain complexity and utilizing economies of scale;
• Quality and cost effectiveness throughout the supply chain creating a
sustainable, low-cost network;
• Deep understanding of consumer needs and customer strategies;
• Industry leading e-commerce support; and
• Expansive pan-European commercial infrastructure, brand-building
capabilities, and a diverse product portfolio.
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Perrigo Company plc - Item 7 Executive Overview Product Categories As we continue to transform to a consumer-focused, self-care company, we re-aligned our product categories in our CSCA and CSCI segments as ofDecember 31, 2019 . The re-alignment standardizes our categories and product level detail to provide consistency across segments. This transformative step will optimize the way in which management reports and evaluates our business (refer to Item 1. Business - Our Segments and Item 8. Note 2 ).
Recent Highlights
Year Ended
• We previously announced a plan to separate our RX business, which, when
completed, will enable us to focus on expanding our consumer-focused
businesses. In 2019, we continued preparations related to our planned
separation, which may include a possible sale, spin-off, merger or other
form of separation. While we remain committed to transforming to a
consumer-focused business, we have not committed to a specific date or
form for the separation. In connection with the proposed separation, we
have incurred significant preparation costs and will continue to incur
costs that when completed will be in the range of $45.0 million to $80.0 million, excluding restructuring expenses and transaction costs, depending
on the final timing and structure of the transaction.
• On
PetIQ for cash consideration of
pre-tax gain of
the Consolidated Statements of Operations.
• On
supplier of private label and branded oral self-care products. After
post-closing adjustments, total cash consideration paid was
million, net of
transformation to a consumer-focused, self-care company while enhancing
our position as a global leader in consumer self-care solutions.
Year Ended
• During the year endedDecember 31, 2018 , our divested financial asset Tysabri® met the 2018 global net sales threshold resulting in a$170.1 million gain. We received the$250.0 million royalty payment onFebruary 22, 2019 .
• During the year ended
worth of shares as part of our authorized share repurchase plan.
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Perrigo Company plc - Item 7 Consolidated RESULTS OF OPERATIONS CONSOLIDATED
Consolidated Financial Results
Year Ended
December 31, December 31, December 31,
(in millions) 2019 2018 2017
Net sales $ 4,837.4 $ 4,731.7 $ 4,946.2
Gross profit $ 1,773.3 $ 1,831.5 $ 1,979.5
Gross profit % 36.7 % 38.7 % 40.0 %
Operating income $ 204.8 $ 236.5 $ 598.2
Operating income % 4.2 % 5.0 % 12.1 %
[[Image Removed: chart-b1b3bc1bbc9b8ff5f2e.jpg]][[Image Removed: chart-b6d308ba3d293492051.jpg]] * Total net sales by geography is derived from the location of the entity that
sells to a third party.
Year Ended
Net sales increased
million, an increase of
and an overall increase in demand for existing products, partially offset
by normal levels of competition-driven pricing pressure primarily in our
RX segment and a
partially offset by
•
•$86.4 million decrease due primarily to unfavorable Euro foreign currency translation;
•
•
•$9.2 million decrease due to the retail market withdrawal of Ranitidine products.
Operating income decreased
•
gross profit as a percentage of net sales, due primarily to normal levels
of competition-driven pricing pressure in our RX segment, the retail
market withdrawal of Ranitidine products and unfavorable product mix;
partially offset by
56--------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Consolidated
•
•$39.9 million decrease in impairment charges due primarily to the absence of$221.9 million in impairment charges related to animal health goodwill and intangible assets and certain in-process research and development ("IPR&D") taken in the prior year period; partially offset by$184.5 million in current year impairments primarily for our RXU.S. reporting unit goodwill and certain definite-lived intangible assets in our RX and CSCI segments; and •$31.1 million decrease in R&D expenses primarily related to the absence of a$50.0 million upfront license fee payment to
enter into
a license agreement with Merck Sharp & Dohme Corp in the prior year
period, partially offset by current year innovation investments and
pre-commercialization R&D costs for generic albuterol sulfate
inhalation aerosol, the generic version of ProAir® HFA; partially
offset by
• $17.8 million increase due to the absence of an insurance recovery
received in the prior year; and
• $20.6 million increase in selling and administrativeexpenses due
primarily to restored employee incentive compensation,increased
acquisition and integration-related charges due to the Ranir
acquisition; partially offset by favorable Euro foreign
currency
translation.
Year Ended
Net sales decreased
•
competition-driven pricing pressure primarily in our RX segment,
discontinued products of
segments, partially offset by
sales; and
•
•$88.7 million decrease due to our divested Russian business and Israel API business; partially offset by •$33.5 million increase due primarily to favorable Euro foreign currency translation.
Operating income decreased
gross profit as a percentage of net sales, due primarily to pricing
pressure in our CSCA and RX segments, unfavorable product mix, and
operating variances and increased input costs; partially offset by
favorable pricing and benefits from continued insourcing initiatives in
our CSCI segment; and
•
•$176.9 million increase in impairment charges related
primarily to
animal health goodwill and intangible assets in 2018;partially
offset by 2017 impairment charges related to certain definite-lived
intangible assets and IPR&D;
• $50.9 million increase in R&D expense primarily related to a $50.0
million upfront license fee payment to enter into a license
agreement with Merck Sharp & Dohme Corp ;
• $38.0 million increase due to the absence of a gain for the sale of
certain ANDAs recognized in 2017, and the absence of a gain related
to contingent consideration adjustments; partially offset by
• $32.4 million decrease in restructuring expense dueprimarily to the
cost reduction initiatives and strategic organizationalenhancements
taken in 2017; and
•
Recent Developments
Internal Revenue Service Notices of Proposed Adjustments
OnAugust 22, 2019 , we received a draft Notice of Proposed Adjustment ("NOPA") from theIRS with respect to our fiscal tax years endedJune 28, 2014 andJune 27, 2015 , relating to the deductibility of interest on$7.5 billion in 57 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Consolidated debts owed toPerrigo Company plc byPerrigo Company , aMichigan corporation and wholly-owned indirect subsidiary ofPerrigo Company, plc . The debts were incurred in connection with the Elan merger transaction in 2013. The draft NOPA would cap the interest rate on the debts forU.S. federal tax purposes at 130.0% of the Applicable Federal Rate (a blended rate reduction of 4.0% per annum from the rates agreed to by the parties), on the stated ground that the loans were not negotiated on an arms'-length basis. As a result of the proposed interest rate reduction, the draft NOPA proposes a reduction in gross interest expense of approximately$480.0 million for fiscal years 2014 and 2015. If theIRS were to prevail in its proposed adjustment, we estimate an increase in tax expense for such fiscal years of approximately$170.0 million , excluding interest and penalties. In addition, we would expect theIRS to seek similar adjustments for the period fromJune 28, 2015 throughDecember 31, 2019 . If those further adjustments were sustained, based on our preliminary calculations and subject to further analysis, our current best estimate is that the additional tax expense would not exceed$200.0 million , excluding interest and penalties, for the periodJune 28, 2015 throughDecember 31, 2019 . We do not expect any similar adjustments beyondDecember 31, 2019 as proposed regulations, issued under section 267A of the Internal Revenue Code, would eliminate the deductibility of interest on this debt. We strongly disagree with theIRS position and will pursue all available administrative and judicial remedies. No payment of any amount related to the proposed adjustments is required to be made, if at all, until all applicable proceedings have been completed. Following receipt of the draft NOPA,Perrigo provided theIRS with a detailed written response onSeptember 20, 2019 . That submission included an analysis by external advisors that supported the original interest rates as being consistent with arms'-length rates for comparable debt and explained why the exam team's analyses and conclusions were both factually and legally misguided. Based on discussions with theIRS , we had believed that theIRS staff would take our submission into account and meet with us to discuss whether this issue could be resolved at the examination level. However, in the weeks following such discussions,IRS staff advised that they would not respond in detail to our September submission or negotiate the interest rate issue prior to issuing a final NOPA consistent with the draft NOPA. Accordingly, we currently expect that we will receive a final NOPA regarding this matter that proposes substantially the same adjustments described in the draft NOPA. While we believe our position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is resolved unfavorably it could have a material adverse impact on our liquidity and capital resources (refer to Item 1A. Risk Factors - Tax Related Risks and Item 8. Note 15 ). OnApril 26, 2019 , we received a revised NOPA from theIRS regarding transfer pricing positions related to theIRS audit of Athena for the years endedDecember 31, 2011 ,December 31, 2012 andDecember 31, 2013 . The NOPA carries forward theIRS's theory from its 2017 draft NOPA that when Elan took over the future funding of Athena's in-process research and development after acquiring Athena in 1996, Elan should have paid a substantially higher royalty rate for the right to exploit Athena's intellectual property, rather than rates based on transfer pricing documentation prepared by Elan's external tax advisors. The NOPA proposes a payment of$843.0 million , which represents additional tax and a 40.0% penalty. This amount excludes consideration of offsetting tax attributes and potentially material interest. We strongly disagree with theIRS position and will pursue all available administrative and judicial remedies, including potentially those available under theU.S. - Ireland Income Tax Treaty to alleviate double taxation. No payment of the additional amounts is required until the matter is resolved administratively, judicially, or through treaty negotiation. While we believe our position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is resolved unfavorably it could have a material adverse impact on our liquidity and capital resources (refer to Item 1A. Risk Factors - Tax Related Risks and Item 8. Note 15 ).
Irish Tax Appeals Commission Notice of Amended Assessment
OnOctober 30, 2018 , we received an audit finding letter from theIrish Office of the Revenue Commissioners ("Irish Revenue") for the years endedDecember 31, 2012 andDecember 31, 2013 . The audit finding letter relates to the tax treatment of the 2013 sale of the Tysabri® intellectual property and other assets related to Tysabri® toBiogen Idec from Elan Pharma. The consideration paid by Biogen to Elan Pharma took the form of an upfront payment and future contingent royalty payments. Irish Revenue issued a Notice of Amended Assessment ("NoA") onNovember 29, 2018 , which assesses an Irish corporation tax liability against Elan Pharma in the amount of €1,636 million, not including interest or any applicable penalties. We disagree with this assessment and believe that the NoA is without merit and incorrect as a matter of law. We filed an appeal of the NoA onDecember 27, 2018 and will pursue all available administrative and judicial avenues as may be necessary or appropriate. In connection with that, Elan Pharma was granted leave by theIrish High Court onFebruary 25, 2019 to seek judicial review of the issuance of the NoA by Irish Revenue. The judicial review filing is based 58 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Consolidated on our belief that Elan Pharma's legitimate expectations as a taxpayer have been breached, not on the merits of the NoA itself.The High Court has scheduled a hearing in this judicial review proceeding inApril 2020 , and we would expect a decision in this matter in the second half of 2020. If we are ultimately successful in the judicial review proceedings, the NoA will be invalidated and Irish Revenue will not be able to re-issue the NoA. The proceedings before theTax Appeals Commission have been stayed until a decision on the judicial review application has been made. If for any reason the judicial review proceedings are ultimately unsuccessful in establishing that Irish Revenue's issuance of the NoA breaches our legitimate expectations, Elan Pharma will reactivate its appeal to challenge the merits of the NoA before theTax Appeals Commission . While we believe our position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is resolved unfavorably it could have a material adverse impact on our liquidity and capital resources (refer to Item 1A. Risk Factors - Tax Related Risks and Item 8. Note 15 ).
Impairments
Throughout the years endedDecember 31, 2019 ,December 31, 2018 , andDecember 31, 2017 , we identified impairment indicators for various assets across our different segments, and therefore, we performed impairment testing. Below is a summary of the impairment charges recorded by segment (in millions): Year Ended December 31, 2019 CSCA CSCI(1) RX(2) Total Goodwill $ - $ -$ 109.2 $ 109.2 Definite-lived intangible assets - 9.7 59.8 69.5 IPR&D 4.1 0.1 1.6 5.8$ 4.1 $ 9.8 $ 170.6 $ 184.5 (1) Relates primarily to an intangible asset for certain pain relief products that we license from a third party. (2) Relates primarily to our RXU.S. reporting unit goodwill, and definite-lived intangible assets for our generic clindamycin and benzoyl peroxide topical gel (generic equivalent to Benzaclin®), our Evamist® branded product, and a generic product. Year Ended December 31, 2018 CSCA(1) CSCI Total Goodwill$ 136.7 $ -$ 136.7 Indefinite-lived intangible assets 27.7 - 27.7 Definite-lived intangible assets 48.9 0.7 49.6 Assets held-for-sale 0.6 1.1 1.7 IPR&D 8.7 - 8.7$ 222.6 $ 1.8 $ 224.4
(1) Relates primarily to animal health and certain IPR&D.
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--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Consolidated Year Ended December 31, 2017 CSCA(1) CSCI(2) RX(3) Other(4) Total Definite-lived intangible assets $ - $ -$ 19.7 $ -$ 19.7 Assets held-for-sale - 3.7 - 3.3 7.0 IPR&D - 1.1 11.6 - 12.7 Property, plant, and equipment 4.5 - 3.6 - 8.1$ 4.5 $ 4.8 $ 34.9 $ 3.3 $ 47.5 (1) Relates to certain idle property, plant and equipment. (2) Relates primarily to our Russian business, which was soldAugust 25, 2017 . (3) Relates primarily to intangible assets acquired through theLumara Health, Inc. acquisition and IPR&D assets acquired in conjunction with certain Development-Stage Rx Products. (4) Relates to our Israel API business, which was soldNovember 21, 2017 .
CONSUMER SELF-CARE
Recent Developments
• On
the oral care assets of
transaction is expected to close in the first quarter of 2020 subject to
bankruptcy court approval in connection with
cases, as well as other customary closing conditions. This transaction, in
combination with our existing children's oral self-care portfolio,
provides a new platform for disruptive product innovation in the form of
exclusive store and value brand programs that challenge current national
brand oral care offerings.
• On
brand and innovator in the toothbrush protector market, from Bonfit
toothbrush protectors, kids' toothbrush protectors and tongue cleaners,
complements our current portfolio of oral self-care products, and
leverages our manufacturing and marketing platform. Operating results
attributable to the products will be included in our CSCA segment. Total
consideration paid was
adjustments
• On
from GlaxoSmithKline for $61.5 million . The acquisition of
Prevacid®24HR expands our U.S. OTC presence with a leading brand in our
digestive health product category.
• During the three months ended
announced worldwide that Ranitidine may potentially contain
N-nitrosodimethylamine ("NDMA"), a known environmental contaminant, we
promptly began testing our externally-sourced Ranitidine API and
Ranitidine-based products. On
product based upon preliminary results. Based on the totality of data
gathered, we made the decision to conduct a voluntary retail market
withdrawal, which resulted in a decrease in net sales of
a decrease in gross profit of $15.5 million in our CSCA segment.
• On
PetIQ for cash consideration of
pre-tax gain of
the Consolidated Statements of Operations.
• On
supplier of private label and branded oral self-care products, for
million. This transaction advances our transformation to a
consumer-focused, self-care company while enhancing our position as a
global leader in consumer self-care solutions.
• On April 1, 2019 , we purchased the ANDAs and other records andregistrations of Budesonide Nasal Spray, a generic equivalent of Rhinocort
Allergy® and Triamcinolone Nasal Spray, a generic equivalent of Nasacort
Allergy®, from Barr Laboratories, Inc. , a subsidiary of Teva
Pharmaceuticals , for a total of $14.0 million in cash.
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Perrigo Company plc - Item 7 CSCA Segment Financial Results
Year Ended
Year Ended
December 31, December 31,
(in millions) 2019 2018
Net sales $ 2,487.7 $ 2,411.6
Gross profit $ 798.9 $ 789.0
Gross profit % 32.1 % 32.7 %
Operating income $ 414.0 $ 174.4
Operating income % 16.6 % 7.2 %
Net sales increased
million due to our acquisition of Ranir, increased volume due to OTC
category growth, market share gains from store brand competitors partly
driven by
and increased OTC store brand penetration versus national brand, partially
offset by lower infant formula contract pack sales as several branded
customers made the strategic decision to exit the category, lower net
sales in the
partially offset by
•
•
•
•$7.4 million decrease due to the retail market withdrawal of Ranitidine products.
Operating income increased
•
as described above, but a 60 basis point decrease in gross profit as a
percentage of net sales, due primarily to pricing pressures, the retail
market withdrawal of Ranitidine products, and unfavorable product mix; and
•
•$218.4 million decrease in impairment charges due primarily to the absence of$213.2 million in impairment charges related to animal health goodwill and intangible assets and a$5.0 million
decrease in
certain IPR&D impairments; and
• $34.5 million decrease in R&D expense due primarily to the absence
of a $50.0 million upfront license fee payment to enter into a
license agreement with Merck; partially offset by current year
innovation investments; partially offset by
• $15.5 million increase in selling and administrativeexpenses due
primarily to increased advertising and promotional spending to
support product launches and eCommerce growth, an increase in
employee-related expenses, and the acquisition of Ranir; and
• $7.1 million increase in other operating expenses due to an asset
abandonment related to our operations in Vermont .
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Perrigo Company plc - Item 7 CSCA
Year Ended
Year Ended
December 31, December 31,
(in millions) 2018 2017
Net sales $ 2,411.6 $ 2,429.9
Gross profit $ 789.0 $ 843.7
Gross profit % 32.7 % 34.7 %
Operating income $ 174.4 $ 470.9
Operating income % 7.2 % 19.4 %
Net sales decreased
•
million and a decrease of existing product sales due to lost distribution
and channel dynamics in our animal health category and normal levels of
competition-driven pricing pressure, partially offset by a
increase due to new product sales; and
•
translation.
Operating income decreased
•
gross profit as a percentage of net sales, due primarily to operating
variances and increased input costs, lower sales in the higher margin
animal health business and pricing pressure; and
•
•$218.0 million increase in impairment charges due primarily to animal health goodwill and intangible assets; and •$44.8 million increase in R&D expense due primarily to a$50.0 million upfront license fee payment to enter into a license agreement with Merck; partially offset by •$26.9 million decrease in restructuring expense related to the cost reduction initiatives taken in 2017.
CONSUMER SELF-CARE INTERNATIONAL
Recent Developments
• During the three months ended
indicators related to certain pain relief products that we licensed from a
third party and reported as a definite-lived intangible asset. The
impairment indicators related to commercial launch delays and a decision
by the licensor to not extend the license agreement upon expiration. We
determined the asset was fully impaired and recorded an asset impairment
of $9.7 million .
• During the three months ended
announced worldwide that Ranitidine may potentially contain NDMA, a known
environmental contaminant, we promptly began testing our externally
sourced Ranitidine API and Ranitidine-based products. On
we halted shipments of the product based upon preliminary results. Based
on the totality of data gathered, we made the decision to conduct a
voluntary retail market withdrawal, which resulted in a decrease in net
sales of $1.8 million and a decrease in gross profit of $2.9 million in
our CSCI segment.
• On July 1, 2019 , we acquired Ranir, a transaction that advances ourtransformation to a consumer-focused, self-care company while enhancing
our position as a global leader in consumer self-care solutions. Ranir's
non-
and China .
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Perrigo Company plc - Item 7 CSCI Segment Financial Results
Year Ended
Year Ended
December 31, December 31,
(in millions) 2019 2018
Net sales $ 1,382.2 $ 1,399.3
Gross profit $ 639.5 $ 668.7
Gross profit % 46.3 % 47.8 %
Operating income $ 19.6 $ 6.8
Operating income % 1.4 % 0.5 %
Net sales decreased
products in the Phytosun® naturals portfolio, a
to our acquisition of Ranir, and volume increases in our UK store brand
business, partially offset by lower net sales in France associated with
restructuring the sales force and a $13.1 million decrease due to
discontinued products; more than offset by
•
•$86.9 million decrease due primarily to unfavorable Euro foreign currency translation; and •$1.8 million decrease due to the retail market withdrawal of Ranitidine products.
Operating income increased
•
foreign currency translation, partially offset by the acquisition of Ranir
and a 150 basis point decrease in gross profit as a percentage of net
sales due primarily to improved performance in the
and the acquisition of Ranir, both of which have relatively lower gross
margins than the overall portfolio; more than offset by
•
•$42.4 million decrease in selling and administrative
expenses due
primarily to favorable Euro foreign currency translation, partially
offset by an increase in employee-related expenses; and
• $7.7 million decrease in restructuring expenses dueprimarily to the
absence of cost reduction initiatives that were taken in the prior
year; partially offset by
• $7.9 million increase in impairment charges due primarily to a
certain definite-lived intangible asset.
Year Ended
Year Ended
December 31, December 31,
(in millions) 2018 2017
Net sales $ 1,399.3 $ 1,406.2
Gross profit $ 668.7 $ 651.2
Gross profit % 47.8 % 46.3 %
Operating income (loss) $ 6.8 $ (2.7 )
Operating income (loss) % 0.5 % (0.2 )%
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Perrigo Company plc - Item 7 CSCI
Net sales decreased
lifestyle and upper respiratory categories and
to discontinued products, partially offset by new product sales of
•
•$37.3 million increase due to favorable Euro foreign currency translation; partially offset by •$33.0 million decrease due to the exited Russian business and 2017 distribution phase out initiatives.
Operating income increased
•
gross profit as a percentage of net sales, due primarily to brand
prioritization and exit of low margin businesses, improved pricing and
benefits from continued insourcing initiatives; partially offset by
•
increase in distribution expense, and
due primarily to innovation investments and the effect of foreign currency
translation.
PRESCRIPTION PHARMACEUTICALS
Recent Trends and Developments
• Although pricing pressure is showing some signs of moderation, during 2019
we continued to experience a significant year-over-year reduction in
pricing in our RX segment due to competitive pressure. We expect softness
in pricing to continue to impact the segment for the foreseeable future.
• On
received approval from the
abbreviated new drug application for generic albuterol sulfate inhalation
aerosol, the first AB-rated generic version of ProAir® HFA. Shortly after
approval, we launched with limited commercial quantities and anticipate
that we will be in a position to provide a steady supply of this product
by the fourth quarter of 2020.
• During the three months ended December 31, 2019 , we tested our RX U.S.
reporting unit for impairment. The impairment indicators related to acombination of industry and market factors that led to reduced projections
of future cash flows. We determined the reporting unit was impaired and
recorded an impairment charge of $109.2 million .
• During the three months ended
indicators on a definite-lived intangible asset related to our clindamycin
and benzoyl peroxide topical gel (generic equivalent to Benzaclin®).
Increased competition caused price erosion that lowered our long-range
revenue forecast, which indicated the asset was no longer recoverable and
was partially impaired. We recorded an asset impairment of
• OnJuly 2, 2019 , we purchased the Abbreviated New Drug Application ("ANDA") for a generic gel product for$49.0 million in cash, which we capitalized as a developed product technology intangible asset. We launched the product during the third quarter of 2019.
• During the three months ended
indicators related to our Evamist® branded product, which is a
definite-lived intangible asset. The indicators related to a decline in
sales volume and a corresponding reduction in our long-range revenue
forecast. We recorded an asset impairment of $10.8 million .
• On May 17, 2019 , we purchased the ANDA for a generic product used to
relieve pain for $15.7 million in cash, which we capitalized as adeveloped product technology intangible asset. We launched the product
during the third quarter of 2019.
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Perrigo Company plc - Item 7 RX
• During the three months ended
indicators for a certain definite-lived asset related to changes in
pricing and competition in the market, which lowered the projected cash
flows we expect to generate from the asset. We recorded an asset
impairment of $27.8 million .
Segment Financial Results
Year Ended
Year Ended
December 31, December 31,
(in millions) 2019 2018
Net sales $ 967.5 $ 920.8
Gross profit $ 334.9 $ 373.9
Gross profit % 34.6 % 40.6 %
Operating income $ 2.6 $ 214.6
Operating income % 0.3 % 23.3 %
Net sales increased
mainly by Acyclovir cream (generic equivalent to Zovirax® cream),
Testosterone Gel 1.62% (generic equivalent to Androgel®), and the
Scopolamine Patch relaunch and higher volumes of existing product sales to
meet the increased demand of our existing customers, partially offset by
competition-driven pricing pressure; partially offset by
•
Operating income decreased
•
gross profit as a percentage of net sales, due primarily to
competition-driven pricing pressure, and unfavorable product mix; and
•
million increase in impairment charges related to goodwill, certain
definite-lived intangible assets and IPR&D, and a
R&D expense due primarily to pre-commercialization R&D costs for generic
albuterol sulfate inhalation aerosol, the generic version of ProAir® HFA.
Year Ended
Year Ended
December 31, December 31,
(in millions) 2018 2017
Net sales $ 920.8 $ 1,054.4
Gross profit $ 373.9 $ 454.6
Gross profit % 40.6 % 43.1 %
Operating income $ 214.6 $ 306.1
Operating income % 23.3 % 29.0 %
Net sales decreased
existing products due primarily to increased competition-driven pricing
pressure and decreased sales volumes of certain products and
decrease due to discontinued products; partially offset by
65--------------------------------------------------------------------------------
Perrigo Company plc - Item 7 RX •$43.2 million increase due to new product sales due primarily to
Testosterone Gel 1.62% (generic equivalent to Androgel®).
Operating income decreased
•
gross profit as a percentage of net sales, due primarily to pricing
pressure and unfavorable product mix as a result of sales growth in lower
margin products; and
•
•$23.0 million increase for the absence of the gain on the sale of certain ANDAs recognized in the prior year,$15.0 million increase for the absence of the gain related to contingent
consideration
adjustments, and $9.8 million increase in R&D expense due to timing
of clinical trials; partially offset by
• $34.9 million decrease in impairment charges related to certain
definite-lived intangible assets and IPR&D.
OTHER
We previously had two legacy segments, Specialty Sciences and Other, which
contained our Tysabri® financial asset and API businesses, respectively, which
we divested. Following these divestitures, there were no substantial assets or
operations left in either of these segments. Effective January 1, 2017 , all
expenses associated with our former Specialty Sciences segment were moved to
unallocated expenses.
During the year ended December 31, 2017 , we completed the divestment of the
Tysabri® financial asset to Royalty Pharma for $2.2 billion upfront 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 in Change in financial assets. See "Interest,
Other (Income) Expense and Change in Financial Assets (Consolidated)" below.
During the year ended December 31, 2017 , we completed the sale of our India API
business to Strides Shasun Limited. We received $22.2 million in proceeds,
resulting in an immaterial gain recorded in Other (income) expense, net on the
Consolidated Statements of Operations. Prior to closing the sale, we determined
that the carrying value of the India API business exceeded its fair value less
the cost to sell, resulting in an impairment charge of $35.3 million , which was
recorded in Impairment charges on the Consolidated Statements of Operations for
the year ended December 31, 2016 .
During the year ended December 31, 2017 , we completed the sale of our Israel API
business to SK Capital for a sale price of $110.0 million , which resulted in an
immaterial gain recorded in Other (income) expense, net on the Consolidated
Statements of Operations.
Unallocated Expenses
Unallocated expenses are comprised of certain corporate services not allocated
to our reporting segments and are recorded above Operating income on the
Consolidated Statements of Operations. Unallocated expenses were as follows (in
millions):
Year Ended
December 31, December 31, December 31,
2019 2018 2017
$ 231.4 $ 159.2 $ 183.9
66--------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Other The$72.2 million increase for the year endedDecember 31, 2019 compared to the prior year was due primarily to a$31.0 million increase in legal and consulting fees partially due to the absence of a$17.8 million insurance recovery received in the prior year, a$15.6 million increase in acquisition and integration-related charges related to the Ranir acquisition, a$13.8 million increase in employee compensation expenses, and a$10.7 million increase due primarily to our strategic transformation initiative and the reorganization of our executive management team. The$24.7 million decrease for the year endedDecember 31, 2018 compared to the prior year was due primarily to an insurance recovery of$17.8 million , a decrease in legal and consulting fees of$8.7 million and, a decrease in restructuring expense of$5.5 million related to strategic organizational enhancements; partially offset by an increase in employee-related expenses of$5.2 million . Interest, Other (Income) Expense and Change in Financial Assets (Consolidated) Year Ended December 31, December 31, December 31, (in millions) 2019 2018 2017 Change in financial assets$ (22.1 ) $ (188.7 ) $ 24.9 Interest expense, net$ 121.7 $ 128.0 $ 168.1 Other (income) expense, net$ (66.0 ) $ 6.1 $ (10.1 ) Loss on extinguishment of debt$ 0.2 $ 0.5 $ 135.2 Change in Financial Assets The proceeds from our 2017 sale of the Tysabri® financial asset consisted of$2.2 billion in upfront cash and up to$250.0 million and$400.0 million in contingent milestone payments related to 2018 and 2020, respectively. During the year endedDecember 31, 2019 we received the$250.0 million contingent milestone payment. During the year endedDecember 31, 2019 the fair value of theRoyalty Pharma milestone payment related to 2020 increased by$22.1 million to$95.3 million . These adjustments were driven by higher projected global net sales of Tysabri® and the estimated probability of achieving the earn-out. In order for us to receive the milestone payment related to 2020 of$400.0 million ,Royalty Pharma payments from Biogen for Tysabri® sales in 2020 must exceed$351.0 million . TheRoyalty Pharma payments from Biogen for Tysabri® were$337.5 million in 2018. IfRoyalty Pharma payments from Biogen for Tysabri® sales do not meet the prescribed threshold in 2020, we will write-off the$95.3 million asset and record a loss. If the prescribed threshold is exceeded, we will increase the asset to$400.0 million and recognize income of$304.7 million in Change in financial assets on the Consolidated Statements of Operations (refer to Item 8. Note 7 ). During the year endedDecember 31, 2018 , royalties on global net sales of Tysabri® received byRoyalty Pharma met the 2018 threshold resulting in an increase to the asset and a gain of$170.1 million recognized in Change in financial assets on the Consolidated Statement of Operations. Also during that period, the fair value of the remainingRoyalty Pharma contingent milestone payment related to 2020 increased$18.6 million due to higher projected global net sales of Tysabri® and the estimated probability of achieving the contingent milestone payment related to 2020.
Interest Expense, Net
The$6.3 million decrease during the year endedDecember 31, 2019 compared to the prior year was due primarily to changes in our underlying hedge exposure and interest income (refer to Item 8. Note 9 ).
The
67
--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Unallocated, Interest, Other, and Taxes Other (Income) Expense, Net
The
The$16.2 million decrease during the year endedDecember 31, 2018 compared to the prior year was due primarily to the absence of$10.0 million in milestone income related to royalty rights, a$9.5 million loss on our fair value investment securities, and$4.5 million of unfavorable changes in revaluation of monetary assets and liabilities held in foreign currencies; partially offset by the absence of a$5.9 million loss on hedges related to the extinguishment of debt in the prior year, and a$2.7 million gain on our equity method investments.
Loss on Extinguishment of Debt
During the year endedDecember 31, 2017 , we recorded a$135.2 million loss on extinguishment of debt, which consisted of tender premium on debt repayments, transaction costs, write-off of deferred financing fees, and bond discounts.
Income Taxes (Consolidated)
The effective tax rates were as follows:
Year Ended
December 31, December 31, December 31,
2019 2018 2017
14.6 % 54.9 % 57.3 %
The effective tax rate for the year ended
The effective tax rate for the year endedDecember 31, 2018 decreased in comparison to the prior year due primarily to the 2017 sale of API Israel and the one-timeU.S. transition toll tax, offset by additional tax expense due to valuation allowances inBelgium and state tax recorded for the future distributions of foreign earnings recorded in 2018.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
We finance our operations with internally generated funds, supplemented by
credit arrangements with third parties and capital market financing. We
routinely monitor current and expected operational requirements and financial
market conditions to evaluate other available financing sources including
revolving bank credit and securities offerings. In determining our future
capital requirements, we regularly consider, among other factors, known trends
and uncertainties, such as the Notice of Assessment ("NoA") and the draft and
final Notices of Proposed Adjustment ("NOPAs") and other contingencies. We note
that no payment of the additional amounts assessed by Irish Revenue pursuant to
the NoA or proposed by the IRS in the NOPAs is currently required, and no such
payment is expected to be required, unless and until a final determination of
the matter is reached that is adverse to us, which could take several years in
either case (refer to Item 8. Note 15 for additional information on the NoA
and NOPAs). Based on the foregoing, management believes that our operations and
borrowing resources are sufficient to provide for our short-term and long-term
capital requirements, as described below. However, an adverse result with
respect to our appeal of any material outstanding tax assessments or litigation,
including securities or drug pricing matters, could ultimately require the use
of corporate assets to pay such assessments, damages resulting from third-party
claims, and related interest and/or penalties, and any such use of corporate
assets would limit the assets available for other corporate purposes. As such,
we continue to evaluate the impact of the above factors on liquidity and may
determine that modifications to our capital structure are appropriate if market
conditions deteriorate, favorable capital market opportunities become available,
or any change in conditions relating to the NoA, the NOPAs or other
contingencies have a material impact on our capital requirements.
68
--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources Cash and Cash Equivalents
[[Image Removed: chart-e966a7ebd1bf5daabbea01.jpg]]* 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 our liquidity and capital expenditures in both the short and long term. Although our lenders have made commitments to make funds available to us in a timely fashion under our revolving credit agreements and overdraft facilities, if economic conditions worsen or new information becomes publicly available impacting the institutions' credit rating or capital ratios, these lenders may be unable or unwilling to lend money pursuant to our existing credit facilities. Should our outlook on liquidity requirements change substantially from current projections, we may seek additional sources of liquidity in the future.
Cash Generated by (Used in) Operating Activities
[[Image Removed: chart-89e91b125f3b5b6d927a01.jpg]]
69
--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources
Year Ended
The
•
due primarily to timing of sales and receipt of payments primarily in RX
and CSCI, and our acquisition of Ranir;
•
current year, current year estimated tax payments, and an Israeli
withholding tax payment; and
•
programs due primarily to pricing dynamics in our RX segment, as well as
timing of rebate and chargeback payments; partially offset by
• $88.9 million increase in cash due to the change in net earnings afteradjustments for items such as deferred income taxes, impairment charges,
restructuring charges, changes in our financial assets, share-based
compensation, amortization of debt premium, gain on sale of business, and
depreciation and amortization;
•
leases and litigation related settlements;
•
build-up of inventory at a lower level than in the prior year to support
customer demands and improved supply management in our CSCA and CSCI
segments, and increased volumes in CSCI due to new product launches; and
•
payroll and related taxes due primarily to an increase in employee
incentive compensation expense.
Year Ended
The
•
adjustments for items such as deferred income taxes, impairment charges,
restructuring charges, changes in our financial assets, loss on
extinguishment of debt, and depreciation and amortization; and
• $82.6 million decrease in cash due to the change in inventory dueprimarily to increased volumes and actions to improve customer service in
our CSCA segment and increased volumes due to new product launches and
changing market dynamics in our RX segment; partially offset by
•
primarily to timing of payments, mix of payment terms, and the absence of
transactions related to the exited Russian business and prior year
distribution phase out initiatives;
• $74.2 million increase in cash due to the change in accrued income taxes
due primarily to U.S. Federal tax obligation payments made in the prior
year, offset by expected tax refunds;
•
due primarily to the change in royalty and profit sharing accruals; and
•
due primarily to the discontinuation of our
factoring program, more than offset by timing of sales and receipt of
payments in our CSCA and RX segments.
70--------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources
Cash Generated by (Used in) Investing Activities
[[Image Removed: chart-dd506aa945bc5f7cb0da01.jpg]]
Year Ended
The
•
to Item 8. Note 3 );
•
the branded OTC rights to Prevacid®24HR for $61.7 million , an ANDA for a
generic gel product for $49.0 million , an ANDA for a generic product used
to relieve pain for $15.7 million , and Budesonide Nasal Spray and
Triamcinolone Nasal Spray for $14.0 million , partially offset by the
absence of
an ANDA for a generic topical cream (refer to Item 8. Note 3 ); and
•
increase tablet and infant formula capacity and quality/regulation
projects; partially offset by
•
(refer to Item 8. Note 7 ); and
•
animal health business (refer to Item 8. Note 3 ).
Capital expenditures for the next twelve months are anticipated to be between
Year Ended
The
•
financial asset to Royalty Pharma ;
• $149.4 million absence of 2017 net proceeds from sale of business and
other assets;
•
•
for a generic topical cream.
Cash used for capital expenditures totaled$102.6 million during the year endedDecember 31, 2018 compared to$88.6 million in the prior year. The increase in cash used for capital expenditures was due primarily to the increase in the number of manufacturing projects in the current year compared to the prior year. 71 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources
Cash Generated by (Used in) Financing Activities
[[Image Removed: chart-d5ee8d60b32e5e72acea01.jpg]]
Year Ended
The
•
•
offset by the absence of our $431.0 million refinance of the 2014 Term
Loan; and
• $4.9 million increase in the change in net borrowings (repayments) of
revolving credit agreements and other financing; and
•
•
Year Ended
The
•
and premium on early debt retirement, respectively, related to debt
extinguishment in 2017; and
•
offset by
•
Share Repurchases
InOctober 2018 , our Board of Directors authorized up to$1.0 billion of share repurchases with no expiration date, subject to the Board of Directors' approval of the pricing parameters and amount that may be repurchased under each specific share repurchase program. Share repurchases were$0.0 million ,$400.0 million , and$191.5 million for the years endedDecember 31, 2019 ,December 31, 2018 , andDecember 31, 2017 , respectively. 72 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources Dividends
In
Year Ended
December 31, December 31, December 31,
2019 2018 2017
Dividends paid (in millions)
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.
Borrowings and Capital Resources
[[Image Removed: chart-9f4c5f1bf91a5a4a8eea01.jpg]]
[[Image Removed: chart-efdae7e7a87d55c2aeba01.jpg]]Overdraft Facilities
We have overdraft facilities available that we use to support our cash
management operations. We report any balances outstanding in "Other Financing"
in Item 8. Note 11 . There were no borrowings outstanding under the
facilities as of
Leases
We had
Accounts Receivable Factoring
We have 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 per invoice is charged on the gross amount of accounts receivables assigned to the Factors, and interest is calculated at the applicableEUR LIBOR rate plus a spread. The total amount factored on a non-recourse basis and excluded from accounts receivable was$10.0 million and$24.3 million atDecember 31, 2019 andDecember 31, 2018 , respectively.
Revolving Credit Agreements
On
73
--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources Term Loans, Notes and Bonds Total Term Loans, Notes and Bonds outstanding are summarized as follows (in millions): Year Ended December 31, December 31, 2019 2018 Term loan * 2018 Term loan due March 8, 2020 $ -$ 351.3 2019 Term loan due August 15, 2022 600.0 - Total term loans 600.0 351.3 Notes and bonds Coupon Due * 5.000% May 23, 2019 - 137.6 3.500% March 15, 2021 280.4 280.4 3.500% December 15, 2021 309.6 309.6 * 5.105% July 28, 2023 151.4 154.9 4.000% November 15, 2023 215.6 215.6 3.900% December 15, 2024 700.0 700.0 4.375% March 15, 2026 700.0 700.0 5.300% November 15, 2043 90.5 90.5 4.900% December 15, 2044 303.9 303.9 Total notes and bonds$ 2,751.4 $ 2,892.5
* Debt denominated in euros subject to fluctuations in the euro-to-
exchange rate.
Debt Repayments
During the year ended December 31, 2019 , we made $24.7 million in scheduled
principal payments. In connection with the Omega acquisition, on March 30, 2015 ,
we assumed a 5.000% retail bond due 2019 in the amount of €120.0 million
($130.7 million ). On May 23, 2019 we repaid the bond in full. On August 15,
2019 , we refinanced the €284.4 million ($317.1 million ) outstanding under the
2018 Term Loan with the proceeds of a new $600.0 million term loan (the "2019
Term Loan"), maturing on August 15, 2022 . During the year ended December 31,
2018 , we made $51.5 million in scheduled principal payments.
We are in compliance with all covenants under our debt agreements as of
Credit Ratings
Our credit ratings on
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. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, net sales or expenses, results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on potential products still in development and enter into R&D arrangements with third parties that often require milestone payments to the third-party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of the product. Because of the contingent nature of these payments, they are not included in our table of contractual obligations below.
Contractual Obligations
Our enforceable and legally binding obligations as ofDecember 31, 2019 are set forth in the following table. Some of the amounts included in this table are based on management's estimates and assumptions about these obligations, including the duration, the possibility of renewal, anticipated actions by third parties and other factors. Because these estimates and assumptions are necessarily subjective, the enforceable and legally binding obligations actually paid in future periods may vary from the amounts reflected in the table (in millions): Payment Due 2020 2021-2022 2023-2024 After 2024 Total Short and long-term debt (1)$ 128.1 $ 1,412.8 $ 1,237.2 $ 1,519.5 $ 4,297.6 Capital lease obligations 4.1 8.1 3.0 14.2 29.4 Purchase obligations (2) 824.1 21.5 0.3 - 845.9 Operating leases (3) 37.2 47.6 26.9 41.5 153.2 Other contractual liabilities reflected on the consolidated balance sheets: Deferred compensation and benefits (4) - - - 104.8 104.8 Other (5) 50.4 6.6 1.8 - 58.8 Total$ 1,043.9 $ 1,496.6 $ 1,269.2 $ 1,680.0 $ 5,489.7
(1) Short-term and long-term debt includes interest payments, which were
calculated using the effective interest rate at
(2) Consists of commitments for both materials and services.
(3) Used in normal course of business, principally for warehouse facilities and
computer equipment.
(4) Includes amounts associated with non-qualified plans related to deferred
compensation, executive retention and post employment benefits. Of this
amount, we have funded
assets on the balance sheet. These amounts are assumed payable after five
years, although certain circumstances, such as termination, would require
earlier payment.
(5) Primarily includes consulting fees, legal settlements, contingent
consideration obligations, restructuring accruals, insurance obligations, and
electrical and gas purchase contracts, which were accrued in Other current
liabilities and Other non-current liabilities at
years.
We fund our U.S. qualified profit-sharing and investment plan in accordance with
the Employee Retirement Income Security Act of 1974 regulations for the minimum
annual required contribution and Internal Revenue Service regulations for the
maximum annual allowable tax deduction. We are committed to making the required
minimum contributions, which we expect to be approximately $24.8 million over
the next 12 months. Future contributions are dependent upon various factors,
including employees' eligible compensation, plan participation and changes, if
any, to current funding requirements. Therefore, no amounts were included in the
Contractual Obligations table above. We generally expect to fund all future
contributions with cash flows from operating activities.
As of December 31, 2019 , we had approximately $448.6 million of liabilities for
uncertain tax positions, including interest and penalties. These unrecognized
tax benefits have been excluded from the Contractual Obligations table above due
to uncertainty as to the amounts and timing of settlement with taxing
authorities.
Net deferred income tax liabilities were $275.2 million as of December 31, 2019 .
This amount is not included in the Contractual Obligations table above because
we believe this presentation would not be meaningful. Net deferred income tax
liabilities are calculated based on temporary differences between the tax basis
of assets and liabilities and their book basis, which will result in taxable
amounts in future years when the book basis is settled. The results of these
calculations do not have a direct connection with the amount of cash taxes to be
paid in
74
--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources any future periods. As a result, scheduling net deferred income tax liabilities as payments due by period could be misleading because this scheduling would not relate to liquidity needs. Critical Accounting Estimates The determination of certain amounts in our financial statements requires the use of estimates. These estimates are based upon our historical experiences combined with management's understanding of current facts and circumstances. Although the estimates are considered reasonable based on the currently available information, actual results could differ from the estimates we have used. Management considers the below accounting estimates to require the most judgment and to be the most critical in the preparation of our financial statements. These estimates are reviewed by the Audit Committee.
Revenue Recognition
Net product sales include estimates of variable consideration for which accruals
and allowances are established. Variable consideration for product sales
consists primarily of chargebacks, rebates, other incentive programs, and
related administrative fees recorded on the Consolidated Balance Sheets as
Accrued customer programs, and sales returns and shelf stock allowances recorded
on the Consolidated Balance Sheets as a reduction to Accounts receivable. Where
appropriate, these estimates take into consideration a range of possible
outcomes in which relevant factors, such as historical experience, current
contractual and statutory requirements, specific known market events and trends,
industry data and forecasted customer buying and payment patterns, are either
probability-weighted to derive an estimate of expected value or the estimate
reflects the single most likely outcome. Overall, these reserves reflect the
best estimates of the amount of consideration to which we are entitled based on
the terms of the contract. Actual amounts of consideration ultimately received
may differ from our estimates. If actual results in the future vary from the
estimates, these estimates are adjusted, which would affect revenue and earnings
in the period such variances become known.
The aggregate gross-to-net adjustments related to RX products can exceed 50% of
the segment's gross sales. In contrast, the aggregate gross-to-net adjustments
related to CSCA and CSCI typically do not exceed 10% of the segment's gross
sales. The following table summarizes the activity in Accrued customer programs
and allowance accounts on the Consolidated Balance Sheets (in millions):
All Other
RX Segments
Sales Returns and
Medicaid Shelf Stock Admin. Fees and Rebates and Other
Chargebacks Rebates Allowances Other Rebates Allowances Total
Balance at December
31, 2017 $ 229.9 $ 36.8 $ 76.2 $ 43.2 $ 126.2 $ 512.3
Foreign currency
translation
adjustments - - - - (3.5 ) (3.5 )
Provisions /
Adjustments 1,754.4 58.3 17.0 99.6 270.3 2,199.6
Credits / Payments (1,718.3 ) (58.7 ) (22.2 ) (98.3 ) (276.1 ) (2,173.6 )
Balance at December
31, 2018 $ 266.0 $ 36.4 $ 71.0 $ 44.5 $ 116.9 $ 534.8
Balances acquired in
business acquisition - - - - 5.7 5.7
Balances disposed of
in business
divestiture - - - - (4.1 ) (4.1 )
Foreign currency
translation
adjustments - - - - (1.7 ) (1.7 )
Provisions /
Adjustments 2,127.2 47.9 33.9 116.5 224.6 2,550.1
Credits / Payments (2,157.4 ) (56.7 ) (33.4 ) (126.3 ) (227.3 ) (2,601.1 )
Balance at December
31, 2019 $ 235.8 $ 27.6 $ 71.5 $ 34.7 $ 114.1 $ 483.7
75--------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Critical Accounting Estimates Chargebacks We market and sellU.S. Rx pharmaceutical products directly to wholesalers, distributors, warehousing pharmacy chains, and other direct purchasing groups. We also market products indirectly to independent pharmacies, non-warehousing chains, managed care organizations, and group purchasing organizations, (collectively referred to as "indirect customers"). In addition, we enter into agreements with some indirect customers to establish contract pricing for certain products. These indirect customers then independently select a wholesaler from which to purchase the products at these contracted prices. Alternatively, we may pre-authorize wholesalers to offer specified contract pricing to other indirect customers. Under either arrangement, we provide chargeback credit to the wholesaler for any difference between the contracted price with the indirect customer and the wholesaler's invoice price. The accrual for chargebacks includes an estimate for outstanding claims that occurred but for which the related claim has not yet been paid, and an estimate for future claims that will be made when the wholesaler inventory is sold to the indirect customer. This estimate is based on historical chargeback experience, which includes sell-through levels by wholesalers to retailers, and confirmed wholesaler inventory levels. We regularly assess current pricing dynamics and wholesaler inventory levels to ensure the liability for future chargebacks is fairly stated. Medicaid Rebates We participate in certain qualifyingU.S. federal and state government programs whereby discounts and rebates are provided to participating government entities. Medicaid rebates are amounts owed based upon contractual agreements or legal requirements with public sector (Medicaid) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. Medicaid reserves are based on expected payments, which are driven by patient usage, contract performance, and field inventory that will be subject to a Medicaid rebate. Medicaid rebates are typically billed up to 180 days after the product is shipped, but can be billed as many as 270 days after the quarter in which the product is dispensed to the Medicaid participant. As a result, our Medicaid rebate provision includes an estimate of outstanding claims for end-customer sales that occurred but for which the related claim has not been billed, and an estimate for future claims that will be made when inventory in the distribution channel is sold through to plan participants. Our calculation also requires other estimates, such as estimates of sales mix, to determine which sales are subject to rebates and the amount of such rebates. Our rebates are reviewed on a monthly basis against actual claims data to ensure the liability is fairly stated.
Returns and Shelf Stock Allowances
We maintain a return policy that allows our customers to return product within a
specified period prior to and subsequent to the expiration date. Generally,
product may be returned for a period beginning six months prior to its
expiration date to up to one year after its expiration date. The majority of our
product returns are the result of product dating, which falls within the range
set by our policy, and are settled through the issuance of a credit to the
customer. Our estimate of the provision for returns is based upon our historical
experience with actual returns, which is applied to the level of sales for the
period that corresponds to the period during which our customers may return
product. The period is based on the shelf life of the products at the time of
shipment. Additionally, when establishing our reserves, we consider factors such
as levels of inventory in the distribution channel, product dating and
expiration period, size and maturity of the market prior to a product launch,
entrance into the market of additional competition, and changes in formulations.
Shelf stock allowances are credits issued to reflect changes in the selling
price of a product and are based upon estimates of the amount of product
remaining in a customer's inventory at the time of the anticipated price change.
In many cases, the customer is contractually entitled to such a credit. The
allowances for shelf stock adjustments are based on specified terms with certain
customers, estimated launch dates of competing products, and estimated changes
in market price.
76--------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Critical Accounting Estimates
RX Administrative Fees and Other Rebates
Rebates or administrative fees are offered to certain wholesale customers, group purchasing organizations, and end-user customers. Settlement of rebates and fees generally may occur from one to 15 months from the date of sale. We provide a provision for rebates at the time of sale based on contracted rates and historical redemption rates. Estimates used to establish the provision include level of wholesaler inventories, contract sales volumes, and average contract pricing.
CSCA and CSCI Rebates and Other Allowances
In the CSCA and CSCI segments, we offer certain customers a volume incentive rebate if specific levels of product purchases are made during a specified period. The accrual for rebates is based on contractual agreements and estimated levels of purchasing. In addition, we have a reserve for product returns, primarily related to damaged and unsaleable products. We also have agreements with certain customers to cover promotional activities related to our products such as coupon programs, new store allowances, and product displays. The accrual for these activities is based on customer agreements and is established at the time product revenue is recognized. Allowances for customer-related programs are generally recorded at the time of sale based on the estimates and methodologies described above. We continually monitor product sales provisions and re-evaluate these estimates as additional information becomes available, which includes, among other things, an assessment of current market conditions, trade inventory levels, and customer product mix. We make adjustments to these provisions at the end of each reporting period to reflect any such updates to the relevant facts and circumstances.
Income Taxes
Our tax rate is subject to adjustment over the balance of the 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 to our interpretation of 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; changes inU.S. generally accepted accounting principles; 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 taxes. For the year endedDecember 31, 2019 we recorded a net decrease in valuation allowances of$56.6 million , comprised primarily of a decrease in theU.S. valuation allowance related to the acquisition of Ranir and disposal of thePerrigo Animal Health business. Although we believe that our 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 our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on 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 (refer to Item 8. Note 15 ).
Legal Contingencies
We are involved in product liability, patent, commercial, regulatory and other
legal proceedings that arise in the normal course of business. We record a
liability when a loss is considered probable and the amount can be reasonably
estimated. If the reasonable estimate of a probable loss is a range and no
amount within that range is a better estimate, the minimum amount in the range
is accrued. If a loss is not probable or a probable loss cannot be reasonably
estimated, no liability is recorded. We have established reserves for certain of
our legal matters (refer to Item 8. Note 17 ). We do not incorporate
insurance recoveries into our reserves for legal contingencies. We separately
record receivables for amounts due under insurance policies when we consider the
realization of recoveries for claims to be probable, which may be different than
the timing in which we establish the loss reserves.
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--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Critical Accounting Estimates Acquisition Accounting We account for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at fair value, with limited exceptions. Any excess of the purchase price over the fair value of the specifically identified assets is recorded as goodwill. If the acquired net assets do not constitute a business, or substantially all of the fair value is in a single asset or group of similar assets, the transaction is accounted for as an asset acquisition and no goodwill is recognized. In an asset acquisition, acquired IPR&D with no alternative future use is charged to expense at the acquisition date. Significant judgment is required in estimating the fair value of intangible assets and in assigning their respective useful lives. The acquired intangible assets can include customer relationships, trademarks, trade names, brands, developed product technology and IPR&D assets. In some of our acquisitions, we acquire IPR&D intangible assets. For acquisitions accounted for as business combinations, IPR&D is considered to be an indefinite-lived intangible asset until the research is completed, at which point it then becomes a definite-lived intangible asset, or is determined to have no future use and is then impaired. There are several methods that can be used to determine the fair value of our intangible assets. We typically use an income approach to value the specifically identifiable intangible assets which is based on forecasts of the expected future cash flows. We have historically used a relief from royalty or multi-period excess earnings methodology. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain. We typically consult with an independent advisor to assist in the valuation of these intangible assets. Significant estimates and assumptions inherent in the valuations include discount rates, revenue growth assumptions and expected profit margins. We consider marketplace participant assumptions in determining the amount and timing of future cash flows along with the length of our customer relationships, the attrition, product or technology life cycles, barriers to entry and the risk associated with the cash flows in concluding upon our discount rate. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, we may record adjustments to the purchase accounting. In addition, unanticipated market or macroeconomic events and circumstances may occur that could affect the accuracy or validity of the estimates and assumptions. Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. With the exception of certain trademarks, trade names, and brands and IPR&D, the majority of our acquired intangible assets are expected to have determinable useful lives. Our assessment as to the useful lives of these intangible assets is based on a number of factors including competitive environment, market share, trademark, brand history, underlying product life cycles, operating plans and the macroeconomic environment of the countries in which the trademarked or branded products are sold. Definite-lived intangible assets are amortized to expense over their estimated useful life.
Change in Financial Assets
We valued our contingent milestone payments fromRoyalty Pharma 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 byRoyalty Pharma until the contingent milestones are resolved. 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 assess volatility and rate of return inputs quarterly by analyzing certain market volatility benchmarks and the risk associated withRoyalty Pharma achieving the underlying projected royalties. The table below represents the volatility and rate of return: Year Ended December 31, December 31, 2019 2018 Volatility 30.0 % 30.0 % Rate of return 7.92 % 8.05 % In order for us to receive the milestone payment related to 2020,Royalty Pharma payments from Biogen for Tysabri® sales in 2020 must exceed$351.0 million . IfRoyalty Pharma payments from Biogen for Tysabri® sales do 78 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Critical Accounting Estimates not meet the prescribed threshold in 2020, we will write-off the$95.3 million asset and record a loss. If the prescribed threshold is exceeded, we will increase the asset to$400.0 million and recognize income of$304.7 million in Change in financial assets on the Consolidated Statements of Operations (refer to Item 8. Note 7 ).Goodwill Goodwill represents amounts paid for an acquisition in excess of the fair value of net assets received. We have six reporting units subject to impairment testing annually, which we performed on the first day of the fourth quarter of the years endedDecember 31, 2019 , 2018, and 2017. We performed impairment testing more frequently if events suggest an impairment may exist. We had triggering events during the second quarter of the year endedDecember 31, 2019 and the third quarter of the year endedDecember 31, 2018 , and we performed interim impairment tests in those periods. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows and market valuation multiples. The estimates associated with the goodwill impairment tests are considered critical due to the judgments required in determining fair value amounts, including projected future cash flows that include assumptions about future performance. The discount rates used in testing each of our reporting units' goodwill for impairment during our interim and annual testing were based on the weighted average cost of capital determined for each of our reporting units. In our annual impairment test as ofSeptember 29, 2019 , discount rates ranged from 7.5% to 12.0%, and perpetual growth rates ranged from 0.0% to 2.0%. In our annual impairment test as ofSeptember 30, 2018 , discount rates ranged from 8.5% to 13.8%, and perpetual growth rates ranged from 2.0% to 3.0%. Changes in these estimates may result in the recognition of an impairment loss. We recorded goodwill impairment losses of$109.2 million related to our RXU.S. reporting unit and$136.7 million related to animal health during the years endedDecember 31, 2019 andDecember 31, 2018 , respectively, which were recorded in Impairment charges on the Consolidated Statements of Operations. No goodwill impairments were recorded during the year endedDecember 31, 2017 . The goodwill impairment that we recorded in the RXU.S. reporting unit during the fourth quarter of the year endedDecember 31, 2019 adjusted the carrying value of the reporting unit to its estimated fair value. Changes in discount rates, projected future cash flows, market valuation multiples and other estimates could result in additional goodwill impairment in this reporting unit in future periods. During our annual goodwill testing as ofSeptember 29, 2019 andSeptember 30, 2018 , we determined the fair value of the Branded Consumer Self-care ("BCS") reporting unit included in the CSCI segment was less than 10.0% higher than its net book value in both analyses. We performed additional quantitative analysis during the three months endedDecember 31, 2018 and concluded that the fair value of the BCS reporting unit remained less than 10.0% higher than its net book value as ofDecember 31, 2018 . As a result of the relatively narrow margin between fair value and net book value during the three months endedDecember 31, 2019 and 2018, this reporting unit is at risk for future impairments if it experiences deterioration in business performance or market multiples or increases in discount rates. During our annual goodwill testing as ofSeptember 29, 2019 , we determined the fair value of the CSCUK andAustralia reporting unit included in the CSCI segment was less than 20.0% higher than its net book value. With a margin between fair value and net book value in this range, the reporting unit is at risk for future goodwill impairments if it experiences deterioration in business performance or market multiples or increases in discount rates. The discounted cash flow forecasts used for our reporting units include assumptions about future activity levels in the near term and longer-term. If growth in our reporting units is lower than expected, we may experience deterioration in our cash flow forecasts that may indicate goodwill in one or more reporting units is impaired in future impairment tests. We continue to monitor the progress of our reporting units and assess them for potential impairment should impairment indicators arise, as applicable, and at least annually during our fourth quarter impairment testing. Management performed sensitivity analyses on the discounted cash flow valuations that were prepared to estimate the enterprise values of each reporting unit. Discount rates and perpetual revenue growth rates were increased and decreased by increments of 25 or 50 basis points. For the BCS reporting unit, a 75 basis point increase in the discount rate, or a 50 basis point increase in the discount rate combined with a 25 basis point decrease in the residual growth rate, would indicate potential impairment for this reporting unit. For the CSCUK and 79 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Critical Accounting EstimatesAustralia reporting unit, a 150 basis point increase in the discount rate, or a 100 basis point increase in the discount rate combined with a 50 basis point decrease in the residual growth rate, would indicate potential impairment for this reporting unit. Our sensitivities for both the BCS and CSCUK andAustralia reporting units assume a corresponding decrease in market valuation multiples. Based on the sensitivity of the discount rate assumptions on these analyses, an increase in the discount rate over the next twelve months could negatively impact the estimated fair value of the reporting units and lead to a future impairment. Certain macroeconomic factors which are not controlled by the reporting units, such as rising inflation or interest rates, could cause an increase in the discount rate to occur. Deterioration in performance of our reporting units over the next twelve months, such as lower than expected revenue or profitability that has a sustained impact on future periods, could also represent potential indicators of impairment requiring further impairment analysis.
See Item 8. Note 4 and Note 7 for further information.
Recently Issued Accounting Standards Pronouncements
See Item 8. Note 1 for information regarding recently issued accounting standards.
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