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 ."
EXECUTIVE OVERVIEW
Perrigo 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. Our vision is to make 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 are designed to enhance individual well-being and empower consumers to proactively prevent or treat conditions that can be self-managed. We endeavor to empower consumers' self-care decisions, utilizing the Company's core competencies to fully take advantage of the massive global trend towards self-care. 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. Consistent with our vision, in 2019Perrigo 's management and board of directors launched a three-year strategy to transform the Company into a consumer self-care leader. We completed our transformation to a consumer self-care company in 2021 by reconfiguring the portfolio through the divestiture of our RX business, announcement of the acquisition of HRA Pharma, and removal of significant uncertainty through settlement of a tax exposure. In addition, we continue to invest in growth initiatives to drive future consistent and sustainable results in line with consumer-packaged goods peers.
Our fiscal year begins on
Our Segments
Our reporting and operating segments are as follows:
•Consumer Self-Care Americas ("CSCA") comprises our consumer self-care business
(OTC, infant formula, and Oral care categories, our divested Animal health
category, and contract manufacturing) in the U.S. , Mexico and Canada .
•Consumer Self-Care International ("CSCI") comprises our consumer self-care
business primarily branded in Europe and Australia , and our store brand business
in the United Kingdom and parts of Europe and Asia . Our liquid licensed products
business in the United Kingdom was divested on June 19, 2020 .
Our segments reflect the way in which our management makes operating decisions, allocates resources and manages the growth and profitability of the Company.
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--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Executive Overview
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 21 .
Strategy
Our objective is to grow our business by responsibly bringing our self-care vision to life. We aim to 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, new geographies and new channels of distribution. Critical to this strategy is investing in and continually improving all aspects of our five strategic pillars which we call thePerrigo Advantage: •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. While delivering on our strategy, we remain committed to our corporate responsibility and sustainability programs, which include environmental and social initiatives, as summarized in Item 1. Business - Corporate Social Responsibility .
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 across all our segments and expansion in new channels like e-commerce. 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 revenue growth which is highly correlated with increases in shareholder value.
Competitive Advantage
We are a fast-moving consumer goods 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 we believe 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 20 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 Recent Highlights
Year Ended
•EffectiveOctober 5, 2021 ,Jim Dillard was named Executive Vice President ("EVP") and President of our CSCA segment.Mr. Dillard's supply chain, manufacturing, R&D, innovation, and regulatory experience, along with his proven leadership skills, make him uniquely qualified to lead this segment. Before this role,Mr. Dillard served asPerrigo 's EVP and Chief Scientific Officer. •OnSeptember 8, 2021 , we announced a definitive agreement to acquire the outstanding equity interests of HRA Pharma for approximately €1.8 billion, or approximately$2.1 billion at the time. The proposed final transaction is expected to close in the first half of 2022, subject to the satisfaction of customary closing conditions, including regulatory approvals. See below under "HRA Pharma Acquisition Agreement" for further details. •OnJuly 6, 2021 , we completed the sale of the RX business for aggregate consideration of$1.55 billion , subject to customary adjustments for cash, debt, working capital and certain transaction expenses. See below under "RX Business Divestiture" for further details.
•On
Year Ended
•During the year endedDecember 31, 2020 , we completed strategic acquisitions and a divestiture that advanced our self-care transformation. We acquired the oral care assets of HighRidge Brands ("Dr. Fresh"), three Eastern European OTC dermatological brands from Sanofi, entered a strategic investment in and long-term supply agreement withKazmira LLC , and divested ourU.K. - basedRosemont Pharmaceuticals business. For additional details on these and other asset acquisitions and the divestiture refer to the "Recent Trends and Developments" discussion in the CSCA and CSCI sections below. •During the year endedDecember 31, 2020 , we repurchased$164.2 million worth of shares at an average purchase price of$48.28 as part of our authorized share repurchase plan.
•Effective
•OnOctober 27, 2020 , we announced that we will be establishing a new North American headquarters inGrand Rapids, Michigan . We signed an agreement to lease space located inMichigan State University's Grand Rapids Innovation Park and expect the building to be ready for occupancy in mid-2022. This new location will help us support cross-functional collaboration and position us to routinely interact with a statewide education and research network within theGrand Rapids Medical Mile. This expansion is consistent with our self-care transformation and will advance our self-care vision.
•Effective
•OnJune 19, 2020 , we, through our subsidiary, issued$750.0 million in aggregate principal amount of 3.150% Senior Notes due 2030 (the "2020 Notes") and received net proceeds of$737.1 million after fees and market discount. OnJuly 6, 2020 , we used a portion of the proceeds to fund the redemption of$280.4 million of our 3.500% Senior Notes dueMarch 15, 2021 and$309.6 million of our 3.500% Senior Notes dueDecember 15, 2021 . 49 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Consolidated RESULTS OF OPERATIONS CONSOLIDATED
Consolidated Financial Results
Year Ended
December 31 , December 31 ,
(in millions, except percentages) 2021 2020
2019
Net sales $ 4,138.7 $ 4,088.2 $ 3,869.9
Gross profit $ 1,416.2 $ 1,494.9 $ 1,433.7
Gross profit % 34.2 % 36.6 % 37.0 %
Operating income $ 410.4 $ 265.2 $ 174.7
Operating income % 9.9 % 6.5 % 4.5 %
[[Image Removed: prgo-20211231_g5.jpg]][[Image Removed: prgo-20211231_g6.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
•$78.4 million increase due primarily to:
•$60.9 million increase from favorable foreign currency translation; and
•$46.2 million increase from our acquisitions of the three Eastern European
Brands in
•$28.7 million decrease due to our now-divested Rosemont pharmaceuticals business previously included in our CSCI segment.
•$27.9 million, or 0.7%, net decrease in the base business due primarily to a decline of$68.3 million in sales of cough and cold products due to the low incidence of related illness during the first half of the year. Additional decreases were due primarily to a decrease in demand of certain products due primarily to COVID-19 restrictions, inventory reductions at our retail customers in theU.S. compared to the prior year, and$38.4 million of discontinued products. These decreases were partially offset by the incremental impact of$130.0 million in sales of new products, recognition of contract manufacturing sales to the now-divested RX business, and positive pricing.
Operating income increased
•$78.7 million decrease in gross profit due primarily to unfavorable plant
overhead absorption due to lower production volumes resulting from the weak
cough cold season in the first half of the year, and by higher input and freight
costs. Gross profit as a percentage of net sales decreased 240 basis points due
to these same factors, as well as unfavorable product mix.
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--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Consolidated
•$223.9 million decrease in operating expenses due primarily to:
•$226.5 million decrease in other operating expenses due primarily to:
•$417.6 million award received for the claim arising from the Omega Acquisition, as described in Item 8. Note 19 ; partially offset by
•$173.1 million of impairment charges primarily on goodwill and held for sale assets related to the Latin American businesses and goodwill related to ourOral Care International business;
•$13.7 million increase in restructuring expenses primarily associated with actions taken to streamline the organization; and
•$4.0 million increase for the absence of an insurance reimbursement received in the prior year period.
•$2.6 million increase in selling, distribution, R&D, and administration expenses due primarily to:
•$7.8 million increase in distribution expenses due primarily to increased warehouse costs; and
•$3.5 million increase in administration expenses due primarily to a reduction
in an insurance recovery receivable related to litigation contingencies, and an
increase in legal and professional fees, partially offset by our Project
Momentum cost savings initiative and transitional service agreement ("TSA")
income from the acquirer of our former RX business; partially offset by
•$9.1 million decrease in selling, advertising and promotion expenses due primarily to decreased spend in our OTC business within CSCA and negative consumption trends in the cough and cold and parasite products within CSCI.
Year Ended
Net sales increased
•$299.4 million, or 8%, net increase due primarily to an increase in the CSCA
segment of
•CSCA growth of$252.1 million included$168.2 million from the acquisitions of Ranir andDr. Fresh for sales in periods of 2020 with no comparable sales in 2019, and net sales growth of$83.9 million driven primarily by certain OTC product categories. OTC growth was due primarily to favorable consumer conversion to products in our Digestive health category, the increase of consumer COVID-19 related demand experienced in the first half of 2020 in the Pain and sleep aids category, and the incremental impact of new product sales, all of which benefited from strong e-commerce performance. These were partially offset by a$38.6 million reduction in sales from the weak start to the cough cold season in late 2020, and normal pricing pressure. •In our CSCI segment, net sales increased$47.4 million due primarily to the Ranir,Dr. Fresh and Eastern European dermatology brands acquisitions contributing$45.3 million in sales for periods of 2020 with no comparable sales in 2019, net positive pricing, the incremental impact of new product sales, and an increase in demand for certain products in our Pain and sleep-aids and Vitamins, minerals and supplements ("VMS") categories due to pandemic-related factors. These increases were partially offset by a decrease in sales of certain products in our Skincare and personal hygiene and Healthy lifestyle categories due to pandemic-related factors, a decrease in sales of$24.1 million from the weak start to the cough cold season in late 2020, and discontinued products of$10.0 million .
•$81.2 million decrease due primarily to:
•$84.0 million decrease due to our divested animal health business previously included in our CSCA segment, and our divested Rosemont pharmaceuticals business and Canoderm prescription product, both previously included in our CSCI segment; and
•$6.4 million decrease due to
51
--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Consolidated
•$9.2 million increase due to the absence of the Ranitidine retail market withdrawal included in the prior year.
Operating income increased
•$61.2 million increase in gross profit due primarily to increased net sales as described above, which was partially offset by infant nutrition operational inefficiencies, increased labor and overhead costs associated with the COVID-19 pandemic, and an increase in commodity costs for a certain OTC brand. Gross profit as a percentage of net sales decreased 40 basis points due primarily to these same factors, unfavorable product mix mainly due to the Oral care acquisitions, and normal pricing pressures, partially offset by the absence of the Ranitidine retail market withdrawal included in 2020.
•$29.3 million decrease in operating expenses due primarily to:
•$22.8 million decrease in restructuring expenses related primarily to the prior
year reorganization of our sales force in
•The absence of$13.8 million of impairment charges primarily for goodwill and certain definite-lived intangible assets in our CSCI segments taken in the prior year;
•The absence of a
•$7.0 million increase in selling and administration expenses due primarily to the inclusion of expenses from our acquisitions of Ranir andDr. Fresh , an increase in insurance expense, an increase in employee incentive compensation expense, and incremental COVID-19 related operating costs, including employee bonuses and costs related to measures implemented to keep employees safe, partially offset by the absence of expenses from the divested animal health and Rosemont pharmaceutical businesses, the absence of acquisition and integration-related charges related to the acquisition of Ranir, and savings from our current Project Momentum cost savings initiative.
Recent Trends and Developments
Operating Trends
The self-care markets in which we compete have been highly dynamic over the past couple of years. These markets were negatively impacted by the COVID-19 pandemic related factors including, a dramatic reduction in cough, cold, and flu illnesses in the first half of the year, higher input costs, and more recently supply chain disruptions. Starting in the second quarter of 2021, we saw a sharp rebound inU.S. and European consumer takeaway in almost all categories we operate as these countries began to remove restrictions and reopen and the incidences of cough, cold and flu related illnesses began to increase. Despite increased consumer purchases, net sales for the second quarter of 2021 significantly lagged this rebound in consumer takeaway, which we primarily attribute to year-over-year reductions in customer inventories. Consumer take-away remained strong in the third quarter and we saw a surge in orders from customers. However, due to supply chain disruptions, including the significant shortage of truck drivers in theU.S. and record delays at global shipping ports, our third quarter net sales were negatively impacted because of the inability to ship product. These supply chain disruptions led to a large increase in unfulfilled customer orders. In the fourth quarter we took a series of actions to improve the situation, including reconfiguring our distribution system for short term shipments, outsourcing highly complex product lines to a third party logistic provider, adding regional carriers for challenged shipping lanes, hiring additional distribution center personnel, and increasing the purchase cycle as it relates to the manufacturing process. Our actions improved our ability to ship and meet increasing market demands, albeit at a higher cost. Higher input costs were somewhat offset by price increases initiated in the second quarter of 2021. We continue to take steps in order to mitigate the challenges of the current global operating environment, including further pricing actions and reducing discretionary costs. While we believe these trends will continue in the near-term, we are expecting an improvement throughout 2022. However, this will depend on the trajectory of the COVID-19 pandemic and worldwide supply chain challenges, as discussed below, and it is possible some of these factors may increase or decrease more than others, and could also negatively affect consumer purchases in the jurisdictions in which we operate. 52 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Consolidated Impact of COVID-19 Pandemic We, along with many other global consumer companies, have been and continue to be impacted by the COVID-19 global pandemic and the responses by government entities to combat the virus. We continue to operate in all our jurisdictions and comply with the rules and guidelines set in each jurisdiction. We continue to closely monitor the impact of COVID-19 on all aspects of our business in all our global locations and have continued our COVID-19 safety protocols for employees. To date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. However, the pandemic and actions to slow its spread have impacted our day-to-day operations, including through increased absenteeism and increased costs of raw materials and finished goods, although most of our facilities have continued to produce at high levels despite these challenges. Moreover, our global operations have been negatively impacted by the worldwide supply chain challenges, which have increased costs and delays. As many jurisdictions have relaxed COVID-19 related restrictions, a number of those jurisdictions have experienced increases in COVID-19 cases, including more contagious variants of the virus and in some cases have begun implementing new or renewed restrictions. In addition, as conditions worldwide continue to evolve, uncertainty remains about the timing of widespread availability and acceptance of vaccines and the efficacy of current vaccines against evolving strains or variants of the virus. As such, if the pandemic continues or intensifies, it is possible that these or other challenges may begin having a larger impact on our operations. Additionally, future volatility in financial and other capital markets may continue to adversely impact our stock price and our ability to access capital markets. The situation surrounding COVID-19 remains fluid, and we continue to actively manage our response and assess potential impacts to our financial condition, supply chains and other operations, employees, results of operations, consumer demand for our products, and our ability to access capital. The magnitude of any such adverse impact cannot currently be determined due to a number of uncertainties surrounding COVID-19. As mentioned above, during the first half of 2021, our segments experienced a sharp decline in net sales for cough and cold products in our Upper respiratory and Pain and sleep aid categories, due to the very low incidence of cough, cold and flu related illness during that time. We believe the low incidence of cough, cold and flu related illness was due to social distancing measures and mask mandates put in place by many of the jurisdictions where we compete to combat the spread of COVID-19. As many of these markets relaxed restrictions and reopened, consumer behavior began to return to normal, and the incidences of cough, cold and flu related illnesses increased. The spread of certain COVID-19 variants may have contributed to these higher incidences as their symptoms can be similar. This resulted in rebounding consumer takeaway in the second quarter, including for cough, cold and flu products, although factory shipments lagged consumption. During the third quarter of 2021, consumer takeaway strengthened in both theU.S. andEurope for cough, cold and flu products. However, we also experienced supply chain disruptions, including a significant shortage of truck drivers in theU.S. and record delays at global shipping ports, which led to higher unfulfilled customer orders compared to the prior year. In the fourth quarter of 2021, we took a series of actions to improve the situation, including reconfiguring our distribution system for short term shipments, outsourcing highly complex product lines to a third party logistic provider, adding regional carriers for challenged shipping lanes, hiring additional distribution center personnel, and increasing the purchase cycle as it relates to the manufacturing process. Moreover, we continue to incur additional operating costs related to COVID-19, due primarily to increased material costs and increased costs driven by pandemic-related global supply chain disruptions as well as costs related to our ongoing employee safety protocols. While the current trend of increased consumer takeaway suggests that the volatility in consumer behavior during the pandemic is improving, the emergence and spread of new disease variants or additional outbreaks in these or other jurisdictions could result in new restrictions or cause these trends to change, slow or reverse. Moving forward, it remains uncertain if the consumer and customer behavior surrounding COVID-19 that has impacted net sales will continue to normalize or change and if the increase in operating costs and supply chain disruptions will continue or change. Any change in these trends will likely depend on the duration and severity of the COVID-19 pandemic, including the emergence of new strains of the virus that are more contagious or harmful, each individual country's evolving response to the pandemic, as well as the availability and efficacy of the COVID-19 vaccines and therapeutics. Given our financial strength, we expect to continue to maintain sufficient liquidity as we continue to operate through the pandemic. 53 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Consolidated RX Business Divestiture OnMarch 1, 2021 , we announced a definitive agreement to sell our RX business to Altaris. OnJuly 6, 2021 , we completed the sale of the RX business for aggregate consideration of$1.55 billion , subject to customary adjustments for cash, debt, working capital and certain transaction expenses. The consideration included approximately$53.3 million of reimbursements, which Altaris will be required to deliver in cash toPerrigo pursuant to the terms of the Agreement. The sale resulted in a pre-tax gain, net of professional fees, of$47.5 million recorded in Other (income) expense, net on the Statement of Operations for discontinued operations. The gain included a$159.3 million increase from the write-off of foreign currency translation adjustment from Accumulated other comprehensive income. The sale of the RX business helped establishPerrigo as a pure-play consumer self-care company, and was an essential milestone in our transformation plan. The financial results of the RX business, which were previously reported as part of our RX segment, have been classified as discontinued operations in the Consolidated Statements of Operations, as there were no substantial assets or operations left in this segment. Unless otherwise noted, amounts and disclosures throughout this Management's Discussion and Analysis relate to our continuing operations. Refer to Item 8. Note 8 for additional information regarding discontinued operations.
HRA Pharma Acquisition Agreement
OnSeptember 8, 2021 , we and the Purchaser entered into a Put Option Agreement to acquire certain holding companies holding all of the outstanding equity interests of HRA Pharma from funds affiliated with the Sellers. Pursuant to the Put Option Agreement, following completion of the works council consultation process required under French law, the selling shareholders exercised their put option right under the Put Option Agreement and, onOctober 20, 2021 , the Company, the Purchaser and the Sellers entered into the Purchase Agreement. Pursuant to the terms and subject to the conditions set forth in the Purchase Agreement, the Purchaser has agreed to acquire certain holding companies holding all of the outstanding equity interests of HRA Pharma from the Sellers for cash. The transaction values HRA Pharma at approximately €1.8 billion, or approximately$2.1 billion based on exchange rates as of the date of the Put Option Agreement, on an enterprise value basis and using a lockbox mechanism set forth in the Purchase Agreement. InSeptember 2021 , we entered into two non-designated currency option contracts to hedge the foreign currency exposure of the euro-denominated purchase price for HRA Pharma (refer to Item 8. Note 11 ). The proposed final transaction is expected to close in the first half of 2022, subject to the satisfaction of customary closing conditions, including regulatory approvals. We intend to pay the purchase price using a combination of cash on hand and, depending upon market conditions, either funds available under our current credit facility or funds from new debt financing. HRA Pharma is one of the fastest growing OTC companies globally, with three category-leading self-care brands in blister care (Compeed®), women's health (ellaOne®) and scar care (Mederma®), and brings expertise in prescription-to-OTC switches. This acquisition is expected to strengthen our presence inEurope , improve our financial profile and margins, and build on our transformation to a consumer self-care company. Operating results are expected to be reported within both our CSCA and CSCI segments.
Irish Revenue Notice of Amended Assessment
OnOctober 30, 2018 , we received an audit findings letter from theIrish Office of the Revenue Commissioners ("Irish Revenue") for the tax years endedDecember 31, 2012 andDecember 31, 2013 . The audit findings letter related to the tax treatment of the 2013 sale of the Tysabri® intellectual property and related assets toBiogen Idec by Elan Pharma. The consideration paid byBiogen Idec to Elan Pharma took the form of an upfront payment and future contingent royalty payments. Elan Pharma recognized such receipts as trading income in its tax returns filed with Irish Revenue, consistent with Elan Pharma's historical practice relating to its active management of intellectual property rights. In its audit findings letter, Irish Revenue proposed to charge Elan Pharma tax on the net chargeable gain realized by Elan Pharma on the Tysabri® transaction in 2013 at a rate of 33%, rather than the 12.5% tax rate applied to trading income. OnNovember 29, 2018 , Irish Revenue issued a Notice of Amended Assessment ("NoA") for the tax year endedDecember 31, 2013 , in the amount of €1,643 million, and claiming tax payable in the amount of €1,636 million, not including any interest or applicable penalties. Accordingly, we filed an appeal of the NoA onDecember 27, 2018 with theIrish Tax Appeals Commission ("TAC"), which is the statutory body charged with considering whether the NoA was properly founded as a matter of Irish tax law. Separately, we were also granted leave by theIrish High Court onFebruary 25, 2019 to seek judicial review of the issuance of the NoA by Irish Revenue. 54 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Consolidated OnNovember 4, 2020 , theHigh Court ruled that the Irish Revenue's decision to issue the NoA did not violate Elan Pharma's constitutional rights and legitimate expectations as a taxpayer.The Irish High Court did not rule on the merits of the NoA under Irish tax law. We strongly believe that Elan Pharma's tax position was correct and ultimately would have been confirmed through judicial process. However, in light of the risks and delays inherent in any litigation, onApril 26, 2021 ,Perrigo , through its tax adviser, made a without prejudice written offer of settlement to Irish Revenue detailing a possible framework to resolve the dispute, which applied an alternative basis of taxation than the respective positions taken by Irish Revenue in the NoA and by Elan Pharma in its tax returns. OnMay 31, 2021 , Irish Revenue issued a formal response toPerrigo 's tax adviser indicating that the written settlement offer would not be accepted as presented. However, Irish Revenue did indicate that they would remain available for further discussion without prejudice and the Company's representatives continued to meet and correspond with Irish Revenue throughout the summer. OnJuly 9, 2021 , Irish Revenue issued a letter acknowledging that not all relevant facts were known to them when they issued the NoA in 2018 and, accordingly, they would not object if the Appeal Commissioner were to make certain adjustments reducing Irish Revenue's original assessment. Such adjustments would reflect contingent royalty payments that were never received by Elan Pharma, deductions for acquisition and development costs incurred, and allowable losses and reliefs, and would, if allowed, result in an aggregate reduction of more than €660.0 million from the income taxes claimed in the NoA as issued. OnSeptember 29, 2021 , Elan Pharma reached an agreement with Irish Revenue providing for full and final settlement of the NoA. Elan Pharma and Irish Revenue agreed to a full and final settlement of the NoA on the following terms: (i) on a 'without prejudice basis' and, for purposes of the settlement, the alternative basis of taxation was applied, (ii) Irish Revenue to take no further action in relation to the NoA or any Tysabri related income or transactions, (iii) no interest or penalties applied, (iv) a total tax of €297.0 million charged as full and final settlement of all liabilities arising from the sale of the Tysabri patents for the fiscal years 2013 to 2021, and (v) after Irish Revenue credited taxes already paid and certain unused R&D credits against the €297.0 million charged settlement amount, the total cash payment of €266.1 million ($307.5 million ) was made onOctober 5, 2021 . We recorded the payment as a component of income tax expense on the Consolidated Statements of Operations (refer to Item 8. Note 17 ).
Internal Revenue Service Audits of
As described in more detail in Item 8. Note 17 ,Perrigo Company , ourU.S. subsidiary ("Perrigo U.S. "), is engaged in a series of tax disputes in theU.S. relating primarily to transfer pricing adjustments including income in connection with the purchase, distribution, and sale of store-brand OTC pharmaceutical products inthe United States , including the heartburn medication omeprazole. The trial of the refund case relating to the dispute of the amount of taxable income on Omeprazole sales was held during the periodMay 25, 2021 toJune 7, 2021 in theUnited States District Court for the Western District of Michigan . Post-trial briefings were completed onSeptember 24, 2021 and the case is now fully submitted for the court's decision. OnMay 7, 2020 , we received final Notices of Proposed Adjustment ("NOPA") from theIRS regarding the deductibility of interest related to theIRS audit ofPerrigo U.S. for the years endedJune 28, 2014 andJune 27, 2015 . The NOPA capped 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) on the stated ground that the loans were not negotiated on an arms'-length basis. OnMay 3, 2021 , theIRS notified us that it will no longer pursue the 130.0% of AFR position as indicated in the NOPA due to a change inIRS policy. OnJanuary 20, 2022 , theIRS responded to our Protest, which we filed onFebruary 26, 2021 , with its Rebuttal, and revised its position on this interest rate issue by reasserting that implicit parental support considerations are necessary to determine the arm's length interest rate and proposed revised interest rates that are higher than the interest rates proposed under its 130.0% of AFR assertion. The blended interest rate proposed by theIRS Rebuttal is 4.36%, an increase from the blended interest rate in the RAR of 2.57%, and lower than the stated blended interest rate of the loans of 6.8%. We will pursue all available administrative and judicial remedies necessary to defend the deductibility of the interest expense on this indebtedness. In addition, the 30-day letter for the 2013-2015 tax years expanded on a NOPA issued onDecember 11, 2019 and proposed to disallow adjustments to gross sales income on the sale of prescription products to wholesalers for accrued wholesale customer pipeline chargebacks where the prescription products were not re-sold by such wholesalers to covered retailers by the end of the tax year for the 2013-2015 tax years. TheIRS' NOPA asserts that the reduction of gross sales income of such chargebacks is an impermissible method of accounting. TheIRS proposed a change in accounting method that would defer the reduction in gross sales income until the year the prescription products were re-sold to covered retailers. The NOPA proposes an increase in sales revenue of approximately$99.5 million for the 2013-2015 tax years. We filed a protest onFebruary 26, 2021 to requestIRS 55 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Consolidated Appeals consideration. OnJanuary 20, 2022 , theIRS responded to our Protest with its Rebuttal and reiterated its position in the NOPA that the accrued chargebacks are not currently deductible in the tax year accrued because all events have not occurred to establish the fact of the liability in the year deducted. If theIRS were to prevail in its proposed adjustment, we estimate a payment of approximately$18.0 million , excluding interest and penalties for the 2013-2015 tax years. In addition, we expect theIRS to seek similar adjustments for future years. If those future adjustments were to be sustained, based on preliminary calculations and subject to further analysis, we estimate this would result in a payment not to exceed$7.0 million through tax year endedDecember 31, 2021 , excluding interest and penalties. We have fully reserved for this issue. We strongly disagree with theIRS's proposed adjustment and will pursue all available administrative and judicial remedies necessary.
On
Internal Revenue Service Audit of
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 dispute involves the royalties payable to Athena for its early-stage intellectual property in several in-process products, including the Multiple Sclerosis drug Tysabri. To avoid double taxation of Tysabri income in theU.S. andIreland , Athena made requests for Competent Authority Assistance with theIRS andIrish Revenue onApril 21 and 23, 2020, which were accepted. Supplemental requests for Competent Authority assistance to resolve a dispute with theIRS over the deductibility of a litigation expense payment for the drug Zonegran were also accepted. An opening conference with theIRS was held onMay 6, 2021 with a follow-up conference held onDecember 3, 2021 . An opening conference with Irish Revenue was held onJuly 23, 2021 (refer to Item 8. Note 17 ). The respective Competent Authorities will attempt to reach a resolution that avoids double taxation on both issues.
Israeli Notice of Assessment
OnDecember 29, 2020 , we received a Stage A assessment from theIsraeli Tax Authority for the tax years endedDecember 31, 2015 throughDecember 31, 2017 in the amount of$63.8 million relating to attribution of intangible income toIsrael , income qualifying for a lower preferential rate of tax, exemption from capital gains tax, and deduction of certain settlement payments. We timely filed our protest onMarch 11, 2021 to move the matter to Stage B of the assessment process. Through negotiations with the ITA, we resolved the audit for the tax year endedJune 27, 2015 through tax year endedDecember 31, 2019 , by agreeing to add tax year endedDecember 31, 2018 and tax year endedDecember 31, 2019 to the audit to reach an agreeable resolution to provide certainty for these additional periods. The agreement with the ITA required us to pay$19.0 million , after offset of refunds of$17.2 million , for the five taxable years. In addition, we paid$12.5 million to resolve a tax liability indemnity for the tax year endedDecember 31, 2017 relating toPerrigo API Ltd , which we disposed of inDecember 2017 .
Refer to Item 1A. Risk Factors - Tax Related Risks and Item 8. Note 17 for additional information on tax related matters.
Tribunal Ruling in Claim Arising from the Omega Acquisition
As previously disclosed, we were involved in arbitration inBelgium related to our claims of fraud in connection with the Omega Acquisition. The Tribunal panel, as described in more detail under Claim Arising from the Omega Acquisition in Item 8. Note 19 , found fraud by the sellers of Omega in a ruling onAugust 27, 2021 and awardedPerrigo approximately €355.0 million ($417.6 million at the time of cash receipt) including fees and costs. The panel also ruled against the sellers and in favor ofPerrigo on all the counterclaims. The sellers have paid all amounts owed under the award, and the arbitral proceedings have now ended. The arbitration proceedings remain confidential as required by the SPA and the rules of CEPANI. We recorded the cash receipt as a reduction to Operating Expenses on the Consolidated Statements of Operations.
Securities Litigation Settlement
A settlement was reached in the case, In rePerrigo Company plc Securities Litigation as described in more detail in Item 8. Note 19 under the header Inthe United States (cases related toIrish Tax events). Motion papers seeking approval of the class action settlement were filed onOctober 4, 2021 . The Court issued a preliminary approval order onOctober 29, 2021 , which led to notices being sent to class members. The Court held a hearing onFebruary 16, 2022 regarding the settlement and issued the Final Approval Order and Judgment. As a result, the settlement has been approved and the case has now ended. The settlement has been funded by insurance. 56 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Consolidated Impairments During the years endedDecember 31, 2021 andDecember 31, 2019 , we identified impairment indicators for various assets across our different segments, and therefore, we performed impairment testing. Below is a summary of the impairment charges recorded by segment (in millions): Year Ended December 31, 2021 CSCA(1) CSCI(2) Total Goodwill$ 6.1 $ 10.0 $ 16.1 Assets held-for-sale 156.1 - 156.1 IPR&D - 0.9 0.9$ 162.2 $ 10.9 $ 173.1
(1) Relates to an impairment associated with our Latin American divestiture.
(2) Relates to our goodwill within ourOral Care International reporting unit and certain IPR&D. Year Ended December 31, 2019 CSCA CSCI(1) Total Definite-lived intangible assets $ -$ 9.7 $ 9.7 IPR&D 4.1 - 4.1$ 4.1 $ 9.7 $ 13.8
(1) Relates primarily to an intangible asset for certain pain relief products that we license from a third party.
CONSUMER SELF-CARE
Recent Trends and Developments
•During the third quarter of 2021, supply chain disruptions, including a significant shortage of truck drivers in theU.S. and record delays at global shipping ports, led to higher unfulfilled customer orders and higher input costs compared to the prior year. In the fourth quarter of 2021, we took a series of actions to improve the situation, including reconfiguring our distribution system for short term shipments, outsourcing highly complex product lines to a third party logistic provider, adding regional carriers for challenged shipping lanes, hiring additional distribution center personnel, and increasing the purchase cycle as it relates to the manufacturing process. While we believe supply chain disruptions will continue in the near-term, we are expecting to continue to see improvements throughout 2022. •During the first half of 2021, net sales of cough and cold products decreased as a result of the very low incidence of cough and cold related illness, which we believe is attributed to social distancing and mask mandates put in place to combat the spread of COVID-19. However, increased consumer takeaway at our retail customers, starting inMay 2021 , suggested normalizing consumer purchasing routines could be expected in the second half of 2021. In the third quarter, we experienced higher demand for cough, cold and pain products due primarily to the higher incidences of cough and cold illness as society returned to in-person activities. Consumer take away continued to remain strong during the fourth quarter and, as such, we expect sales of cough, cold and pain products to continue to increase, depending on the trajectory of the COVID-19 pandemic moving forward. Refer to " Impact of COVID-19 Pandemic " above. •OnMay 18, 2021 , we announced a definitive agreement to sell our Latin American businesses toAdvent International . This transaction is part of our margin improvement program and our Project Momentum cost savings initiative and is expected to close in the first half of 2022. We determined that the carrying value of these businesses exceeded their fair value less cost to sell, resulting in an impairment charge of$162.2 million allocated to goodwill and assets held for sale (refer to Item 8. Note 9 ). 57 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 CSCA Segment Financial Results
Year Ended
Year Ended
December 31, December 31,
(in millions, except percentages) 2021 2020
Net sales $ 2,693.1 $ 2,693.0
Gross profit $ 765.1 $ 853.5
Gross profit % 28.4 % 31.7 %
Operating income $ 206.5 $ 465.0
Operating income % 7.7 % 17.3 %
Net sales increased
•Higher net sales in the Oral care, Skincare and personal hygiene, and Other categories offset decreases in Healthy lifestyle, Pain and sleep-aids, and Upper respiratory categories. Favorable Mexican peso foreign currency translation drove a 0.2%, or$4.9 million increase. Year EndedDecember 31 ,
2021
(in millions, except percentages) Sales $ Change % Change
Upper respiratory $ 483.1 $ (22.7) (4.5) %
Digestive health 475.1 3.8 0.8 %
Pain and sleep-aids 405.4 (29.1) (6.7) %
Nutrition 401.9 13.6 3.5 %
Oral care 311.9 23.7 8.2 %
Healthy lifestyle 297.7 (54.7) (15.5) %
Skincare and personal hygiene 219.2 18.6 9.3 %
Vitamins, minerals, and supplements 31.7 4.7 17.4 %
Other CSCA 67.1 42.2 169.5 %
Total CSCA $ 2,693.1 $ 0.1 -%
Sales in each category were driven primarily by:
•Upper respiratory: Net sales of$483.1 million decreased 4.5% due primarily to the historically weak 2020- 2021 cough and cold season and the recall of an allergy product in the third quarter of 2021. Increased pricing and new products partially offset these declines; •Digestive health: Net sales of$475.1 million increased 0.8% due primarily to sales of unique 'national brand better' products, new products and e-commerce. These drivers were mostly offset by competition for a proton pump inhibitor and the re-launch of a national brand acid reducer, which gained market share from competing store brand products; •Pain and sleep-aids: Net sales of$405.4 million decreased 6.7% due primarily to the historically weak 2020- 2021 cough and cold season, partially offset by higher sales of store brand diclofenac 1%; •Nutrition: Net sales of$401.9 million increased 3.5% driven by new products, including in the infant formula contract manufacturing business, and continued growth in oral electrolytes. These drivers were partially offset by lower sales inU.S. store brand infant formula due primarily to supply constraints earlier in the year; •Oral care: Net sales of$311.9 million increased 8.2% due primarily to one quarter of inorganic growth stemming from theApril 2020 acquisition ofDr. Fresh and strong growth in the overall business during the first half of 2021. These drivers were partially offset by delayed receipt of product manufactured outside theU.S. in the second half, leading to unfulfilled customer orders;
•Healthy lifestyle: Net sales of
58
--------------------------------------------------------------------------------Perrigo Company plc - Item 7 CSCA •Skincare and personal hygiene: Net sales of$219.2 million increased 9.3% due primarily to higher sales in the minoxidil franchise and the ScarAway® brand, partially offset by lower sales of creams for topical fungal infections; and
•VMS and Other: Net sales of
Operating income decreased
•$88.4 million decrease in gross profit due primarily to unfavorable plant overhead absorption as a result of lower OTC production volumes resulting from the weak cough cold season, higher freight and input costs, and a product recall related to an allergy product. Gross profit as a percentage of net sales decreased 330 basis points due primarily to unfavorable plant overhead absorption and the higher freight and input costs; and
•$170.1 million increase in operating expenses due primarily to:
•$173.7 million increase in other operating expenses due primarily to:
?
?
?$7.1 million increase in restructuring costs related primarily with actions taken to streamline the organization and business integrations; partially offset by
•$3.6 million decrease in distribution, R&D, selling, and administration expenses due to:
?
?
?
Year Ended
Year Ended
December 31, December 31,
(in millions, except percentages) 2020 2019
Net sales $ 2,693.0 $ 2,487.7
Gross profit $ 853.5 $ 794.2
Gross profit % 31.7 % 31.9 %
Operating income $ 465.0 $ 406.7
Operating income % 17.3 % 16.3 %
Net sales increased
•$252.1 million, or 10%, net increase due primarily to an increase of$178.2 million in our Oral care category and from demand-driven growth in certain of our OTC product categories. CSCA continued to benefit from robust e-commerce growth. •Oral care net sales increased$168.2 million due to the acquisitions of Ranir andDr. Fresh for sales in periods of 2020 with no comparable sales for 2019. In periods with comparable sales in 2019 and 2020, net sales grew$10.0 million driven by the incremental impact of new product sales and growth in the Plackers® brand. These increases were partially offset by declines in sales of travel-sized products related to COVID-19 travel restrictions. •OTC net sales increased$75.5 million due primarily to favorable consumer conversion to products in our Digestive health category, the increase of consumer COVID-19 related demand experienced in the first half of 2020 in the Pain and sleep aids category, and the incremental impact of new product 59 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 CSCA sales led by Prevacid®, Diclofenac sodium topical gel 1%, and Esomeprazole Mini. These increases were partially offset by a decline of$38.6 million in sales of certain products in the Upper respiratory and Pain and sleep aids categories, primarily in the fourth quarter of 2020, resulting from the weak start to the cough cold season, and normal pricing pressure on certain products. •Nutrition net sales decreased$2.6 million due primarily to the decrease in infant formula product sales resulting from the prior year pre-build of contract pack inventory, operational challenges that led to a shortfall in achieving normal customer service levels, multi-year pricing contracts, and$5.7 million in discontinued products. These decreases were partially offset by new product sales from an infant formula launch at a major retailer in the prior year.
•$46.8 million decrease due primarily to:
•$43.7 million decrease due to our divested animal health business; and
•$10.5 million decrease from unfavorable Mexican peso foreign currency translation; partially offset by
•$7.4 million increase due to the absence of the Ranitidine retail market withdrawal impact included in the prior year.
Operating income increased
•$59.3 million increase in gross profit due primarily to increased net sales as described above, partially offset by operating inefficiencies at one of our infant nutrition facilities as well as increased labor and overhead costs associated with the COVID-19 pandemic. Gross profit as a percentage of net sales decreased 20 basis points due primarily to the operating inefficiencies described above and pricing pressure on certain products, partially offset by the absence of the Ranitidine retail market withdrawal included in the prior year, and favorable product mix; further offset by
•$1.0 million increase in operating expenses due primarily to:
•$14.3 million increase in selling and administration expenses due primarily to the inclusion of expenses from our acquisitions of Ranir andDr. Fresh and an increase in promotional expenses on branded products in advance of their pending market launches, partially offset by the absence of expenses from the divested animal health business and savings from our current Project Momentum cost savings initiative; partially offset by
•The absence of a
•$4.0 million legal settlement received in 2020.
CONSUMER SELF-CARE INTERNATIONAL
Recent Trends and Developments
•During the first half of 2021, net sales of cough and cold products decreased
as a result of the very low incidence of cough, cold and flu related illness
this year. We believe the very low incidence of cough, cold and flu related
illness was attributed to COVID-19 social distancing and mask requirements.
During the second half of 2021, we experienced higher demand for cough and cold,
and pain products due primarily to the higher incidences of cough, cold and flu
illness as society returned to in-person activities. The spread of certain
COVID-19 variants may have contributed to these higher incidences as their
symptoms can be similar. Further, consumer take away remained strong during the
second half of 2021 led by cough and cold, and pain products and we expect
further normalizing of consumer purchasing routines moving forward depending on
the trajectory of the COVID-19 pandemic. Refer to " Impact of COVID-19
Pandemic ".
•During the third quarter, a number of EU regulators requested recalls, some at
the consumer level, due to the detection of 2-chloroethanol ("2-CE"). 2-CE has
been associated with the presence of ethylene oxide, a constituent in
pesticides, which is not permitted for use in food products under food
regulations in the EU. Due to the potential presence of ethylene oxide in
certain of our VMS products, we initiated recalls. We have since secured
alternate sourcing of the raw material. During the year ended December 31, 2021 ,
these recalls resulted in a decrease in net sales of $2.6 million and a decrease
in gross profit of $5.5 million , which included obsolete inventory.
60
--------------------------------------------------------------------------------Perrigo Company plc - Item 7 CSCI Segment Financial Results
Year Ended
Year Ended
December 31, December 31,
(in millions, except percentages) 2021 2020
Net sales $ 1,445.6 $ 1,395.2
Gross profit $ 651.1 $ 641.1
Gross profit % 45.0 % 45.9 %
Operating income $ 36.1 $ 32.3
Operating income % 2.5 % 2.3 %
Net sales increased
•Higher net sales in the Skincare and personal hygiene category offset decreases in Upper respiratory category and Other. Favorable foreign currency translation drove a 4.0%, or$56.0 million increase. Year EndedDecember 31 ,
2021
(in millions, except percentages) Sales $ Change % Change
Skincare and personal hygiene $ 394.3 $ 42.5 12.1 %
Upper respiratory 226.2 (28.9) (11.3) %
Vitamins, minerals, and supplements 217.4 16.4 8.2 %
Pain and sleep-aids 201.8 11.4 6.0 %
Healthy lifestyle 179.3 13.9 8.4 %
Oral care 95.8 (2.0) (2.0) %
Digestive health 38.4 11.9 44.9 %
Other CSCI 92.4 (14.8) (13.8) %
Total CSCI $ 1,445.6 $ 50.4 3.6 %
Sales in each category were driven primarily by:
•Skincare and personal hygiene: Net sales of$394.3 million increased 12.1% driven primarily by theOctober 30, 2020 acquisition of three Eastern European OTC Dermatology Brands, increased market share in the ACO skincare franchise and new product launches in the Sebamed skincare portfolio. These drivers were partially offset by a decline in the anti-parasite portfolio and lower sales inAustralia ; •Upper respiratory: Net sales of$226.2 million decreased 11.3% due primarily to the historically weak 2020- 2021 cough and cold season, partially offset by new products; •VMS: Net sales of$217.4 million increase of 8.2% due primarily to a strong performance of Granufink, herbal medicines to keep bladder function healthy, and the launch of the Probify line of probiotics; •Pain & sleep-aids: Net sales of$201.8 million increased 6.0% due to higher sales of U.K.store brand andTiger Balm were partially offset by declines in other pain products due primarily to the historically weak 2020- 2021 cough and cold season; •Healthy lifestyle: Net sales of$179.3 million increased 8.4% as growing demand for NiQuitin smoking cessation products and higher net sales inAustralia were partially offset by lower net sales in the XLS Medical weight management franchise due primarily to lower category consumption; •Oral care: Net sales of$95.8 million decreased 2.0% due primarily to delayed receipt of product manufactured outside the E.U. in the second half of the year, leading to unfulfilled customer orders; •Digestive health and Other: Net sales of$130.8 million decreased 2.2% due primarily to lower distribution sales inEurope partially offset by higher sales inAustralia . 61 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 CSCI
Operating income increased
•$10.0 million increase in gross profit due primarily to greater operating efficiencies, positive pricing and foreign currency translation, partially offset by an increase in lower margin product sales, the now-divested Rosemont pharmaceuticals business, and the VMS product recall. Gross profit as a percentage of net sales decreased 90 basis points due primarily to unfavorable product mix and the VMS product recall, partially offset by greater operating efficiencies; and
•$6.2 million increase in operating expenses due primarily to:
•$10.9 million of impairment charges related toOral Care International goodwill and certain IPR&D assets; •$4.6 million increase in restructuring expenses associated with actions taken to streamline the organization; partially offset by •$4.5 million decrease in selling, advertising and promotion ("A&P") expenses due primarily to negative consumption trends in the cough and cold and parasite products; and •$3.9 million decrease in distribution expense due primarily to lower volumes in the cough and cold products.
Year Ended
Year Ended
December 31, December 31,
(in millions, except percentages) 2020 2019
Net sales $ 1,395.2 $ 1,382.2
Gross profit $ 641.1 $ 639.5
Gross profit % 45.9 % 46.3 %
Operating income $ 32.3 $ 19.6
Operating income % 2.3 % 1.4 %
Net sales increased
•$47.4 million, or 3%, net increase due primarily to the increase of$45.3 million in sales from our acquisitions of Ranir,Dr. Fresh and Eastern European dermatology brands for periods of 2020 with no comparable sales in 2019, and the incremental impact of new product sales including line extensions in the ACO dermatology product line and the XLS Forte-Five weight management brand in the Skincare and personal hygiene and Healthy lifestyle categories, respectively. The segment also benefited from an increase in demand for products in our Pain and sleep-aids and VMS categories due to pandemic-related consumer behavior in favor of immune support, and an increase in sales from ourU.K. store brand business. These increases were partially offset by a decrease in sales of certain products in our Skincare and personal hygiene and Healthy lifestyle categories due to pandemic-related consumer behavior, school closings, social distancing measures and country lock-downs, a decline of$24.1 million for products in the Upper respiratory category from the weak start to the cough cold season experienced in the fourth quarter of 2020, and discontinued products of$10.0 million .
•$34.4 million decrease due primarily to:
•$40.3 million decrease due to our divested Rosemont pharmaceuticals business and Canoderm prescription product previously included in the Nordic region; partially offset by
•$4.1 million increase from favorable foreign currency translation primarily related to the Euro; and
•$1.8 million increase due to the absence of the Ranitidine retail market withdrawal impact included in the prior year.
62
--------------------------------------------------------------------------------Perrigo Company plc - Item 7 CSCI
Operating income increased
•$1.6 million increase in gross profit due primarily to increased net sales as described above, partially offset by higher commodity costs for a certain OTC brand. Gross profit as a percentage of net sales decreased 40 basis points due primarily to the addition of the Oral care category and improved performance in theU.K. store brand business which both have a relatively lower gross margins than the overall portfolio, the impact from divested businesses, and an increase in commodity costs for a certain OTC brand, partially offset by the absence of the Ranitidine retail market withdrawal included in the prior year; and
•$11.1 million decrease in operating expenses due primarily to:
•$9.7 million decrease in impairment charges due to an impairment taken in the prior year on a certain definite-lived intangible asset; and
•$8.3 million decrease due primarily to the absence of restructuring expenses related to the reorganization of our sales force inFrance included in the prior year; partially offset by
•$4.7 million increase in R&D expenses towards continued innovation efforts; and
•$1.1 million increase in selling and administration expenses due primarily to unfavorable Euro foreign currency translation, and the inclusion of expenses from our acquisitions of Ranir andDr. Fresh , partially offset by a reduction in selling, advertising and promotional expenses, the absence of expenses from the divestiture of our Rosemont pharmaceuticals business, and savings from our current Project Momentum cost savings initiative.
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,
2021 2020 2019
$ (167.8) $ 232.4 $ 251.6
The decrease of $400.2 million in unallocated expenses during the year ended
December 31, 2021 compared to the prior year period was due primarily to the
award in the claim arising from the Omega Acquisition, as described in Item 8.
Note 19 , for $417.6 million , TSA income from the acquirer of our former RX
business, decreased employee compensation expense, and Project Momentum cost
savings initiative. This was partially offset by an increase in legal and
professional fees, a reduction in an insurance recovery receivable related to
litigation contingencies, and an increase in restructuring expenses.
The $19.2 million increase for the year ended December 31, 2020 compared to the
prior year was due primarily to the absence of $15.6 million in acquisition and
integration-related charges related to the acquisition of Ranir, a $14.8 million
decrease in legal and consulting fees in part due to our current Project
Momentum cost savings initiative, and a $12.6 million decrease in Restructuring
expense related primarily to the reorganization of our executive management
team. These decreases were partially offset by an increase of $15.7 million in
employee incentive compensation expenses, which included COVID-19 bonuses for
production employees, and an increase of $8.0 million in insurance-related
expenses.
63
--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Unallocated, Interest, Other, and Taxes
Change in Financial Assets, Interest expense, net, Other (income) expense, net and Loss on extinguishment of debt (Consolidated)
Year Ended
December 31, December 31, December 31,
(in millions) 2021 2020 2019
Change in financial assets $ - $ 95.3 $ (22.1)
Interest expense, net $ 125.0 $ 127.7 $ 117.5
Other (income) expense, net $ 26.7 $ 16.3 $ (68.9)
Loss on extinguishment of debt $ - $ 20.0 $ 0.2
Change in Financial Assets
The proceeds from our 2017 sale of the Tysabri® financial asset to Royalty
Pharma consisted of
During the year endedDecember 31, 2020 , Royalty Pharma payments from Biogen for Tysabri® sales, as defined in the agreement between the parties, did not exceed the 2020 global net sales threshold of$351.0 million . Therefore, we are not entitled to receive the remaining contingent milestone payment of$400.0 million and, accordingly, wrote off the entire fair value of the remaining milestone payment related to 2020 of$95.3 million in Change in financial assets on the Consolidated Statements of Operations (refer to Item 8. Note 7 ). As ofDecember 31, 2020 , there were no contingent milestone payments outstanding. During the year endedDecember 31, 2019 the fair value of the contingent 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. The Royalty Pharma payments from Biogen for Tysabri® were$337.5 million in 2018, which triggered the$250.0 million milestone payment received during the year endedDecember 31, 2019 . Interest Expense, net The$2.7 million decrease during the year endedDecember 31, 2021 compared to the prior year was due primarily to a reduction in interest expense related to our 2018 Revolver (as defined below). The$10.2 million increase during the year endedDecember 31, 2020 compared to the prior year was due primarily to the addition of interest expense on our 2020 Notes and two promissory notes related to our equity method investment in Kazmira, as well as a reduction of interest income.
Other (Income) Expense, Net
The
The$85.2 million change from income to expense during the year endedDecember 31, 2020 compared to the prior year was due primarily to the absence of the pre-tax gain of$71.7 million on the sale of our animal health business and the$21.1 million pre-tax loss on the divestiture of ourRosemont Pharmaceuticals business, partially offset by a decrease of$2.6 million in unfavorable changes from the revaluation of monetary assets and liabilities held in foreign currencies (refer to Item 8. Note 3 ). 64 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Unallocated, Interest, Other, and Taxes
Loss on Extinguishment of Debt
During the year endedDecember 31, 2020 , we recorded a loss of$20.0 million as a result of the early redemption of the 3.500% Senior Notes dueMarch 15, 2021 and 3.500% Senior Notes dueDecember 15, 2021 , consisting of the premium on debt repayments, the write-off of deferred financing fees, and the write-off of the remaining bond discounts (refer to Item 8. Note 13 ).
Income Taxes (Consolidated)
The effective tax rates were as follows:
Year Ended
December 31, December 31, December 31,
2021 2020 2019
150.6 % (655.8) % (7.2) %
The effective tax rate for the year ended
The effective tax rate for the year ended
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 term
and 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 Notices of Proposed Adjustment ("NOPAs") from the
IRS , the current COVID-19 pandemic, the conflict in Ukraine , and other
contingencies. We note that no payment of the additional amounts proposed by the
IRS in the NOPAs is currently required, and no such payment is expected to be
required, unless and until a settlement or other final determination of the
matter is reached that is adverse to us. Refer to Item 8. Note 17 for
additional information on the 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 and
product liability cases, damages resulting from third-party claims, and related
interest and/or penalties, could ultimately require the use of corporate assets
to pay such assessments 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 NOPAs, the COVID-19 pandemic, the conflict
in Ukraine or other contingencies have a material impact on our capital
requirements.
We previously had an RX segment which was comprised of our prescription
pharmaceuticals business in the U.S. and other pharmaceuticals and diagnostic
businesses in Israel , which have been divested. The RX segment was reported as
Discontinued Operations in 2021, and is presented as such for all periods in
this report. Cash flows from discontinued operations are reported within the
consolidated statement of cash flows, and select cash flow information related
to discontinued operations are presented in Item 8. Note 8 . We received $1.5
billion in cash upon the completion of the RX business sale on July 6, 2021 . We
intend to use a portion of these proceeds to fund the acquisition of HRA Pharma
(refer to Item 8. Note 3 ).
We also received $417.6 million relating to the claim arising from the Omega
Acquisition in September 2021 . A portion of these proceeds were used for the
settlement of the NoA dispute with Irish Revenue.
65
--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources Cash and Cash Equivalents
[[Image Removed: prgo-20211231_g7.jpg]]
* Working capital represents current assets less current liabilities, excluding
cash and cash equivalents, assets and liabilities held for sale, and excluding
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, including due to the COVID-19 pandemic, 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: prgo-20211231_g8.jpg]]
Year Ended
The
•$253.7 million decrease in cash flow from the change in net earnings after
adjustments for items including impairment charges, deferred income taxes,
restructuring charges, changes in our financial assets, share-based
compensation, amortization of debt premium, loss (gain) on sale of businesses,
loss on extinguishment of debt, and depreciation and amortization;
•$328.6 million decrease in cash flow from the change in accounts receivable,
due primarily to our discontinued operations and timing of sales and receipt of
payments;
66
--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources •$63.8 million decrease in cash flow from the change in accrued payroll and related taxes, due primarily to the timing of payroll and the increase in annual management and employee bonus payments compared to the prior year period; and •$40.7 million decrease in cash flow from the change in accrued income taxes, due primarily to the cash escrow payment to theIsrael Tax Authority relating to their review of a 2009 transaction (for which no formal assessment or notice of deficiency has been filed); partially offset by •$168.2 million increase in cash flow from the change in inventory, due primarily to inventory increases in the prior year period which did not persist in the current year. Inventory increases in the prior year were partially related to inventory builds to improve customer service, combined with lower demand for certain products and customers lowering their inventories.
•$44.7 million increase in cash flow from the change in accrued customer programs, due primarily to pricing dynamics and timing of rebate and chargeback payments related to our discontinued operations.
Year Ended
The
•$309.6 million increase in cash from the change in accounts receivable, due primarily to timing of sales and receipt of payments;
•$67.5 million increase in cash from the change in accrued income taxes, due primarily to the CARES Act and adoption of final and proposed 163(j) regulations, as well as the absence of tax liabilities on the Royalty Pharma contingent milestone payment received in the prior year and Israeli withholding tax paid in the prior year; and •$14.5 million increase in cash from the change in accrued payroll and related taxes, due primarily to the CARES Act payroll tax payment deferrals; partially offset by •$103.6 million decrease in cash from the change in inventory, due primarily to the buildup of inventory levels to improve customer service levels in the CSCA and CSCI segments, as well as higher inventory levels due to a reduction in sales for certain products and an increase in inventory for new product launches in the CSCI segment, partially offset by the current year launch of new products in our discontinued operations; •$31.6 million decrease in cash from the change in other, due primarily to the$29.4 million change in prepaid expenses, mainly from payments made for annual prepaid expenses, a payment made for a transitional service agreement, an increase in the cost of our directors and officers prepaid insurance, and the absence of a litigation related settlement received in the prior year, partially offset by payments received related to our cross currency swap; and
•$19.7 million decrease in cash from the change in accounts payable, due primarily to the timing of payments and mix of payment terms.
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--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources
Cash Generated by (Used in) Investing Activities
[[Image Removed: prgo-20211231_g9.jpg]]
Year Ended
The
•$1,304.1 million increase in cash flow due to the proceeds from the RX business sale, which substantially exceeded the proceeds from the prior year divestiture of ourRosemont Pharmaceuticals business (refer to Item 8. Note 3 ); •$168.5 million increase in cash flow due to the absence of cash paid in the prior year for the acquisitions ofDr. Fresh for$106.2 million and Eastern European dermatology brands for$62.3 million the payment made in the prior year for the acquisition ofDr. Fresh (refer to Item 8. Note 3 ); •$15.0 million increase in cash flow due to the absence of the payment made in the prior year for the purchase of our equity method investment inKazmira LLC ; and
•$18.3 million increase in cash flow due to the change in capital spending, due primarily to reduced spending as a result of current year divestitures; partially offset by
•$35.4 million decrease in cash flow due to the increase in spending on asset acquisitions, primarily related to the payment for an ANDA for a generic topical gel for$16.4 million and the purchase of an ANDA for a generic topical lotion for$53.3 million , which exceeded prior year acquisitions for the Steripod® brand for$25.1 million and the Dexsil® brand for approximately$8.0 million (refer to Item 8. Note 3 ). Capital expenditures for the next twelve months are anticipated to be between$100.0 million and$140.0 million , depending on the progression of project timelines, related to manufacturing productivity and efficiency upgrades, infant formula plant investments, software and technology initiatives, and general plant maintenance. We expect to fund these estimated capital expenditures with funds from operating cash flows.
Year Ended
The
•$579.2 million decrease in cash used due to the absence of the payment made in the prior year for the acquisition of Ranir for$747.7 million , partially offset by the cash paid for the acquisitions ofDr. Fresh for$106.2 million and Eastern European dermatology brands for$62.3 million (refer to Item 8. Note 3 ); •$113.9 million decrease in cash used due to the decrease in spending on asset acquisitions, as payments made in the prior year to purchase the Steripod® brand for$25.1 million and the Dexsil® brand for approximately$8.0 million , represented a decline in spending compared to the cash used in prior year acquisitions, including for the branded OTC rights to Prevacid®24HR for$61.7 million , two ANDAs for generic products for 68 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources
•$5.3 million increase in cash due primarily to the net proceeds from the sale of our Rosemont pharmaceuticals business, which exceeded the proceeds from the prior year's sale of our animal health business (refer to Item 8. Note 3 ); partially offset by •$250.0 million decrease in cash flow due to the absence of the Royalty Pharma contingent milestone proceeds received in the prior year (refer to Item 8. Note 7 ); •$32.7 million decrease in cash due to a net increase in capital spending, used primarily to increase tablet and infant formula capacity, plant efficiency projects, investments in our Oral care business, and for software and technology initiatives; and
•$15.0 million decrease in cash for the purchase of our equity method investment in Kazmira (refer to Item 8. Note 10 ).
Cash Generated by (Used in) Financing Activities
[[Image Removed: prgo-20211231_g10.jpg]]
Year Ended
The
•$590.0 million increase due to payments on long-term debt in 2020 that were not made in 2021;
•$164.2 million increase due to share repurchases in 2020 that were not made in 2021; and
•$19.0 million increase due to the payment of premiums in the prior year related to the early redemption of the 2021 Notes that were not made in 2021; partially offset by
•$743.8 million decrease due to absence of the debt issuance completed in the prior year; and
•$26.7 million decrease due primarily to the payment made on the promissory notes related to our Kazmira investment.
Year Ended
The
•$164.2 million decrease in cash due to share repurchases;
•$114.0 million decrease in cash due to the increase in payments on long-term debt;
•$19.0 million decrease in cash due to the payment of premiums on the early redemption of the 3.500% Senior Notes dueMarch 15, 2021 and 3.500% Senior Notes dueDecember 15, 2021 ; 69
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Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources
•$11.5 million decrease in cash due to an increase in dividend payments;
•$5.7 million decrease in cash due to an increase in deferred financing fees related to the issuance of long-term debt; and
•$4.4 million decrease in cash due primarily to the payment made on the
•$143.8 million increase in cash for the issuance of long-term debt (refer to
Item 8. Note 13 ). Share Repurchases InOctober 2015 , the Board of Directors approved a three-year share repurchase plan of up to$2.0 billion . Following the expiration of our 2015 share repurchase plan authorization 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. We did not repurchase any shares during the year endedDecember 31, 2021 orDecember 31, 2019 . During the year endedDecember 31, 2020 , we repurchased 3.4 million ordinary shares at an average purchase price of$48.28 per share for a total of$164.2 million under the 2018 Authorization.
Dividends
In
Year Ended
December 31, December 31, December 31,
2021 2020 2019
Dividends paid (in millions) $ 129.6 $ 123.9 $ 112.4
Dividends paid per share $ 0.96 $ 0.90 $ 0.82
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: prgo-20211231_g11.jpg]][[Image Removed: prgo-20211231_g12.jpg]]
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--------------------------------------------------------------------------------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,
2021 2020
Term loan
2019 Term loan due August 15, 2022 $ 600.0 $ 600.0
Notes and bonds
Coupon Due
* 5.105% July 28, 2023 $ 153.5 $ 164.9
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
3.900% June 15, 2030 750.0 750.0
5.300% November 15, 2043 90.5 90.5
4.900% December 15, 2044 303.9 303.9
Total notes and bonds $ 2,913.5 $ 2,924.9 * Debt denominated in euros subject to fluctuations in the euro-to-
OnJune 19, 2020 ,Perrigo Finance Unlimited Company , an indirect wholly-owned finance subsidiary ofPerrigo ("Perrigo Finance"), issued$750.0 million in aggregate principal amount of 3.150% Senior Notes due 2030 (the "2020 Notes"). Due to a credit ratings downgrade by S&P and Moody's in the third quarter of 2021, the interest of the 2020 Notes has stepped up from 3.150% to 3.900%, starting with the interest payment due onDecember 15, 2021 . OnJuly 6, 2020 , the proceeds of the 2020 Notes were used to fund the redemption ofPerrigo Finance's$280.4 million of 3.500% Senior Notes dueMarch 15, 2021 and$309.6 million of 3.500% Senior Notes dueDecember 15, 2021 . As a result of the early redemption of the$280.4 million of 3.500% Senior Notes and$309.6 million of 3.500% Senior Notes, during the year endedDecember 31, 2021 , we recorded a loss of$20.0 million in Loss on extinguishment of debt on the Consolidated Statements of Operations, consisting of the premium on debt repayments, the write-off of deferred financing fees, and the write-off of the remaining bond discounts. 71 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources OnMay 23, 2019 , we repaid our 5.000% retail bond due in 2019 in the amount of €120.0 million ($130.7 million ), which we assumed in connection with the Omega acquisition. Refer to Item 8. Note 13 for additional details regarding our debt financing transactions. 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 13 . There were no borrowings outstanding under the
facilities as of
Leases
We had
Accounts Receivable Factoring
During the year endedDecember 31, 2020 , we had 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. AtDecember 31, 2020 , the total amount factored on a non-recourse basis and excluded from accounts receivable was$6.9 million . During the year endedDecember 31, 2021 , the factoring program was discontinued and there were no amounts factored on a non-recourse basis and excluded from accounts receivable.
Revolving Credit Agreement
On
Waiver and Amendment of Debt Covenants
We are subject to financial covenants in the 2018 Revolver and 2019 Term Loan, including a maximum leverage ratio covenant, which previously required us to maintain a ratio of Consolidated Net Indebtedness to Consolidated EBITDA (as such terms are defined in such credit agreements) of not more than 3.75 to 1.00 at the end of each fiscal quarter. During the year endedDecember 31, 2021 , we received a waiver for non-compliance with such covenants as ofJuly 3, 2021 , from the lenders under both such credit facilities and entered into amendments to each of the 2018 Revolver and 2019 Term Loan. Due to the waiver and amendment described above, our leverage ratios at the end of the second and third quarters of 2021 do not prevent us from drawing under the 2018 Revolver. Additionally, onDecember 3, 2021 , we,Perrigo Finance, each lender party thereto, andJPMorgan Chase Bank, N.A . as administrative agent, entered into Amendment No. 2 to the Company's 2019 Term Loan (the "Term Loan Amendment") and Amendment No. 3 to the Company's 2018 Revolver (the "Revolver Amendment") with the lenders under each such facility, pursuant to which the maximum leverage ratio was increased to 5.75 to 1.00 for the fourth quarter of 2021 and the first quarter of 2022, returning to 3.75 to 1.00 beginning with the second quarter of 2022. If we consummate certain qualifying acquisitions in the second quarter of 2022 or any subsequent quarter during the term of the loan, the maximum ratio would increase to 4.00 to 1.00 for such quarter. The amendments also modified certain provisions related to restricted payments to account for the amended leverage ratio covenant. Finally, the Revolver Amendment contains amendments related to the replacement of LIBOR with the Sterling Overnight Index Average (SONIA) as the benchmark for borrowings under the 2018 Revolver in Pounds Sterling. During the year endedDecember 31, 2021 , we incurred amendment and arrangement fees of$1.4 million in connection with these amendments, which were capitalized and will be amortized over the life of the debt. As ofDecember 31, 2021 , we are in compliance with all the covenants under our debt agreements.
Other Financing
On
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--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources pursuant to two promissory notes, with$3.7 million ,$5.8 million and$24.8 million to be settled inNovember 2020 ,May 2021 andNovember 2021 , respectively (refer to Item 8. N ote 10 ). On December 8, 2020, we repaid the$3.7 million balance due on theNovember 2020 portion of the Promissory Notes. During the year endedDecember 31, 2021 , we repaid the$5.8 million balance due on theMay 2021 portion of the Promissory Notes and the$24.8 million balance due on theNovember 2021 portion, settling the debt in full.
Credit Ratings
During the third quarter of 2021, our credit ratings were downgraded by Moody's andS&P Global Ratings to Ba1 (negative) and BB (stable), respectively, which are not investment grade ratings. OnDecember 31, 2021 , our credit rating was BBB- (negative) byFitch Ratings Inc. , which is an investment grade rating. 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. A security rating is not a recommendation to buy, sell or hold securities.
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.
Contractual Obligations
Our enforceable and legally binding obligations as ofDecember 31, 2021 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 2022 2023-2024 2025-2026 After 2026 Total Short and long-term debt (1)$ 726.1 $ 1,286.6 $ 823.6 $ 1,575.8 $ 4,412.1 Finance lease obligations 5.6 6.3 4.3 13.7 29.9 Purchase obligations (2) 862.6 3.0 - - 865.6 Operating leases (3) 29.9 41.9 32.2 94.9 198.9 Other contractual liabilities reflected on the consolidated balance sheets: Deferred compensation and benefits (4) - - - 72.5 72.5 Other (5) 22.3 18.4 9.2 - 49.9 Total$ 1,646.5 $ 1,356.2 $ 869.3 $ 1,756.9 $ 5,628.9 (1)Short-term and long-term debt includes interest payments, which were calculated using the effective interest rate atDecember 31, 2021 . (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$38.4 million , which is recorded in Other non-current 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, restructuring accruals, insurance obligations, and electrical and gas purchase contracts, which were accrued in Other current liabilities and Other non-current liabilities atDecember 31, 2021 for all years. We fund ourU.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$36.5 million over the next 12 months. Future contributions are dependent upon various factors, including employees' eligible compensation, plan participation and changes, if any, to 73 --------------------------------------------------------------------------------
Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources
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 ofDecember 31, 2021 , we had approximately$452.3 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$232.8 million as ofDecember 31, 2021 . 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 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 rebates and other incentive programs recorded on the Consolidated Balance Sheets as Accrued customer programs. 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.
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, 2021 , we recorded a net increase in valuation allowances of$35.9 million , comprised primarily of an increase of valuation allowance for deferred tax assets related to our Latin American businesses included as held for sale. Although we believe our tax estimates are reasonable and 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 17 ).
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--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Critical Accounting Estimates 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 19 ). 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.
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. 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.
Goodwill represents amounts paid for an acquisition of a business in excess of the fair value of net assets received. We perform annual goodwill impairment testing on the first day of the fourth quarter. In the fourth quarter of 2021, we reorganized the reporting structure within our CSCI operating segment which resulted in theOral Care International , CSCUK andAustralia , and BCS reporting units being combined into a new CSCI reporting unit. Following the CSCI reorganization, we have two reporting units as ofDecember 31, 2021 . Impairment tests were performed for the legacy reporting units prior to the reorganization and for the CSCI reporting unit immediately after the reorganization.
The impairment test we performed for the legacy
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--------------------------------------------------------------------------------Perrigo Company plc - Item 7 Critical Accounting Estimates projections of future cash flows resulting from increased costs throughout the global supply chain. During the year endedDecember 31, 2021 , we also performed impairment testing related to ourLatin America disposal group on its classification as held-for-sale and recorded a goodwill impairment loss of$6.1 million . We recorded goodwill impairment losses in Impairment charges on the Consolidated Statements of Operations. The test for impairment requires us to make several significant assumptions that impact our estimate of the fair value of a reporting unit, including revenue growth, operating margins, and discount rate. These assumptions are considered critical due to the sensitivity of changes in these assumptions to the related estimate of fair value. The discount rates used in testing each of our reporting units' goodwill for impairment during our testing were based on the weighted average cost of capital determined for each of our reporting units. In our annual impairment test as ofOctober 3, 2021 , discount rates ranged from 7.75% to 9.75%, and perpetual revenue growth rates were 2.0%. In our annual impairment test as ofSeptember 27, 2020 , discount rates ranged from 7.25% to 9.25%, and perpetual revenue growth rates were 2.0%. The 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. An increase in the discount rate could negatively impact the estimated fair value of the reporting units and lead to 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, 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 analysis. We performed sensitivity analyses on the discounted cash flow valuations that were prepared to estimate the fair value 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 CSCI reporting unit, the fair value exceeds our carrying amount by less than 10%. Therefore, a 50 basis point increase in the discount rate, or a 25 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. Our sensitivities 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. 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.
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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