PERRIGO COMPANY PLC This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements included in this Form 10-Q, and our Form 10-K for the year endedDecember 31, 2021 (the "2021 Form 10-K"). These historical financial statements may not be indicative of our future performance. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks referred to under "Risk Factors" in Item 1A of our 2021 Form 10-K and Part II. Item 1A of this Form 10-Q.
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.
Our core competencies are geared 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 advanced 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 that closed in the second quarter of 2022, 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 reporting and operating segments reflect the way our management makes operating decisions, allocates resources and manages the growth and profitability of the Company. Our segments are as follows:
•Consumer Self-Care Americas ("CSCA") comprises our consumer self-care business
in the U.S. and Canada , including HRA Pharma since it was acquired on April 29,
2022 . CSCA previously included our Latin America businesses until they were
disposed on March 9, 2022 .
•Consumer Self-Care International ("CSCI") comprises our consumer self-care
business in Europe and Australia , including HRA Pharma since it was acquired on
April 29, 2022 , which are primarily branded, and our store brand business in the
United Kingdom and parts of Europe and Asia .
Highlights and Recent Developments
•OnApril 20, 2022 , pursuant to a new credit agreement, we entered into new senior secured credit facilities consisting of (i) a$1.0 billion five-year revolving credit facility (the "2022 Revolver") and (ii) a$500 million five-year Term Loan A facility (the "2022 Term Loan A Facility") and a$1.1 billion seven-year Term Loan B facility (the "2022 Term Loan B Facility" and, together with the 2022 Term Loan A Facility and the 2022 Revolver, the "New Senior Secured Credit Facilities") through our indirect wholly-owned subsidiary,Perrigo Investments, LLC . We used a portion of the proceeds from the New Senior Secured Credit Facilities, together with cash on hand, to finance the acquisition of HRA Pharma and to repay our outstanding term loan facility. We also redeemed our 4.00% Senior Notes due 2023 andPerrigo Holding N.V.'s 5.1045% Guaranteed Senior Notes due 2023 onMay 20, 2022 , using the proceeds from the New Senior Secured Credit Facilities. 48 --------------------------------------------------------------------------------
Perrigo Company plc - Item 2 Executive Overview •OnApril 29, 2022 , we completed the previously announced acquisition of HRA Pharma for €1.8 billion, or approximately$1.9 billion based on exchange rates at the time of closing on an enterprise value basis and using a lockbox mechanism set forth in the Purchase Agreement. 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 completed our transformation to a consumer self-care company. Operating results are reported within both our CSCA and CSCI segments. •As described in more detail in Item 1. Note 9 , in April, 2022, we entered into several financing hedge activities associated with the acquisition of HRA Pharma and New Senior Secured Credit Facilities to economically hedge the purchase price for HRA Pharma, fix the interest rate on a substantial portion of the 2022 Term Loan A Facility and 2022 Term Loan B Facility, and to reduce the Euro exposure of our net investment in European operations. •OnMay 26, 2022 , we received final approval from theU.S. Food and Drug Administration ("FDA") for Omeprazole Magnesium Delayed-Release Mini Capsules, 20 mg over-the-counter ("OTC"). This launch represents a first-to-market mini capsule form of omeprazole, which was developed to treat frequent heartburn. We expect to launch Omeprazole Minis later this year. •OnJuly 11, 2022 , HRA Pharma, aPerrigo company, announced that it submitted its application for an Rx-to-OTC switch for Opill®, a progestin-only daily birth control pill (also referred to as a mini pill or non-estrogen pill). If approved, this would be the first daily birth control pill available OTC without a prescription in theU.S. •Several leadership changes were announced during the three months endedJuly 2, 2022 : •OnJune 1, 2022 ,Alison Ives was promoted to Executive Vice President and Chief Scientific Officer, responsible for global oversight and coordination ofPerrigo 's R&D, Regulatory and Innovation functions. •OnMay 11, 2022 ,Eduardo Bezerra was named Executive Vice President and Chief Financial Officer, effectiveMay 16, 2022 , succeedingRay Silcock , who retired onJuly 15, 2022 . •OnMay 11, 2022 ,Kyle Hanson was named Executive Vice President, General Counsel and Corporate Secretary, effectiveJune 1, 2022 , succeedingTodd Kingma , who announced his intent to retire effectiveAugust 31, 2022 . •As a result of the completed acquisition of HRA Pharma, the Company has updated its global reporting product categories beginning in the second quarter of 2022. These product category updates have been adjusted retrospectively to reflect the changes. The following updates have no impact on the Company's historical consolidated financial position, results of operations, or cash flows: •The creation of a new "Women's Health " reporting category, comprised of the women's health portfolio of HRA Pharma, including ellaOne® and Hana®, in addition to legacyPerrigo women's health products, including feminine hygiene and pregnancy products; •The creation of a new "Skin Care" reporting category, comprised of Compeed®, Mederma®, and all of the products in the legacyPerrigo "Skincare and Personal Hygiene" category except for legacyPerrigo women's health products; and •The "Other" category now includes the HRA Pharma Rare Diseases business. 49 --------------------------------------------------------------------------------
Perrigo Company plc - Item 2 Executive Overview •The Company has initiated restructuring actions within our supply chain and operations to generate and identify possible strategic opportunities that will makePerrigo 's supply chains even more competitive to support our business objectives, as well as our current and future customer and consumer expectations.$7.6 million of expense associated with these actions was recognized in the second quarter of 2022.
War in
The Russian invasion ofUkraine and resulting economic and political sanctions imposed bythe United States ,United Kingdom ,European Union , and other countries onRussia ,Belarus , and occupied regions inUkraine have negatively impacted our results from operations in the region. We currently have 97 employees working out of ourUkraine subsidiary. We do not have a subsidiary or employees inRussia . We have no manufacturing facilities in eitherRussia orUkraine and we sold products intoRussia entirely through distributors. For the year endedDecember 31, 2021 , these countries included approximately$27 million of net sales,$15 million of gross profit, and$8 million of operating income. InMarch 2022 , we halted all sales to distributors inRussia and sales inUkraine were severely depressed. While there is a possibility that sales levels may rebound inUkraine , they are not likely to fully materialize in the short-term. More broadly, there could be additional impacts to our net sales, earnings and cash flows, including, among other potential impacts, lower economic growth or recessions in certain neighboring countries, or globally, due to increases in global commodity costs and inflationary impacts and the limited availability of energy, and other supply chain items we procure. Additionally, our suppliers, distributors and retailers may be impacted by the war and related sanctions, and any such challenges could in turn impact our operations or negatively impact the sales, cost, or availability of our products. We will continue to monitor any impact that the war inUkraine and existing and proposed sanctions may have on our business operations, as well as the impact that such events may have on economic and political conditions in the region and on our industry generally. If the conflict spreads or materially escalates, or economic conditions deteriorate, the impact on our business and results of operations could be material.
Impact of COVID-19 Pandemic and Economic Conditions
As the COVID-19 global pandemic and the emergence of new variants continues to
evolve, the spread of the disease and actions to slow it have impacted, and
continue to impact, our business and the global self-care markets in which we
compete. This evolution may contribute to economic recessions or a slowdown of
economic growth in certain countries or globally, which may result in increased
or reduced demand for our products. COVID-19 has and could lead to future
volatility in consumer preferences and access to our products (due to government
actions or key material, transportation and labor shortages impacting our
ability to produce and ship products), or impact consumers' movements and access
to our products.
Currently, most of the markets in which we operate have relaxed COVID-19 related
restrictions and have returned to in-person activities, leading to higher
incidences of factors that may impact sales of our products, including cough,
cold and flu-like illnesses, sun burn care, and head lice as children return to
school. For instance, we experienced higher demand in the first half of 2022 for
our cough/cold sales relative to the first half of 2021 when there was very low
incidence of cough, cold and flu-like illness, which we attributed to COVID-19
social distancing and mask requirements.
We continue to closely monitor and adjust our COVID-19 safety protocols for
employees in response to the changing incidence rate, rules and guidelines in
each jurisdiction in which we operate. While most of our facilities have
maintained production at high levels despite the challenges posed by the impact
of the COVID-19 pandemic, our global operations have been negatively impacted by
the worldwide supply chain challenges. This has resulted in increased costs of
materials, labor, logistics and distribution networks. We have taken steps to
substantially mitigate these and other inflationary cost pressures, including
pricing actions, productivity improvements and reducing discretionary costs.
While the current trend of increased consumer takeaway and retailer restocking
suggests that the volatility in consumer behavior is stabilizing, the emergence
and spread of new disease variants or additional outbreaks in markets in which
we operate could result in new or reimposed 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 had impacted net sales will
continue to normalize, or change, and how the increase in operating costs and
supply chain disruptions will evolve going forward. 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
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--------------------------------------------------------------------------------Perrigo Company plc - Item 2 Executive Overview harmful, each individual country's evolving response to the pandemic, as well as the availability, acceptance and efficacy of the COVID-19 vaccines and therapeutics. Moreover, disruptions in global supply chains, labor shortages, inflation and rising interest rates may further exacerbate challenging economic conditions as a result of the pandemic or otherwise. The magnitude of any such adverse impact cannot currently be determined due to a number of uncertainties surrounding COVID-19.
Internal Revenue Service Audits of
As described in more detail in Item 1. Note 1 4 ,Perrigo Company , ourU.S. subsidiary ("Perrigo U.S. "), is engaged in a series of tax disputes inthe United States 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 a final Notice 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 certain intercompany debt forU.S. federal tax purposes at 130.0% of the Applicable Federal Rate (a blended rate reduction of approximately 4.0% per annum) on the stated ground that the loans were not negotiated on an arms-length basis. TheIRS followed-up the NOPA with the issuance of a Revenue Agent's Report ("RAR"), together with a 30-day letter onJanuary 13, 2021 , restating its adjustments in the NOPA. OnMay 3, 2021 , theIRS notified us that it would 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 to requestIRS Appeals consideration, 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 proposing 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 NOPA of 2.57%, but lower than the stated blended interest rate of the loans of 6.8%. AnIRS Appeals meeting has not yet been scheduled to discuss this issue. 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 and Revenue Agent's Report for the 2013-2015 tax years expanded on a NOPA issued onDecember 11, 2019 and proposed to disallow reductions 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. The NOPA asserted that the reduction of gross sales income of such chargebacks is an impermissible method of accounting and 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 proposed 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 Appeals consideration. OnJanuary 20, 2022 , theIRS responded to our protest with its rebuttal and reiterated the NOPA's position 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. The first meeting to discuss this issue withIRS Appeals has been scheduled forOctober 12 and 13, 2022. We strongly disagree with theIRS's proposed adjustment and will pursue all available administrative and judicial remedies necessary.
On
Internal Revenue Service Audit of
As described in more detail in Item 1. Note 14 , 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 and reportable by Athena asU.S. royalty income for its contribution of its early-stage intellectual property in several in-process products, including the Multiple Sclerosis drug Tysabri for further development by non-U.S. entities. 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 pursuant to the Mutual Agreement Procedure in theU.S. - 51 --------------------------------------------------------------------------------
Perrigo Company plc - Item 2 Executive Overview Ireland Income Tax Treaty, which were accepted by theIRS andIrish Revenue . Supplemental requests for Competent Authority assistance to resolve a dispute with theIRS over the deductibility forU.S. tax purposes of a litigation settlement payment made in 2011 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 . Athena has subsequently responded to multiple requests for information from both Competent Authorities. The respective Competent Authorities will attempt to reach a resolution that avoids double taxation on both issues. RESULTS OF OPERATIONS Currency Translation Currency translation effects described below represent estimates of the net differences between translation of foreign currency transactions intoU.S. dollars for the three and six months endedJuly 2, 2022 at the average exchange rates for the reporting period and average exchange rates for the three and six months endedJuly 3, 2021 . CONSOLIDATED
Consolidated Financial Results
Three Month Comparison
Three Months Ended
(in millions, except percentages) July 2, 2022 July 3, 2021
Net sales $ 1,121.7 $ 981.1
Gross profit $ 372.1 $ 349.0
Gross profit % 33.2 % 35.6 %
Operating income (loss) $ (6.9) $ (125.9)
Operating income (loss) % (0.6) % (12.8) %
[[Image Removed: prgo-20220702_g1.jpg]]
[[Image Removed: prgo-20220702_g2.jpg]]
* Total net sales by geography is derived from the location of the entity that
sells to a third party.
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--------------------------------------------------------------------------------Perrigo Company plc - Item 2 Consolidated
Three Months Ended
Net sales increased
•$163.5 million increase, or 17.2% due primarily to a$71.5 million increase in cough/cold sales resulting from higher incidences of cough/cold and flu-like illnesses globally, an increase of$29.3 million inU.S. Nutrition business stemming from store brand infant formula share gains due partly to a competitor recall, an increase of$38.0 million from the addition of contract manufacturing sales to the divested RX business, and positive pricing; and
•$57.8 million increase from the addition of HRA Pharma; partially offset by
•$29.6 million decrease from divestitures of
•$51.1 million decrease from unfavorable foreign currency translation.
•$23.1 million increase in gross profit due primarily to the$27.8 million increase from the addition of HRA Pharma and higher gross profit flow-through resulting from higher sales volumes, partially offset by unfavorable foreign currency translation of$25.1 million , cost of goods sold inflation and increased freight expenses (which were largely offset by pricing benefits); and divestitures ofLatin America businesses and ScarAway®. Gross profit as a percentage of net sales decreased 240 basis points compared to the prior year due to the addition of third party sales to the divested RX business, which have a lower margin profile, cost of goods sold inflation and increased freight expenses, and unfavorable foreign currency translation, partially offset by the same factors that drove gross profit.
•$95.9 million decrease in operating expenses favorably impacted operating income due primarily to:
•The absence of
•an increase in consulting and other expenses related to the acquisition of HRA Pharma, a divestiture gain recognized in the prior year, and expenses associated with supply chain restructuring, and •higher employee expenses, higher distribution costs due primarily to increased third party logistics and warehouse costs, the inclusion of HRA Pharma expenses, partially offset by cost savings related to restructuring initiatives and favorable foreign currency translation.
Six Month Comparison
Six Months Ended
(in millions, except percentages) July 2, 2022 July 3, 2021
Net sales $ 2,196.2 $ 1,991.1
Gross profit $ 709.9 $ 717.4
Gross profit % 32.3 % 36.0 %
Operating income (loss) $ 14.8 $ (74.6)
Operating income (loss) % 0.7 % (3.7) %
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Perrigo Company plc - Item 2 Consolidated [[Image Removed: prgo-20220702_g3.jpg]] [[Image Removed: prgo-20220702_g4.jpg]] * Total net sales by geography is derived from the location of the entity that sells to a third party.
Six Months Ended
Net sales increased
•$261.7 million increase, or 13.3% due primarily to a$120.6 million increase in cough/cold sales resulting from higher incidences of cough/cold and flu-like illnesses globally, an increase of$64.3 million inU.S. Nutrition business stemming from store brand infant formula share gains due partly to a competitor recall, an increase of$70.8 million from the addition of contract manufacturing sales to the divested RX business, and positive pricing, partially offset by net sales declines in certain other product categories; and
•$57.8 million increase from the addition of HRA Pharma; partially offset by
•$29.6 million decrease from divestitures of
•$84.8 million decrease from unfavorable foreign currency translation.
Operating income increased
•$7.5 million decrease in gross profit due primarily to$42.3 million of unfavorable foreign currency translation, cost of goods sold inflation and increased freight expenses (which were partially offset by pricing benefits), lower operating efficiencies, an increase in customer service penalties, and divestitures ofLatin America businesses and ScarAway®, partially offset by higher gross profit flow-through resulting from higher sales volumes, and$27.8 million from the addition of HRA Pharma. Gross profit as a percentage of net sales decreased 370 basis points compared to the prior year due to the same factors that drove gross profit, and from the addition of third party sales to the divested RX business.
•$96.9 million decrease in operating expenses due primarily to:
•The absence of
•an increase in consulting and other expenses related to the acquisition of HRA Pharma, a divestiture gain recognized in the prior year, a litigation settlement, and expenses associated with supply chain restructuring, and
•higher employee expenses, higher distribution costs due primarily to increased
third party logistics and warehouse costs, higher planned advertising and
promotion expenses to support brand growth, the inclusion of HRA Pharma
expenses, partially offset by cost savings related to restructuring initiatives,
favorable foreign currency translation and a gain on the sale of ScarAway®.
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--------------------------------------------------------------------------------Perrigo Company plc - Item 2 CSCA CONSUMER SELF-CAREAMERICAS
Recent Trends and Developments
•Currently, most of the markets in which we operate have relaxed COVID-19 related restrictions and have returned to in-person activities, leading to normalizing incidence levels of factors that may impact sales of our products, including cough, cold and flu-like illnesses. For instance, we experienced higher demand in the first half of 2022 for our Upper Respiratory and Pain and Sleep-Aids categories relative to the first half of 2021 when there was very low incidence of cough, cold and flu-like illness, which we attributed to COVID-19 social distancing and mask requirements. We expect consumer purchasing patterns to continue to normalize over the long-term but such patterns may be less predictable and may be impacted by the duration and severity of COVID-19 in the short-term. Refer to " Impact of COVID-19 Pandemic " above. •Gross margin has been negatively impacted by significant inflation and disruption costs in our supply chain, and more recently less availability in our labor markets and wage rate inflation. Starting in the second half of 2021, supply chain disruptions, including a lack 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. 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. Subsequent ongoing supply chain disruption resulting from the COVID-19 pandemic and Russian war inUkraine has driven prices higher for many of the cost of goods sold items and commodities we procure. Additionally, limited labor market availability has become more challenging with higher vacancies and increased attrition, driving the need for higher compensation, such as wage rate increases and other retention benefits. As such, we implemented additional pricing and procurement actions, which offset the negative gross profit dollar impact in the second quarter of 2022. Continued benefits from our actions are anticipated to substantially offset inflationary pressures in the second half of 2022, however the duration and extent of inflation pressure, including impacts from the Russian war inUkraine , labor market availability and wage rates, as well as the acceptance of pricing actions in the markets we operate, is uncertain. Segment Financial Results Three Month Comparison Three Months Ended (in millions, except percentages) July 2, 2022 July 3, 2021 Net sales$ 728.0 $ 622.3 Gross profit$ 192.3 $ 187.3 Gross profit % 26.4 % 30.1 % Operating income (loss)$ 86.3 $ (72.0) Operating income (loss) % 11.9 % (11.6) % 55
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Perrigo Company plc - Item 2 CSCA
Three Months Ended
Net sales increased
•a strong rebound in categories that were negatively impacted by the reduced COVID-19 pandemic-related consumer demand in the prior year (including cough, cold and flu related products), pricing actions, share gains and benefits from a competitor recall in the Nutrition segment, the addition of HRA Pharma, the addition of contract manufacturing sales to the divested RX business, and new products sales, partially offset by divestitures ofLatin America businesses and the ScarAway® brand asset. Sales Three Months Ended
(in millions, except percentages)
$ Change % Change Upper Respiratory$ 145.9 $ 105.3 $ 40.6 38.6 % Nutrition 125.1 95.8 29.3 30.6 % Digestive Health 125.1 115.0 10.1 8.8 % Pain and Sleep-Aids 102.6 89.4 13.2 14.8 % Oral Care 76.6 75.7 0.9 1.2 % Healthy Lifestyle 67.3 64.7 2.6 4.0 % Skin Care 48.6 47.1 1.5 3.2 % Women's Health 12.0 8.1 3.9 48.1 % Vitamins, Minerals, and Supplements ("VMS") 8.2 8.4 (0.2) (2.4) % Other CSCA 16.6 12.8 3.8 29.7 % Total CSCA$ 728.0 $ 622.3 $ 105.7 17.0% Global product category reporting was updated in the second quarter of 2022 and results were adjusted retrospectively to reflect the changes. Refer to Item 1. Note 2 .
Sales drivers in each category are provided below:
•Upper Respiratory: Net sales of$145.9 million increased 38.6% due primarily to higher incidences of cough/cold and flu-like illnesses that led to strong demand, online and in-store, for cough/cold-related products. Sales of allergy products were particularly strong, despite lower levels of incidence compared to the year ago period, due primarily to increased promotions at a particular customer; •Nutrition: Net sales of$125.1 million increased 30.6% due primarily to strong growth inU.S. store brand and contract manufacturing for national brands infant formula stemming from share gains and a competitor recall, new product launches within infant formula and continued growth in the oral electrolytes business; •Digestive Health: Net sales of$125.1 million increased 8.8% due primarily to growth in store brand proton pump inhibitor products, including the store brand versions of Esomeprazole and Omeprazole, driven by share gains, in addition to growth in store brand versions of Famotidine; •Pain and Sleep-aids: Net sales of$102.6 million increased 14.8% due primarily to strong demand, online and in-store, for analgesics products stemming from higher incidences of cough/cold and flu-like illnesses, including COVID-19;
•Oral Care: Net sales of
•Healthy Lifestyle: Net sales of
•Skin Care: Net sales of$48.6 million increased 3.2% due primarily to the addition of HRA Pharma brands, including Mederma® and Compeed®, partially offset by the divested ScarAway® brand asset;
•Women's Health: Net sales of
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--------------------------------------------------------------------------------Perrigo Company plc - Item 2 CSCA
•VMS and Other: Net sales of
Operating income increase of
•$5.0 million increase in gross profit due to gross profit flow-through resulting from higher sales volumes and pricing benefits, plus the addition of HRA Pharma; partially offset by cost of goods sold inflation and increased freight expenses, lower operating efficiencies, and divestitures ofLatin America businesses and ScarAway®. Gross profit as a percentage of net sales decreased 370 basis points compared to the prior year due to the addition of third party sales to the divested RX business, partially offset by the same factors that drove gross profit. Despite continued challenges in our supply chain, gross profit as a percentage of sales improved sequentially by 210 basis points over the first quarter of 2022 from benefits of pricing actions and a decrease in customer service penalties. •$153.3 million decrease in operating expenses due primarily to the absence of$158.6 million of prior year impairment charges on goodwill and assets related to the divestedLatin America businesses, partially offset by higher distribution costs due primarily to increased third party logistics and warehouse costs and a litigation settlement.
Six Month Comparison
Six Months Ended
(in millions, except percentages) July 2, 2022 July 3, 2021
Net sales $ 1,438.0 $ 1,262.8
Gross profit $ 364.8 $ 381.8
Gross profit % 25.4 % 30.2 %
Operating income $ 164.8 $ 23.6
Operating income % 11.5 % 1.9 %
Six Months Ended
Net sales increased
•a strong rebound in categories that were negatively impacted by the reduced
COVID-19 pandemic-related consumer demand in the prior year (including cough,
cold and flu related products), pricing actions, share gains and a competitor
recall in the Nutrition segment, the recognition of contract manufacturing sales
to the now-divested RX business, the addition of HRA Pharma, and new products
sales.
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--------------------------------------------------------------------------------Perrigo Company plc - Item 2 CSCA Sales Six Months Ended
(in millions, except percentages)
$ Change % Change Upper Respiratory$ 298.7 $ 223.9 $ 74.8 33.4 % Nutrition 252.3 188.0 64.3 34.2 % Digestive Health 243.7 233.4 10.3 4.4 % Pain and Sleep-Aids 205.5 184.5 21.0 11.4 % Oral Care 147.0 150.7 (3.7) (2.5) % Healthy Lifestyle 134.9 140.9 (6.0) (4.3) % Skin Care 89.5 92.7 (3.2) (3.5) % Women's Health 20.2 18.3 1.9 10.4 % VMS 15.9 16.2 (0.3) (1.9) % Other CSCA 30.3 14.2 16.1 113.4 % Total CSCA$ 1,438.0 $ 1,262.8 $ 175.2 13.9% Global product category reporting was updated in the second quarter of 2022 and results were adjusted retrospectively to reflect the changes. Refer to Item 1. Note 2 .
Sales in each category were driven primarily by:
•Upper Respiratory: Net sales of$298.7 million increased 33.4% due primarily to higher incidences of cough/cold and flu-like illnesses that led to strong demand, online and in-store, for cough/cold products, and demand for allergy products;
•Nutrition: Net sales of
•Digestive Health: Net sales of
•Pain and Sleep-Aids: Net sales of
•Oral Care: Net sales of
•Healthy Lifestyle: Net sales of
•Skin Care: Net sales of$89.5 million decreased 3.5% due primarily to the divested ScarAway® brand asset, partially offset by the addition of HRA Pharma, including Mederma® and Compeed®;
•Women's Health: Net sales of
•VMS and Other: Net sales of
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--------------------------------------------------------------------------------Perrigo Company plc - Item 2 CSCA
Operating income increased
•$17.0 million decrease in gross profit due primarily to cost of goods sold inflation and increased freight expenses, lower operating efficiencies, an increase in customer service penalties, and divestitures ofLatin America businesses and ScarAway®, which were partially offset by higher gross profit flow-through resulting from higher sales volumes, pricing benefits, and the addition of HRA Pharma. Gross profit as a percentage of net sales decreased 480 basis points compared to the prior year due to the addition of third party sales to the divested RX business and the same factors that drove gross profit. •$158.2 million decrease in operating expenses due primarily to the absence of$158.6 million of prior year impairment charges on goodwill and assets related to the divestedLatin America businesses. Additionally, higher distribution costs due primarily to increased third party logistics and warehouse costs and costs from a litigation settlement were largely offset by a gain on the sale of ScarAway®, and lower R&D expenses.
CONSUMER SELF-CARE INTERNATIONAL
Recent Trends and Developments
•Currently, most of the markets in which we operate have relaxed COVID-19 related restrictions and have returned to in-person activities, leading to higher incidences of factors that may impact sales of our products, including cough, cold and flu-like illnesses. For instance, we experienced higher demand in the first half of 2022 for our Upper Respiratory and Pain and Sleep-Aids categories relative to the first half of 2021 when there was very low incidence of cough, cold and flu-like illness, which we attributed to COVID-19 social distancing and mask requirements. We expect consumer purchasing patterns to continue to normalize over the long-term but such patterns may be less predictable and may be impacted by the duration and severity of COVID-19 in the short-term. Refer to " Impact of COVID-19 Pandemic " above. •The Russia invasion ofUkraine and resulting economic and political sanctions imposed bythe United States ,United Kingdom ,European Union , and other countries onRussia ,Belarus , and occupied regions inUkraine has negatively impacted our results of operations in the region. For the year endedDecember 31, 2021 , these countries included approximately$27 million of net sales,$15 million of gross profit, and$8 million of operating income. InMarch 2022 , we halted all sales to distributors inRussia and sales inUkraine have been severely depressed. While there is a possibility that sales levels may rebound inUkraine , they are not likely to fully materialize in the short-term. Refer to " War inUkraine " above. •Supply chain inflation and labor market availability and wage rates are driving higher input costs compared to the prior year. As such, we implemented a series of actions to improve the situation, including pricing and procurement actions, which offset the negative gross profit dollar impact in the second quarter of 2022; however, the duration and extent of inflation pressure, including impacts from the Russian war inUkraine , labor market availability and wage rates, as well as the acceptance of pricing actions in the markets we operate, is uncertain. Segment Financial Results Three Month Comparison Three Months Ended (in millions, except percentages) July 2, 2022 July 3, 2021 Net sales$ 393.7 $ 358.8 Gross profit$ 179.8 $ 161.7 Gross profit % 45.7 % 45.1 % Operating income$ 1.5 $ 1.3 Operating income % 0.4 % 0.4 % 59
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Perrigo Company plc - Item 2 CSCI
Three Months Ended
Net sales increased
•$86.0 million, or 24.0%, increase driven primarily by the addition of
•$51.1 million decrease from unfavorable foreign currency translation.
Sales Three Months Ended
(in millions, except percentages)
$ Change % Change Skin Care$ 120.3 $ 98.7 $ 21.6 21.9 % Upper Respiratory 59.8 42.4 17.4 41.0 % Pain and Sleep-Aids 48.8 48.6 0.2 0.4 % VMS 47.5 53.9 (6.4) (11.9) % Healthy Lifestyle 38.5 46.7 (8.2) (17.6) % Oral Care 20.6 22.5 (1.9) (8.4) % Women's Health 24.4 14.4 10.0 69.4 % Digestive Health 4.8 4.9 (0.1) (2.0) % Other CSCI 29.0 26.7 2.3 8.6 % Total CSCI$ 393.7 $ 358.8 $ 34.9 9.7 % Global product category reporting was updated in the second quarter of 2022 and results were adjusted retrospectively to reflect the changes. Refer to Item 1. Note 2 .
Sales in each category were driven primarily by:
•Skin Care: Net sales of$120.3 million increased 21.9%, inclusive of a 17.3% negative effect of currency translation, driven primarily by the addition of HRA Pharma brands, including Compeed®, strong performance in the Sebamed and ACO skincare lines, and increased net sales of anti-parasite offerings, due to the easing of COVID-19-related restrictions. These benefits were partially offset by lower sales inUkraine andRussia ; •Upper Respiratory: Net sales of$59.8 million increased 41.0%, inclusive of a 18.0% negative effect of currency translation, as the higher incidences of cough/cold and flu-like illnesses led to strong demand for cough/cold products, including the Bronchonolo, Bronchostop and Coldrex brands andU.K. store brands. In addition, a relatively stronger hayfever season drove strong performance in allergy related products, particularly the Beconase brand in theU.K ; •Pain & Sleep-Aids: Net sales of$48.8 million increased 0.4%, inclusive of a 12.4% negative effect of currency translation, due primarily to higher demand for Solpadeine, a paracetamol-based analgesics product, as well as an increase inU.K. store brand consumption within the category. These increases were driven primarily by strong demand for analgesics products stemming from higher incidences of cough/cold and flu-like illnesses, including COVID-19; •VMS: Net sales of$47.5 million decreased 11.9%, inclusive of a 11.5% negative effect of currency translation, due primarily to lower overall category consumption and lower sales of Probify in certain geographies, partially offset by the restocking of the Abtei brand inGermany following the third quarter 2021 recall of certain batches; •Healthy Lifestyle: Net sales of$38.5 million decreased 17.6%, inclusive of a 9.9% negative effect of currency translation, due primarily to lower net sales in the XLS Medical weight management franchise stemming from lower category consumption, partially offset by strong performance of NiQuitin smoking cessation product sales due to customer restocking following supply constraints earlier in the year; •Women's Health: Net sales of$24.4 million increased 69.4%, inclusive of a 11.9% negative effect of currency translation, due primarily to the addition of HRA Pharma brands, including ellaOne® and NorLevo®; and 60 --------------------------------------------------------------------------------
Perrigo Company plc - Item 2 CSCI •Digestive Health,Oral Care and Other: Net sales of$54.4 million increased 0.6%, inclusive of a 14.4% negative effect of currency translation, due primarily to the addition of the HRA Pharma's Rare Diseases portfolio in the Other category.
Operating income increased
•$18.1 million increase in gross profit due primarily to higher gross profit flow-through resulting from higher sales volumes, pricing actions, and the addition of HRA Pharma, partially offset by unfavorable foreign currency translation, higher freight and input costs, and negative impact from the Russian war inUkraine . Gross profit as a percentage of net sales increased 60 basis points due primarily to the same factors that drove gross profit. •$17.9 million increase in operating expenses due primarily to higher employee expenses and the addition of HRA Pharma, partially offset by favorable foreign currency translation. Six Month Comparison Six Months Ended (in millions, except percentages) July 2, 2022 July 3, 2021 Net sales$ 758.2 $ 728.3 Gross profit$ 345.1 $ 335.6 Gross profit % 45.5 % 45.9 % Operating income$ 17.7 $ 18.8 Operating income % 2.3 % 2.6 %
Six Months Ended
Net sales increased
•$114.7 million, or 15.7%, net increase driven primarily by the addition of$48.1 million from HRA Pharma, a strong rebound in categories that were negatively impacted by the reduced COVID-19 pandemic-related consumer demand in the prior year, pricing actions and new products sales; partially offset by
•$84.8 million decrease from unfavorable foreign currency translation.
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--------------------------------------------------------------------------------Perrigo Company plc - Item 2 CSCI Sales Six Months Ended
(in millions, except percentages)
$ Change % Change Skin Care$ 209.7 $ 190.1 $ 19.6 10.3 % Upper Respiratory 121.4 85.1 36.3 42.7 % VMS 100.2 116.6 (16.4) (14.1) % Pain and Sleep-Aids 101.8 97.7 4.1 4.2 % Healthy Lifestyle 80.4 97.4 (17.0) (17.5) % Oral Care 44.9 47.5 (2.6) (5.5) % Digestive Health 9.2 9.8 (0.6) (6.1) % Women's Health 37.4 28.7 8.7 30.3 % Other CSCI 53.2 55.4 (2.2) (4.0) % Total CSCI$ 758.2 $ 728.3 $ 29.9 4.1 % Global product category reporting was updated in the second quarter of 2022 and results were adjusted retrospectively to reflect the changes. Refer to Item 1. Note 2 .
Sales in each category were driven primarily by:
•Skin Care: Net sales of$209.7 million increased 10.3%, inclusive of a 15.6% negative effect of currency translation, driven primarily by the addition of HRA Pharma sales, strong performance in the Sebamed and ACO skincare lines, and increased net sales of anti-parasite products; •Upper Respiratory: Net sales of$121.4 million increased 42.7%, inclusive of a 13.7% negative effect of currency translation, as the higher incidences of cough/cold and flu-like illnesses led to strong demand for cough/cold products in addition to strong performance in allergy related products; •VMS: Net sales of$100.2 million decreased 14.1%, inclusive of a 8.4% negative effect of currency translation, due primarily to lower category consumption and lower sales of Probify in certain markets; •Pain & Sleep-Aids: Net sales of$101.8 million increased 4.2%, inclusive of a 8.7% negative effect of currency translation, due primarily to higher demand for Solpadeine and an increase inU.K. store brand sales within the category; •Healthy Lifestyle: Net sales of$80.4 million decreased 17.5%, inclusive of a 7.4% negative effect of currency translation, due primarily to lower net sales in the XLS Medical weight management franchise stemming from lower category consumption; •Women's Health: Net sales of$37.4 million increased 30.3%, inclusive of a 10.5% negative effect of currency translation, due primarily to the addition of HRA Pharma sales; and •Digestive Health,Oral Care and Other: Net sales of$107.3 million decreased 4.8%, inclusive of a 13.1% negative effect of currency translation, due primarily to the addition of HRA Pharma's Rare Diseases portfolio in the Other category, partially offset by lower sales of distribution brands.
Operating income decreased
•$9.5 million increase in gross profit due primarily to higher gross profit flow-through resulting from higher sales volumes, pricing actions, and the addition of HRA Pharma, partially offset by unfavorable foreign currency translation, higher freight and input costs, and negative impact from the Russian war inUkraine . Gross profit as a percentage of net sales decreased 40 basis points due primarily to less favorable product mix and lower operational productivity due to inflationary pressures; and •$10.6 million increase in operating expenses due primarily to the addition of HRA Pharma, higher employee expenses, higher advertising and promotion investments to support brand growth, and a divestiture gain recognized in the prior year, partially offset by favorable foreign currency translation. 62 --------------------------------------------------------------------------------
Perrigo Company plc - Item 2 Unallocated, Interest, Other, and Taxes Unallocated Expenses Unallocated expenses are comprised of certain corporate services not allocated to our reporting segments and are recorded in Operating income on the Condensed Consolidated Statements of Operations. Unallocated expenses were as follows (in millions): Three Months Ended Six Months Ended July 2, 2022 July 3, 2021 July 2, 2022
July 3, 2021 $ 94.7 $ 55.2 $ 167.7 $ 117.0 The increase of$39.5 million in unallocated expenses during the three months endedJuly 2, 2022 compared to the prior year period was due primarily to an increase in consulting and other fees related to the acquisition of HRA Pharma, higher employee expenses, and expenses associated with supply chain restructuring. This was partially offset by cost savings related to restructuring initiatives. The increase of$50.7 million in unallocated expenses during the six months endedJuly 2, 2022 compared to the prior year period was due primarily to an increase in consulting and related acquisition fees, share-based compensation, a loss on disposal of a fixed asset, and expenses associated with supply chain restructuring. This was partially offset by lower legal expenses and cost savings related to restructuring initiatives.
Interest expense, net, and Other (income) expense, net
Three Months Ended Six Months Ended
(in millions) July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021
Interest expense, net $ 38.3 $ 31.6 $ 74.1 $ 63.6
Other (income) expense, net $ 53.8 $ (0.4) $ 52.7 $ 1.9
Loss on extinguishment of debt
Interest Expense, Net The$6.7 million increase during the three months endedJuly 2, 2022 , compared to the prior year period was due primarily to an increase in interest expense associated with the interest rates on our New Senior Secured Credit Facilities and associated interest rate swaps. The$10.5 million increase for the six months endedJuly 2, 2022 , compared to the prior year period was due primarily to an increase in interest expense associated with our New Senior Secured Credit Facilities and associated interest rate swaps, an increase in interest expense from a step up in interest rate on our 3.150% Senior Notes due 2030 from 3.150% to 3.900% during the fourth quarter of 2021, as well as our cross currency swaps and interest rate swap termination expenses. Other (Income) Expense, Net The$54.2 million increase in expense during the three months endedJuly 2, 2022 compared to the prior year period and the$50.8 million increase in expense during the six months endedJuly 2, 2022 compared to the prior year period was due primarily to unfavorable changes in revaluation of foreign currency expense associated with the acquisition of HRA Pharma and termination expense of the forward currency options related to the acquisition of HRA Pharma.
Loss on extinguishment of debt
The$9.3 million loss on extinguishment of debt expense during the three months endedJuly 2, 2022 consisted of the write-off of certain new and previously deferred financing fees and make whole payments on the redeemed 4.00% Senior Notes due 2023 (refer to Item 1. N ote 11 ). 63 --------------------------------------------------------------------------------
Perrigo Company plc - Item 2 Unallocated, Interest, Other, and Taxes Income Taxes (Consolidated)
The effective tax rates were as follows:
Three Months Ended Six Months Ended
July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021
40.1 % 28.8 % 45.4 % 22.1 %
The effective tax rate on the pre-tax loss for the three and six months ended
July 2, 2022 , increased compared to the effective tax rate on the pre-tax loss
for the three and six months ended July 3, 2021 , primarily due to the tax
benefit of the loss on sale of our Latin America businesses and the
non-deductibility of certain costs related to the acquisition of HRA Pharma for
tax purposes. The increase in the effective tax rate was offset, in part, by
income tax expense associated with internal legal entity restructuring
recognized for the six months ended July 2, 2022 , and the net income tax expense
on intra-entity transfers of intellectual property recognized for the three and
six months ended July 3, 2021 .
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 rising inflation rates, as well as the NOPAs from theIRS , the current COVID-19 pandemic, and other contingencies. We note that no payment of the additional amounts proposed by theIRS 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 1. Note 14 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 or other contingencies have a material impact on our capital requirements. Cash and Cash Equivalents
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* Working capital represents current assets less current liabilities, excluding
cash and cash equivalents, assets and liabilities held for sale, and excluding
current indebtedness.
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--------------------------------------------------------------------------------Perrigo Company plc - Item 2 Financial Condition, Liquidity and Capital Resources 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
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The
•$86.7 million increase in cash flow from the change in accounts payable, due primarily to the timing of payments and mix of payment terms for the current year and in our discontinued operations in the prior year period; •$55.5 million increase in cash flow from the change in inventory, due primarily to a higher build-up of inventory levels to support customer demand in the prior year period; •$51.8 million increase in cash flow from the change in accounts receivable, due primarily to the timing of sales and receipt of payments for the current year and in our discontinued operations business in the prior year period; •$46.3 million increase in cash flow from the change in accrued liabilities, due primarily to the change in accrued royalties and profit sharing, litigation and our discontinued operations; •$35.7 million increase in cash flow from the change in accrued income taxes, due primarily to intra-entity IP transfers and settlement of Israeli tax audit in the prior year, partially offset by a reduction in the amount of interest and research and development costs deductible in theU.S. in 2022; and •$22.3 million increase in cash flow from the change in accrued payroll and related taxes, due primarily to the decrease in annual management and employee bonus payments compared to the prior year period and the timing of payroll; partially offset by •$171.8 million decrease in cash flow from the change in net earnings after adjustments for items including deferred income taxes, restructuring charges, share-based compensation, amortization of debt premium, loss on sale of businesses, gain on sale of brands, foreign currency remeasurement losses and depreciation and amortization. 65 --------------------------------------------------------------------------------
Perrigo Company plc - Item 2 Financial Condition, Liquidity and Capital Resources
Cash Generated by (Used in) Investing Activities
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The
•$1.9 billion decrease in cash due to the acquisition of HRA Pharma;
•$37.1 million decrease in cash due to the cash settlement of non-designated foreign currency derivatives we used to hedge the euro-denominated HRA Pharma purchase price; partially offset by •$60.6 million increase in cash due primarily to the absence of cash paid in prior year for an ANDA for a generic topical gel and an ANDA for a generic topical lotion for$16.4 million and$53.3 million , respectively; partially offset by a$10.0 million milestone payment to the licensor for Nasonex® 24HR Allergy (refer to Item 1. Note 3 );
•$58.7 million increase in cash due to the proceeds from the sale of our
•$24.8 million increase in cash due primarily to the proceeds from the sale of ScarAway® (refer to Item 1. Note 3 ).
•$19.7 million increase in cash due to the change in capital spending, due primarily to reduced spending as a result of divestitures, and decreased spend related to our Nutrition plant expansion.
Cash Generated by (Used in) Financing Activities
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The
•$1.6 billion increase in cash due to the issuance of our New Senior Secured Credit Facilities; partially offset by
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--------------------------------------------------------------------------------Perrigo Company plc - Item 2 Financial Condition, Liquidity and Capital Resources
•$958.9 million decrease in cash due to the payment of our 2019 Term Loan, 4.00% Senior Notes due 2023, and 5.1045% Guaranteed Senior Notes due 2023;
•$19.5 million decrease in cash due to payments for debt issuance costs;
•$12.2 million decrease in cash due to a make-whole premium paid in connection with the redemption of our 4.00% Senior Notes due 2023;
•$6.9 million decrease in cash due to the amount of cash used to settle taxes on behalf of employees; and
•$4.5 million decrease in cash due to an increase in dividend payments.
Dividends
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.
Share Repurchases
InOctober 2018 , our Board of Directors authorized up to$1.0 billion of share repurchases with no expiration date, subject to the Board of Directors' approval of the pricing parameters and amount that may be repurchased under each specific share repurchase program. We did not repurchase any shares during the three and six months endedJuly 2, 2022 orJuly 3, 2021 .
Borrowings and Capital Resources
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OnApril 20, 2022 , we and our indirect wholly-owned subsidiary,Perrigo Investments, LLC (the "Borrower"), entered into new senior secured credit facilities that consist of (i) a$1.0 billion 2022 Revolver, (ii) a$500 million 2022 Term Loan A Facility, and (iii) a$1.1 billion 2022 Term Loan B Facility, pursuant to a new Term Loan and Revolving Credit Agreement (the "Credit Agreement"). The New Senior Secured Credit Facilities are guaranteed, along with any hedging or cash management obligations entered into with a lender, by us and certain of our wholly-owned subsidiaries organized in theU.S. ,Ireland ,Belgium and theEngland andWales (subject to certain exceptions) (the "Guarantor Subsidiaries" and together with the Company, the "Guarantors"). We refer to the Borrower and the Guarantors collectively as the "Loan Parties".
Revolving Credit Agreements
On
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--------------------------------------------------------------------------------Perrigo Company plc - Item 2 Financial Condition, Liquidity and Capital Resources Term Loans and Notes As ofJuly 2, 2022 , we had$1.1 billion and$500.0 million outstanding under our 2022 Term Loan B Facility and 2022 Term Loan A Facility, respectively. There were no borrowings outstanding under our 2019 Term Loan as ofJuly 2, 2022 . We had$600.0 million outstanding under our 2019 Term Loan as ofDecember 31, 2021 . OnApril 20, 2022 , we repaid the prior$600.0 million 2019 Term Loan with the proceeds of the New Senior Secured Credit Facilities. The remaining$500.0 million of proceeds were used to (i) redeem the 4.00% Senior Notes due 2023 onMay 19, 2022 and the 5.1045% Guaranteed Senior Notes due 2023, onMay 19, 2022 (collectively, the "Redeemed Notes"), (ii) to fund a portion of the cash consideration payable in connection with the acquisition of HRA Pharma (Refer to Item 1. Note 3 ), and (iii) to pay related fees and expenses. Upon the repayment in full of loans under the 2019 Term Loan and termination of the 2018 Revolver, such facilities were terminated and all guarantees thereunder were released. Upon the redemption of the Redeemed Notes, the guarantees related thereto were released. The Loan Parties' obligations under the Credit Agreement are secured, subject to customary permitted liens and other exceptions, by a security interest in all tangible and intangible assets of the Loan Parties, except for certain excluded assets. We may make voluntary prepayments at any time without payment of a premium or penalty, subject to certain exceptions, and are required to make certain mandatory prepayments of outstanding indebtedness under the Credit Agreement in certain circumstances. Principal repayments of the 2022 Term Loan B Facility, which are due quarterly, begin inSeptember 2022 and are equal to 1.0% per annum of the original principal amount of the 2022 Term Loan B Facility incurred with any remaining balance payable on the maturity date. Principal repayments of the 2022 Term Loan A Facility, which are due quarterly, begin inSeptember 2022 and are equal to (i) for the first year anniversary of the Closing Date (as such term is defined in such Credit Agreement), 2.5% per annum of the original principal amount of the 2022 Term Loan A Facility incurred and (ii) after the first year anniversary of the Closing Date (as such term is defined in such Credit Agreement), 5.0% per annum of the original principal amount of the 2022 Term Loan A Facility incurred, with any remaining balance payable on the maturity date. The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Borrower and its restricted subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of junior indebtedness and dividends and other distributions. The Credit Agreement contains financial covenants that require the Borrower and its restricted subsidiaries to (a) not exceed a maximum first lien secured net leverage ratio of 3.00 to 1.00 at the end of each fiscal quarter and (b) not fall below a minimum interest coverage ratio of 3.00 to 1.00 at the end of each fiscal quarter, provided that such covenants apply only to the 2022 Revolver. The Credit Agreement also contains customary events of default relating to, among other things, failure to make payments, breach of covenants and breach of representations. If we consummate certain qualifying acquisitions during the term of the loan, the maximum first lien secured net leverage ratio covenant would increase to 3.25 to 1.00 for such quarter and the three following fiscal quarters thereafter.
We are in compliance with all the covenants under our debt agreements.
Overdraft Facilities
We have overdraft facilities available that we use to support our cash
management operations. There were no borrowings outstanding under the facilities
as of
Leases
We had$228.6 million and$199.1 million of lease liabilities and$231.5 million and$194.8 million of lease assets as ofJuly 2, 2022 andDecember 31, 2021 , respectively. 68 --------------------------------------------------------------------------------
Perrigo Company plc - Item 2 Financial Condition, Liquidity and Capital Resources Credit Ratings Due to a credit ratings downgrade byS&P Global Ratings and Moody's Investor Services in the first quarter of 2022, the interest of the 3.150% Senior Notes due 2030 stepped up from 3.900% to 4.400% on payments made afterJune 15, 2022 . 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 credit rating is not a recommendation to buy, sell or hold securities.
Guarantor Financial Information
The Guarantor Subsidiaries and the Borrower provide full and unconditional guarantees, jointly and severally, on a senior unsecured basis, of the 5.300% Notes due 2043 issued by the Company, and the Loan Parties provide full and unconditional guarantees, jointly and severally, on a senior unsecured basis, of the 3.900% Notes due 2024, the 4.375% Notes due 2026, the 4.400% Notes due 2030 and the 4.900% Notes due 2044 issued byPerrigo Finance Unlimited Company . The guarantees of the Guarantor Subsidiaries, the Company and the Borrower are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The guarantees of the Guarantor Subsidiaries, the Company and the Borrower rank senior in right of payment to any future subordinated indebtedness of the Company, equal in right of payment with all of the Company's existing and future senior indebtedness and effectively subordinated to any of the Company's existing and future secured indebtedness, to the extent of the value of the collateral securing such indebtedness.
Basis of Presentation
The following tables include summarized financial information of the obligor groups of debt issued byPerrigo Finance Unlimited Company andPerrigo Company plc . The summarized financial information of each obligor group is presented on a combined basis with balances and transactions within the obligor group eliminated. Investments in and the equity in earnings of non-guarantor subsidiaries, which would otherwise be consolidated in accordance withU.S. GAAP, are excluded from the below summarized financial information pursuant to SEC Regulation S-X Rule 13-01.
The summarized balance sheet information for the consolidated obligor group of
debt issued by
July 2, 2022 December 31, 2021
Current Assets $ 2,033.7 $ 3,921.7
Non-current Assets $ 4,884.8 $ 5,016.5
Current liabilities $ 695.8 $ 1,307.4
Non-current liabilities $ 11,018.9 $ 9,672.1
Due to non-guarantors $ 6,330.2 $ 6,195.5
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Perrigo Company plc - Item 2 Financial Condition, Liquidity and Capital Resources The summarized results of operations information for the consolidated obligor group of debt issued byPerrigo Finance Unlimited Company andPerrigo Company plc is presented in the table below: Six Months Ended Year Ended July 2, 2022 December 31, 2021 Total Revenues $ 1,631.4 $ 3,046.2 Gross Profit $ 731.9 $ 1,435.9 Operating Income (loss) $ (60.1) $ 342.2 Net Income (loss) $ (153.1) $ 985.1 Revenue from non-guarantors $ 141.4 $ 241.7 Operating Expenses to non-guarantors $ 0.6 $
2.2
Other (income) expense to non-guarantors $ 53.7 $
(19.2)
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, net sales or expenses, results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on potential products still in development and enter into R&D arrangements with third parties that often require milestone payments to the third-party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of the product. Because of the contingent nature of these payments, they are not included in our table of contractual obligations.
Contractual Obligations and Commitments
There were no material changes in contractual obligations as of
As a result of changes in our debt structure from the New Senior Secured Credit Facilities, below is a revised schedule of our enforceable and legally binding obligations as ofJuly 2, 2022 related to our short and long-term debt arrangements. Payment Due 2022 (2) 2023-2024 2025-2026
After 2026 Total
Short and long-term debt (1)
(1) Short-term and long-term debt includes interest payments, which were
calculated using the effective interest rate at
Significant Accounting Policies
There have been no other material changes to the significant accounting policies as disclosed in our 2021 Form 10-K, other than as described below.
OnMarch 21, 2022 , theSEC issued a proposed rule that would enhance and standardize the climate-related disclosures provided by public companies. Under the proposed rule, we would be required to provide quantitative and qualitative disclosures in registration statements and annual reports that include climate-related financial impact and expenditure metrics as well as a discussion of climate-related impacts on financial estimates and assumptions, all of which would be presented in a footnote to the financial statements. Such disclosures would also be subject to management's internal control over financial reporting and external audit. We will continue to monitor developments around this proposed rule, which once finalized, is expected to allow for a multi-year phased transition to achieve compliance. 70 --------------------------------------------------------------------------------
Perrigo Company plc - Item 2 Unallocated, Interest, Other, and Taxes 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. There have been no material changes to the critical accounting estimates as disclosed in our 2021 Form 10-K.
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