Securities registered pursuant to Section 12(g) of the Act:
None
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| Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | | Yes | YES☒ | [ ]No | NO | [X]☐ |
| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. | | Yes | YES☐ | [ ]No | NO | [X]☒ |
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | | Yes | YES☒ | [X]No | NO | [ ]☐ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). | | Yes | YES☒ | [X]No | NO | [ ]☐ |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | | | | | [ ] |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. .
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| Large accelerated filer | [X]☒ | | Accelerated filer | [ ]☐ | | Non-accelerated filer | [ ]☐ | | Smaller reporting company | [ ]☐ |
| | | | | | | | | Emerging growth company | [ ] | | | | | | | | | ☐ |
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| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | [ ]☐ |
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| Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. | ☒ |
| If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. | | | | | ☐ |
| Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). | ☐ |
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). | | Yes | YES☐ | [ ]No | NO | [X]☒ |
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of our ordinary shares on June 30, 2017July 1, 2023 as reported on the New York Stock Exchange, was $10,768,787,616.$4,596,310,972. Ordinary shares held by each director or executive officer have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 23, 2018,2024, the registrant had 140,833,598135,515,939 outstanding ordinary shares.
Documents incorporated by reference:
The information called for by Part III will be incorporated by reference from the Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be filed pursuant to Regulation 14A or will be included in an amendment to this Form 10-K.
PERRIGO COMPANY PLC
FORM 10-K
YEAR ENDED DECEMBER 31, 20172023
TABLE OF CONTENTS
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| Part I. | | |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
Item 2.1C. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| Additional Item. | | |
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| Part II. | | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| Item 9C. | | |
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| Part III. | | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| Part IV. | | |
| Item 15. | | |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our, or our industry’s actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. In particular, statements about our expectations, beliefs, plans, objectives, assumptions, future events or future performance contained in this report, including certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” "forecast," “predict,” “potential” or the negative of those terms or other comparable terminology.
We haveThe Company has based these forward-looking statements on ourits current expectations, assumptions, estimates and projections. While we believethe Company believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond ourthe Company’s control, including: supply chain impacts on the timing, amountCompany’s business, including those caused or exacerbated by armed conflict, trade and costother economic sanctions and/or disease; general economic, credit, and market conditions; the impact of the war in Ukraine and any share repurchases;escalation thereof, including the effects of economic and political sanctions imposed by the United States, United Kingdom, European Union, and other countries related thereto; the outbreak or escalation of conflict in other regions where we do business; future impairment charges;charges, if we determine that the successcarrying amount of management transition;specific assets may not be recoverable from the expected future cash flows of such assets; customer acceptance of new products; competition from other industry participants, some of whom have greater marketing resources or larger market shares in certain product categories than we do;the Company does; pricing pressures from customers and consumers; potential third-party claimsresolution of uncertain tax positions and litigation, includingany litigation relating to our restatement of previously-filed financial information; potential impacts ofthereto, ongoing or future government investigations and regulatory initiatives; resolution of uncertain tax positions;uncertainty regarding the Company's ability to obtain and maintain its regulatory approvals; potential costs and reputational impact of product recalls or sales halts; potential adverse changes to U.S. and foreign tax, reform legislationhealthcare and healthcareother government policy; general economic conditions;the effect of the coronavirus (COVID-19) pandemic and its variants, or other epidemic or pandemic disease; the timing, amount and cost of any share repurchases (or the absence thereof) and/or any refinancing of outstanding debt at or prior to maturity; fluctuations in currency exchange rates and interest rates; the Company’s ability to achieve the benefits expected from the sale of its Rx business and the risk that potential costs or liabilities incurred or retained in connection with that transaction may exceed the Company’s estimates or adversely affect the Company’s business or operations; the Company's ability to achieve the benefits expected from the acquisitions of Héra SAS ("HRA Pharma") and Nestlé’s Gateway infant formula plant along with the U.S. and Canadian rights to the GoodStart® infant formula brand and other related formula brands ("Gateway") and/or the risks that the Company’s synergy estimates are inaccurate or that the Company faces higher than anticipated integration or other costs in connection with the acquisitions; risks associated with the integration of HRA Pharma and Gateway, including the risk that growth rates are adversely affected by any delay in the integration of sales and distribution networks; the consummation and success of other announced and unannounced acquisitions or dispositions, and the success of such transactions, and ourCompany’s ability to realize the desired benefits thereof; and ourthe Company’s ability to execute and achieve the desired benefits of announced cost-reduction efforts and other initiatives. In addition, we maystrategic initiatives and investments, including the Company's ability to achieve the expected benefits from its ongoing restructuring programs described herein. Adverse results with respect to the Company’s appeal of any material outstanding tax assessments or pending litigation could have a material adverse impact on the Company's operating results, cash flows and liquidity, and could ultimately require the use of corporate assets to pay damages, reducing assets that would otherwise be unable to remediate one or more previously identified material weaknesses in our internal control over financial reporting. Furthermore, we may incur additional tax liabilities in respect of 2016 and prior years or be found to have breached certain provisions of Irish company law in connection with our restatement of our previously filed financial statements, which may result in additional expenses and penalties.available for other corporate purposes. These and other important factors, including those discussed in this report under “Risk Factors” and in any subsequent filings with the United States Securities and Exchange Commission, may cause actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. The forward-looking statements in this report are made only as of the date hereof, and unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
This report contains trademarks, trade names and service marks that are the property of Perrigo Company plc, as well as, for informational purposes, trademarks, trade names, and service marks that are the property of other organizations. Solely for convenience, certain trademarks, trade names, and service marks referred to in this report appear without the ®,™ and SM symbols, but those references are not intended to indicate that we or the applicable owner, as the case may be, will not assert, to the fullest extent under applicable law, our or their rights to such trademarks, trade names, and service marks.
NOTE REGARDING FISCAL YEAR
Our fiscal year previously consisted of a 52- or 53-week year ending on or around June 30 of each year with each quarter ending on the Saturday closest to each calendar quarter end. Beginning on January 1, 2016, we changed our fiscal year to begin on January 1 and end on December 31 of each year. As a result of our change in year end, this report on Form 10-K discloses the results of our operations for the twelve-month periods from January 1, 2017 through December 31, 2017 and January 1, 2016 through December 31, 2016. The six months ended December 31, 2015 reflects our financial results from June 28, 2015 through December 31, 2015. The year ended June 27, 2015 reflects our financial results for the twelve-month period from June 29, 2014 to June 27, 2015.
We cut off our quarterly accounting periods on the Saturday closest to the end of the calendar quarter, with the fourth quarter ending on December 31 of each year.
Perrigo Company plc - Item 1
Business Overview
PART I.
ITEM 1. BUSINESS
Perrigo Company plc was incorporated under the laws of Ireland on June 28, 2013. We2013 and became the successor registrant toof Perrigo Company, a Michigan corporation, on December 18, 2013 in connection with the acquisition of Elan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo", the "Company", "we," "our," "us," and similar pronouns used herein refer to Perrigo Company plc, its subsidiaries, and all predecessors of Perrigo Company plc and its subsidiaries.
WHO WE ARE
We arePerrigo is a leading global healthcarepure-play self-care company delivering value to our customerswith more than a century of innovation and consumers by providing Quality Affordable Healthcare Products®. Founded in 1887 as a packagerexperience serving the health and wellness needs of home remedies, we have built a unique business model that is best described as the convergence of a fast-moving consumer goods company, a high-quality pharmaceutical manufacturing organization and a world-class supply chain network. We believe we areconsumers. As one of the world's largest manufacturersoriginators of the over-the-counter (“OTC”("OTC") healthcareself-care market, Perrigo has a powerful legacy and vast scale in producing high-quality self-care products through a proven ability to proactively shape its portfolio to meet the evolving needs of consumers and supplierscustomers.
Perrigo provides access to trusted self-care products that can be procured without needing to visit a doctor for a prescription. Guided by our vision and purpose, our strategic goal is to create a sustainable and value accretive growth engine by 1) delivering consumer preferred brands and innovation, 2) driving category growth with our customers, 3) powering our business with our world-class quality and supply chain, including a focus on sustainability with meaningful goals to reduce greenhouse gas emissions, water, and waste, in addition to improving the recyclability of infant formulas for theour packaging, and 4) evolving our ways of working to one operating model. Our unique competency is to deliver a blended-branded business model of branded, value and store brand market. Weproduct offerings that provide consumers access to self-care products across the value spectrum.
Perrigo's broad offerings are a leading provider of branded OTC products throughout Europe, and also a leading producer of generic pharmaceutical topical products such as creams, lotions, and gels,well diversified across several major product categories as well as nasal sprays and injection ("extended topical") prescription drugs. We are headquartered in Ireland, and sell our productsacross geographies, primarily in North America and Europe as well aswith no one product representing more than 3% of total revenue. In North America, Perrigo is the leading store brand private label provider of self-care products in many categories, including upper respiratory, nutrition and women's health. In Europe, our portfolio consists primarily of brands, including Compeed®, EllaOne®, Solpadeine®, and ACO®.
Several initiatives are anticipated to advance our self-care strategy, including the implementation of our Supply Chain Reinvention Program and Project Energize, a global investment and efficiency program. In addition, we continue to invest in other markets,initiatives, including Australia, Israelinnovation, information systems and China.
MAJOR DEVELOPMENTS IN OUR BUSINESS
Restructuring
On February 21, 2017, we approved a workforce reduction plan as part of a larger cost optimization strategy across the Company, which was completed during the year. Our plan was to reduce our global workforce by approximately 750 employees, which included some actions already taken and 235 employees who had elected to participate in a voluntary early retirement program. This represented a reduction of approximately 14% of our global non-production workforce. The changes to our workforce varied by country, based on legal requirements and required consultations with works councils and other employee representatives, as appropriate. During the year ended December 31, 2017, we recognized $61.0 million of restructuring expenses (refer to Item 8. Note 18). In addition, during the year ended December 31, 2017, we executed a supply chain reorganization which continues to generate savings for both our North American and International segments.
Perrigo Company plc - Item 1
Business Overview
Segments
Our reporting segments are as follows:
Consumer Healthcare Americas ("CHCA"), comprises our U.S., Mexico and Canada consumer healthcare business (OTC, contract, infant formula and animal health categories).
Consumer Healthcare International("CHCI"),comprises our branded consumer healthcare business primarily in Europetools, and our consumer focused businesses in the U.K., Australia,people to drive consistent and Israel. This segment also includes our U.K. liquid licensed products business.
Prescription Pharmaceuticals("RX"),comprises our U.S. Prescription Pharmaceuticals business.
We also had two legacy operating segments, Specialty Sciences and Other, which contained our Tysabri® financial asset and Active Pharmaceuticals business ("API") businesses, respectively, which we divested (refer to Item 8. Note 2 and Note 6). Following these divestitures, there were no substantial assets or operations left in either of these segments. Effective January 1, 2017, all expenses associated with our former Specialty Sciences segment were moved to unallocated expenses. Financial information related to our business segments and geographic locationssustainable results. Further 2023 highlights can be found in Item 8. Note 197. Management Discussion and Analysis - Executive Overview.
Strategy & Competitive Advantage
Our objective is to grow our business by responsibly leveraging our global infrastructure to deliver high quality self-care solutions to customers and consumers through our expansive product offerings, providing new innovative products, brands, and product line extensions to existing consumers and servicing new consumers through entering new adjacent products and categories, new geographies and new channels of distribution organically and inorganically.
Among other things, we believe the following factors give us a competitive advantage and provide value to our customers and consumers:
•A diverse product portfolio, leadership in first-to-market product development, and product life cycle management;
•Experienced research and development ("R&D") capabilities to develop high quality products and product formulations, differentiated product features and benefits, product reformulation, new brands and brand line extensions, and differentiated store brand products relative to national brands;
•Deep understanding of consumer needs and customer strategies;
•Expansive pan-European commercial infrastructure, brand-building capabilities, and an extensive and diverse product portfolio;
•Turn-key regulatory and promotional capabilities;
Perrigo Company plc - Item 1
Business Overview
•Supply chain breadth, and utilizing economies of scale to manage supply chain complexity across multiple dosage forms, formulations, and stock-keeping units;
•Quality and cost effectiveness throughout the supply chain and operational systems across all products creating a sustainable, low-cost network across our 17 manufacturing plants and distribution networks; and
•Industry leading e-commerce support.
SEGMENTS
Our reporting and operating segments reflect the way in which our managementchief operating decision maker, who is our CEO, makes operating decisions, allocates resources and manages the growth and profitability of the Company. Our reporting and operating segments are:
Omega Acquisition•Consumer Self-Care Americas ("CSCA") comprises our consumer self-care business in the U.S. and Canada. CSCA previously included our Latin American businesses until they were disposed on March 9, 2022.
On March 30, 2015, we acquired Omega Pharma Invest N.V.•Consumer Self-Care International ("Omega"CSCI"), one comprises our consumer self-care business outside of the largest OTC companiesU.S. and Canada, primarily in Europe and Australia.
We previously had an Rx segment which comprised our generic prescription pharmaceuticals business in the U.S., and other pharmaceuticals and diagnostic businesses in Israel, which have been divested. Following the divestiture, there were no substantial assets or operations left in this segment. The Rx segment was reported as Discontinued Operations in 2021, and is presented as such for $3.0 billionall periods in equitythis report (refer to Item 8. Note 4). Financial information related to our business segments can be found in Item 8. Note 20.
CONSUMER SELF-CARE AMERICAS
The CSCA segment develops, manufactures and cashmarkets our leading self-care consumer products in the U.S. and assumed debtCanada. We primarily provide our customers self-care products that are sold and marketed under the customer's own brands and/or exclusive brands ("store brands"). We additionally have a select lineup of $1.6 billion,branded self-care products. Customers include major global, national, and regional retail drug, supermarket, and mass merchandise chains, e-commerce stores, and major wholesalers.
Our store brand products are comparable in quality and effectiveness to national brands. Store brand products must meet the same stringent U.S. Food and Drug Administration ("FDA") requirements as national brands within the U.S. and the requirements of comparable regulatory bodies outside the U.S. In most instances, our product packaging, marketing and advertising, and e-commerce focus are designed to invite and reinforce comparison to national brand products, while conveying a better value for consumers. The cost of store brand products to retailers is significantly lower than that of comparable nationally advertised brand name products. The retailer, therefore, can price a total purchasestore brand product below the competing national brand product and realize a greater percentage and dollar profit, while consumers benefit from receiving a high-quality product at a price below the comparable national brand product. Consumer awareness and knowledge of $4.6 billion. the quality, value and efficacy of our products are achieved from marketing efforts made by us, our retailers and wholesalers.
Certain branded products are developed, manufactured and distributed within the CSCA segment. Our primary branded products sold under brand names include Compeed®, Dr. Fresh®, Firefly®, Good Sense®, Good Start®, Mederma®, Nasonex®, Plackers®, Prevacid®24HR,REACH®, Rembrandt®, and Steripod®. On July 13, 2023, the FDA approved Opill® for OTC use for all ages. Opill®is the first ever birth control pill available over the counter in the United States.
CONSUMER SELF-CARE INTERNATIONAL
The Omega acquisition expandedCSCI segment comprises our OTC leadership position into continentalconsumer self-care product categories outside the U.S. and Canada, including our branded products in Europe acceleratedand Australia and our international expansionstore brand products in the United Kingdom and geographic diversification through enhanced scaleparts of Europe and a broader footprint,Asia. These products are developed, manufactured, marketed and diversifieddistributed by us, leveraging our netbroad regulatory, sales and cash flow streams.distribution infrastructure to drive market share, innovate new products and brands, in-license and expand product lines, and sell and distribute third-party brands. The CSCI segment products are sold primarily through an established pharmacy sales force to an extensive network of customers including pharmacies, wholesalers, drug and grocery store retailers, e-commerce stores, and para-pharmacies in more than 29 countries, predominantly in Europe. Products in the CSCI segment are marketed using broadcast and digital advertising as well as point-of-sale promotional spending to enhance brand equity.
Perrigo Company plc - Item 1
CSCI
While we have hundreds of brands, we primarily concentrate our resources on 'Focus Brands' and sub-brands, such as Solpadeine®, Coldrex®, Physiomer®, NiQuitin®, ACO®, Compeed®, and ellaOne®. Many of these Focus Brands have leading positions in the markets in which they compete. Additional resources, including R&D investments, are allocated to these Focus Brands to strengthen their market position in high opportunity profit categories while leveraging the same R&D efforts under smaller local brands. The broader European platform established throughnew product pipeline is supported by internal R&D, new product development, acquisitions and partnerships, both in terms of brand extensions and product improvements.
PRODUCTS
We offer products in the Omega acquisition, facilitatedfollowing categories:
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| Product Category | | Description |
| Upper Respiratory | | Products that relieve upper respiratory symptoms, including cough suppressants, expectorants, sinus and allergy relief. |
Nutrition(1) | | Infant formulas and nutritional beverages. |
| Digestive Health | | Products such as antacids, anti-diarrheal, and anti-heartburn that relieve symptoms associated with digestive issues. |
| Pain and Sleep-Aids | | Products comprised of pain relievers, fever reducers and sleep-aids. |
| Oral Care | | Products used for oral care, including toothbrushes, toothbrush replacement heads, floss, flossers, whitening products and toothbrush covers. |
| Healthy Lifestyle | | Products that help consumers live a healthy lifestyle such as smoking cessation, and well-being products. |
| Skin Care | | Products for the face and body such as dermatological care, scar management, lice treatment, and other products for various skin conditions. |
| Women's Health | | Women's health products, including feminine hygiene and contraceptives. |
| Vitamins, Minerals, and Supplements ("VMS") | | Vitamins, minerals, and supplements. |
Other(2) | | Rare diseases business and other miscellaneous self-care products. |
(1) The Nutrition product category is exclusive to CSCA. During 2023 we exited the nutritional beverages product line.
(2) Rare Diseases business within the Other product category is exclusive to CSCI
In April 2022, we completed the acquisition of a portfolioHRA Pharma for €1.8 billion, or approximately $1.9 billion based on exchange rates at the time of well-established OTC brands sold primarily in Europe from GlaxoSmithKline Consumer Healthcare (“GSK”), on August 28, 2015 and Naturwohl Pharma, GmbH ("Naturwohl"), with its leading German dietary supplement brand, Yokebe®,on September 15, 2015closing (refer to Item 8. Note 2). Subsequently, during the year ended December 31, 2016, we identified impairment indicators associated with certain intangible assets and goodwill, which required us to test these assets for impairment. As a result, we recorded total impairments of $2.0 billion (refer to Item 8. Note 3) for transaction details).
Elan Acquisition
On December 18, 2013, we acquired Elan in a cash HRA Pharma operating results are reported within both our CSCA and stock transaction totaling $9.5 billion. The acquisition led to the creation of our then new corporate structure headquartered in Dublin, Ireland. We have utilized this structure to continue to grow in our core markets and further expand outside of the U.S. The acquisition also provided us with the Tysabri® financial asset.
In November 2016, we initiated a strategic review of the Tysabri® financial asset. During this review, we identified impairment indicators of the fair value of that royalty stream, which led to a goodwill impairment recorded during the year ended December 31, 2016 (refer to Item 8. Note 3 and Note 6 for additional information on the impairment and fair value adjustments, respectively). On March 27, 2017, we announced the completed divestment of the Tysabri® financial asset to Royalty Pharma for up to $2.85 billion, consisting of $2.2 billion in cash and up to $250.0 million and $400.0 million in royalties earned if global net sales of Tysabri® meet specific thresholds in 2018 and 2020, respectively.CSCI segments. As a result of this transaction, we transferred the entire financial assetacquisition, the Company made the following updates to Royaltyits global reporting product categories described above:
•The creation of a new "Women's Health" reporting category, comprised of the women's health portfolio of HRA Pharma, including ellaOne®and recordedHana®, in addition to legacy Perrigo women's health products, including feminine hygiene and contraceptive products;
•The creation of a $17.1 million gain duringnew "Skin Care" reporting category, comprised of Compeed®, Mederma®, and all of the three months ended April 1, 2017 (referproducts in the legacy Perrigo "Skincare and Personal Hygiene" category except for legacy Perrigo women's health products; and
•The "Other" category includes the Rare Diseases business acquired with HRA Pharma exclusive to Item 8. Note 6 for additional informationthe CSCI segment. The updates were applied retroactively to impacted product categories. Such changes had no impact on the Royalty Pharma contingent milestone payments).Company's historical consolidated financial position, results of operations or cash flows.
DivestituresNew Products
In addition to the above mentioned Tysabri® financial asset disposal, as a result of our continued efforts to implement certain initiatives, streamline our organization and review our portfolio, during the year ended December 31, 2017, we divested the following (refer to Item 8. Note 2):Perrigo Company plc - Item 1
Business Overview
Certain Abbreviated New Drug Applications ("ANDAs") for $15.0 million in proceeds.
Our animal health pet treats plant fixed assets for $7.7 million in proceeds.
Our India API business for $22.2 million in proceeds.
Our Russian business for €12.7 million ($15.1 million) in proceeds.
Our Israel API business for $110.0 million in proceeds.
NEW PRODUCTS
We consider a product to be new if it (i) was (i) reformulated into an additional unique product, (ii) involvedwas a product line extension due to changes in characteristics such as strength, flavor, or color, (iii) involvedhad a change in product status from "prescription only" ("Rx") to OTC, (iv) was a new genericstore brand or branded launch, (v) was provided in a new dosage form or (vi) was sold to a new geographic area with different regulatory authorities, in all cases, within 12 months prior to the end of the period for which net sales are being measured. DuringNotable new product launches in the year ended December 31, 2017, new2023 included the Acetaminophen and Ibuprofen Dual Action product, sales were $209.7 million.
CONSUMER HEALTHCARE AMERICAS
Overview
The CHCA segment is focused primarily on the saleover-the-counter use of OTC storeNicotine Coated Lozenges and Cold/Flu Honey Liquids in CSCA, and the launch of the Compeed Stops®products brand products, including cough, cold, allergy and sinus, analgesic, gastrointestinal, smoking cessation, infant formula and food, animal health, and diagnostic productsin CSCI. We also launched various CSCI line extensions in the U.S.XLS® weight management brand in the Healthy lifestyle category, and in VMS under the brands Arterin®, MexicoDavitamon®, Apiserum® and Canada. We are a leading provider of consumer healthcare products sold to consumers via store brands and also sell consumer healthcare products under our own brands. Consumer awareness and knowledge of the quality and value that OTC store brand products represent continues to grow due to retailer efforts to promote their own label programs. During the year ended December 31, 2017, our CHCA segment represented approximately 49% of consolidated net sales.Abtei®.
The CHCA segment develops, manufactures, and markets products that are comparable in quality and effectiveness to national brands. Store brand products must meet the same U.S. Food and Drug Administration ("FDA") requirements as national brands within the U.S. and the requirements of comparable regulatory bodies outside the U.S. In most instances our product packaging is designed to invite and reinforce comparison to national brand products, while communicating store brand value to consumers.
Perrigo Company plc - Item 1
CSCI
The cost of store brand products to retailers is significantly lower than that of comparable nationally advertised brand-name products. Generally, retailers’ dollar profit per unit of store brand product is greater than the dollar profit per unit of the comparable national brand product. The retailer, therefore, can price a store brand product below the competing national brand product and realize a greater profit margin. The consumer benefits by receiving a high quality product at a price below the comparable national brand product. As a result, our business model results in consumers saving money on their healthcare spending.
We are dedicated to continuing to be the leader in developing and marketing new OTC store brand products, including infant formula, and have a research and development ("R&D") staffOn March 1, 2023, we announced that we believe is one ofhad received final approval from the most experienced in the industry at developing products comparable in formulation and quality to national brand products. Our R&D team also responds to changes in existing national brand products by reformulating existing products. For example, in the OTC pharmaceutical market, certain new products are the result of changes in product status from Rx to OTC. These “Rx-to-OTC switches” require FDA approval through a process initiated by the drug innovator. The drug innovator usually begins the process by filing afor our Abbreviated New Drug Application ("NDA"ANDA"), which is often followed by filing an ANDA. New drugs are also marketed through the FDA's OTC monograph process, which allows for the production of drugs that are generally recognized as safeAcetaminophen and effective without pre-marketing approval.
The CHCA segment also develops, manufactures, and distributes certain branded products whenIbuprofen Tablets, 250 mg/125 mg, the strategy is synergistic with our store brand business. Branded products includeOTC equivalent of Advil® Dual Action Tablets 250 mg/125 mg. On May 10, 2023, the Good SenseFDA Nonprescription Drugs Advisory Committee ("NDAC") and the Obstetrics, Reproductive, and Urologic Drugs Advisory Committee voted unanimously 17 to 0, with no abstentions, that the benefits of making Opill®, Sergeant'sa progestin-only daily oral contraceptive, available for OTC use outweighs the risks. The FDA approved Opill®, Sentry for OTC use for all ages. Opill®, Zephrex D®, PetArmor®,is the first ever birth control pill available over the counter in the United States and ScarAwayPerrigo was awarded the "Innovation of the Year" in the health category by Popular Science in December 2023. Opill®is expected to launch during the first quarter of 2024. On May 16, 2023, the FDA granted final approval for Nicotine Coated Mint Lozenges, 2 mg and 4 mg OTC. This product will be marketed under retailer's store brand names.labels as a comparable offering to Nicorette® Coated Ice Mint Lozenge.
Perrigo Company plc - Item 1
CHCA
We manufacture a significant portionEach of our CHCA segment's products at our plants in the U.S., Mexico,product categories and Israel, and we source our remaining needs from third parties.'Focus Brands' have a three to five-year innovation master plan. We rely on both internal R&D and strategic product development agreements with outside sources to develop new products. In addition,
SIGNIFICANT CUSTOMERS
Sales to Walmart Inc. represented 11.8% and 12.5% of our consolidated net sales in order to maximize both2023 and 2022, respectively. While we have other important customers, no other individual customer represents more than 10% of net sales. Our top ten customers accounted for 46% and 47% of our capacitytotal consolidated net sales in 2023 and sales of proprietary formulas, we engage in contract manufacturing, which involves producing unique ANDAs and monographproducts through partnerships with major pharmaceutical and direct-to-consumer companies.
2022, respectively. We believe
the increasing age of the population will drive the needwe generally have good relationships with our customers. Refer to Item 1A. Risk Factors - Operational Risks for the greater value that our store brand products provide consumers. In addition, we believe that new products and products switching from Rx to OTC (as described above) will continue to drive growth within the segment.risks associated with customers.
Products
COMPETITION
Our CHCA segment offers products in the following categories:
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| | |
Product Category | | Description |
Analgesics | | Pain relievers and fever reducers |
Cough/cold/allergy/sinus | | Cough, cold, allergy, and sinus products |
Gastrointestinal | | Antacids, anti-diarrheal, and anti-heartburn products |
Infant nutritionals | | Infant formula and food products |
Smoking cessation | | Gums, lozenges, and other products designed to help users quit smoking |
Animal health | | Pet health and wellness products |
Other | | Feminine hygiene, diabetes care, dermatological care, diagnostic products, scar management, and other miscellaneous healthcare products |
The chart below reflects net sales by product category in the CHCA segment for the year ended December 31, 2017.
Perrigo Company plc - Item 1
CHCA
We launched a number of new CHCA products in the year ended December 31, 2017, most notably esomeprazole magnesium (store brand equivalent to Nexium® 24HR capsules), and smoking cessation products. During the year ended December 31, 2017, new product sales in the CHCA segment were $68.7 million.
We, on our own or in conjunction with partners, received final FDA approval from U.S. health authorities for two new products within the CHCA segment in the year ended December 31, 2017, and as of December 31, 2017, we had eight new product applications pending FDA approval.
Sales and Marketing
Our customers include major global, national, and regional retail drug, supermarket, and mass merchandise chains such as Walmart, CVS, Walgreens Boots Alliance, Rite Aid, Kroger, Target, Dollar General, Sam’s Club, Costco, Petco, Petsmart, Aldi, Amazon, and major wholesalers, including McKesson, Cardinal Health, and Amerisource Bergen.
We seek to establish customer loyalty through superior customer service by providing a comprehensive assortment of high quality, value-priced products; timely processing, shipment and delivery of orders; assistance in managing customer inventories; and support in managing and building the customer’s store brand business. The CHCA segment employs its own sales force to service larger customers, and uses industry brokers for other retailers. Field sales employees, with support from marketing and customer service, are assigned to specific customers in order to work most effectively with the customer. They assist customers by developing customized brand and in-store marketing programs for customers' store brand products.
The primary objective of this store brand management approach is to enable our customers, retailers and wholesalers, to increase sales of their own store brand products by communicating store brand quality and value to the consumer and by inviting comparison to national brand products. Our sales and marketing personnel assist customers in the development and introduction of new store brand products and in the promotion of customers’ existing store brand products by providing market information; establishing individualized promotions and marketing programs, which may include floor displays, bonus sizes, coupons, rebates, store signs, and promotional packs; and performing consumer research.
In contrast with national brand manufacturers, which incur considerable advertising and marketing expenditures targeted directly to the end user or consumer, the CHCA segment’s primary marketing efforts are channeled through retailers and wholesalers and reach the consumer through our customers’ in-store marketing programs and our digital media programs. Because the retail profit margin for store brand products is generally higher than for national brand products, retailers and wholesalers often commit funds for additional promotions.
Our animal health category, which has a greater emphasis on value-branded products, promotes product awareness through direct-to-consumer advertising, including television commercials, online advertising, in-store display vehicles, and social media.
In addition to in-store marketing programs, our infant formula category markets directly to consumers and healthcare professionals.
Competition
The markets for OTC pharmaceuticals and infant formulaour self-care products are highly competitive and differ for each product line and geographic region. Local companies often hold leading positions in individual product lines in particular countries. The competitive landscape of the European consumer products market in the categories in which we compete is more fragmented than the North American market. Our primary competitors include manufacturers, such as Dr. Reddy's Labs, LNK International, Inc., PL Developments, Aurobindo and Dr. Reddy's Labs,Sun Pharmaceuticals, and brand-name pharmaceutical and consumer product companies, such as Haleon (the consumer health business spun-off by GSK plc in 2022), Kenvue (the consumer health business unit of Johnson & Johnson, Pfizer,Johnson), Procter & Gamble, Reckitt Benckiser, Abbott Nutrition, Bayer AG, GSK, Nestle S.A. (Gerber), Abbott Nutrition,Sanofi, Philips, Teva, Viatris, Stada, and Mead Johnson Nutrition Co. The competition is highly fragmented in termsNovartis. Each product category of geographic market coverage and product categories,our business has certain key competitors, such that a competitor generally does not compete across all product lines.lines or across all geographic markets. However, some competitors do have larger sales volumes in certain of our categories. Additionally, national brand companies tend to have more resources committed to marketing their products and could in the future manufacture store brands of their products at lower prices than their national brand products. Competition is based on a variety of factors, including price, quality, assortment of products, customer service, marketing support and approvals for new products (referproducts. Refer to Item 1A. Risk Factors - Operational Risks Related to Operations for additional information and risks associated with competition).competition. Perrigo Company plc - Item 1
CHCA
TRADEMARKS, PATENTS AND LICENSING AGREEMENTS
CONSUMER HEALTHCARE INTERNATIONAL
Overview
The CHCI segment is comprised of our branded OTC sales primarily in Europe and our consumer focused businesses in the U.K., Australia, and Israel. The CHCI segment develops, manufactures, markets and distributes many well-known European OTC brands in the cough, cold and allergy, lifestyle, personal care and derma-therapeutics, natural health and vitamins, and anti-parasite categories. In addition, the segment leverages its broad regulatory, sales, and distribution infrastructure to in-license and sell third-party brands and generic pharmaceutical products. The CHCI segment distributes these products through an extensive network of customers including pharmacies, wholesalers, drug and grocery store retailers, and para-pharmacies in 28 countries, primarily in Europe. Many CHCI products have market leading positions in the markets in which they compete. During the year ended December 31, 2017, the CHCI segment represented approximately 30% of consolidated net sales.
Through continued investment in R&D partnerships and new technologies, the CHCI segment strives to offer high quality products that meet consumers' needs. The combination of internal R&D, in-sourcing, acquisitions, and partnerships support the product pipeline, both in terms of brand expansion and product improvement. In the U.K., R&D focuses on oral liquid formulations for the branded Rx products for which liquid formulations are not available, as well as the development of store brand products and products for the branded business. An additional R&D center resides in Sweden. In the rest of Europe, most R&D is performed by external partners with oversight by our teams. The segment has six plants dedicated to manufacturing certain of its products.
The CHCI segment primarily focuses on building local and regional brands. In many markets outside of the U.S., a brand marketing strategy can be more effective than a store brand strategy due to the absence of mass merchandisers and large scale pharmacy chains. Additionally, the absence of a centralized regulatory environment within Europe adds to the complexity of obtaining approvals for products in these markets.
While the CHCI segment sells products from over 300 brands both on its own and through third parties, it focuses its resources on its "Focus brands", which are selected on the basis of their current sales and growth potential in the OTC market. Additional resources are allocated to these brands to build strong positions in the largest, most highly profitable categories in the OTC market, while maintaining leadership in smaller branded categories.
Recent Developments
Management has developed a strategy to: (1) implement a brand prioritization to address certain market dynamics, with an objective to balance the cost of advertising and promotional investments with expected contributions from category sales, (2) restructure the sales force in certain markets to more effectively serve customers, and (3) in-source certain product manufacturing and development. The combination of these actions is expected to improve the segment's focus on higher value OTC products, reduce selling costs and improve operating margins in the segment.
As part of our previously announced strategic initiatives, management implemented improvements and evaluated the overall cost structures within our CHCI segment in the following ways:
On December 8, 2016, we announced the cancellation of the unprofitable EuroGenerics NV distribution agreement in Belgium. The year-over-year effect of the cancellation, combined with the exit of certain OTC distribution agreements, reduced our net sales by $200.3 million in 2017, with an immaterial impact to operating income.
| |
• | We made progress on our previously announced restructuring plans to right-size the Omega business due to the impact of market dynamics on sales volumes. During the year ended December 31, 2017, we recognized $17.1 million of restructuring expense in the CHCI segment (refer to Item 8. Note 18). |
Perrigo Company plc - Item 1
CHCI
Management continues to evaluate the most effective business model for each country, aligning our sales infrastructure and actively integrating sales strategies with promotional programs.
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• | On August 25, 2017, we completed the sale of our Russian business, which was previously classified as held-for-sale, to Alvogen Pharma LLC. The total sale price was €12.7 million ($15.1 million), inclusive of an estimated working capital adjustment, which resulted in an immaterial gain in the segment (refer to Item 8. Note 2). |
The combination of these actions improved the segment's focus on higher value OTC products, reduced selling costs and improved operating margins in the segment.
The CHCI segment has been positively impacted by market dynamics in countries such as the Nordics, Italy, and Portugal, offset by softness in certain brand categories in France and Germany, as well as unfavorable foreign currency impacts primarily in the U.K. related to Brexit.
Products
Below are the categories in which the CHCI segment competes and some of the top brands in each category.
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Product Category | | Description | | Focus Brands |
Cough, Cold, and Allergy | | Products that address respiratory symptoms, including traditional medications and alternative treatments such as aromatherapy solutions. | | Bittner®/Aflubin®
Bronchenolo®/Bronchostop®
Coldrex®
Libenar®
Physiomer®
Phytosun®/Valda®
Solpadeine®/Antigrippine®
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Lifestyle | | Weight management, pregnancy and fertility kits, pain relief, sleep management, smoking cessation, and eye care. | | Niquitin®
Silence®/Nytol®
XLS (Medical)®
Ymea®
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| |
Personal Care and Derma-Therapeutics | | Products for the face and body, including sun care, baby-specific, and feminine hygiene products, and solutions for various skin conditions and allergies such as eczema, psoriasis and rosacea.
| | ACO®
Biodermal®
Canoderm®
Dermalex®
Lactacyd®
Wartner®
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Natural Health and Vitamin, Minerals, and Supplements ("VMS") | | Vitamins, minerals, supplements, and various other natural remedies.
| | Abtei®
Biover®
Davitamon®
Granufink®
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Anti-Parasite | | Products focused on the elimination of parasites in both humans and pets including lice treatment and insect repellent. | | Jungle Formula®
Paranix®
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The chart below reflects net sales by product category in the CHCI segment for the year ended December 31, 2017.
Perrigo Company plc - Item 1
CHCI
We launched a number of new CHCI products in the year ended December 31, 2017, most notably a cold & flu triple active hot drink, various intimate hygiene products, derma-therapeutics, and VMS line extensions. During the year ended December 31, 2017, new product sales in the CHCI segment were $64.1 million.
The CHCI segment has more than 100 strategic new products in five product categories in development, with each of its Focus brands having a five-year innovation master plan.
Sales and Marketing
Our customers include pharmacies, drug, and grocery stores located primarily in Europe, including Walgreens Boots Alliance, ASDA, Tesco, DM, Rossmann, ETOS, and Kruidvat. The CHCI segment sells its products primarily through an established pharmacy sales force to an extensive network of pharmacists. Our sales representatives visit pharmacists daily, ensuring strong in-store visibility of our brands and facilitating pharmacist education programs. Our sales, marketing, and regulatory teams use training/merchandising teams to work in conjunction with local sales representatives to improve our brands' presence and recognition. We seek to attract key talent from leading OTC, Fast Moving Consumer Goods ("FMCG"), and retailer companiesto build strong local teams throughout the countries in which the CHCI segment operates.
While CHCI products have a higher average gross margin than products sold by the CHCA segment, selling expenses are significantly higher due to the sales force mentioned above, as well as targeted advertising and promotional spending to enhance brand equity. Key marketing communication tools for the CHCI segment include TV commercials, consumer leaflets, product websites, digital and targeted promotional campaigns.
Competition
The competitive landscape of the European OTC market is highly fragmented, as local companies often hold leadership positions in individual product segments in particular countries. As a result, the relevant competition in each of the CHCI segment's markets is both local and global. Competitors include Sarnofi, Bayer, Reckitt Benckiser, GSK, Novartis, and Johnson & Johnson, as well as additional regional competitors. We believe our key advantage lies in our unique combination of best practices in sales, marketing, and product development from
Perrigo Company plc - Item 1
CHCI
PRESCRIPTION PHARMACEUTICALS
Overview
The RX segment develops, manufactures, and markets a portfolio of generic prescription drugs primarily in the U.S. We define this portfolio as predominantly "extended" topical as it encompasses a broad array of topical dosage forms such as creams, ointments, lotions, gels, shampoos, foams, suppositories, sprays, liquids, suspensions, solutions, and powders. The portfolio also includes select controlled substances, injectables, hormones, oral solid dosage forms, and oral liquid formulations. During the year ended December 31, 2017, the RX segment represented approximately 20% of consolidated net sales.
Our current development areas include other delivery systems such as oral liquids, metered dose inhalers, injectables, and transdermal products, some of which we are developing with third parties.Our other areas of expertise include our production capabilities for controlled substances and hormonal products. R&D efforts focus on complex formulations, many of which require costly clinical endpoint trials.
We manufacture our topical and oral products in the U.S. and Israel, and also source from various FDA-approved third parties. Rx products are manufactured, labeled, and packaged in facilities that comply with strict regulatory standards and meet customers’ stringent requirements.
In addition, the RX segment offers OTC products through the prescription channel (referred to as "ORx®", these products are marketed using the Perrigo name). ORx® products are OTC products that are available for pharmacy fulfillment and healthcare reimbursement when prescribed by a physician. We offer numerous ORx® products that are reimbursable through many health plans and the U.S. Medicaid and Medicare programs.
We actively collaborate with other pharmaceutical companies to develop, manufacture, and market certain products or groups of products. These types of agreements are common in the pharmaceutical industry. We may choose to enter into these types of agreements to, among other things, leverage our or our collaborators' scientific R&D expertise, or utilize our extensive marketing and distribution resources (refer to Item 8. Note 1 for more information regarding our method for recognizing revenue and expenses related to collaboration agreements, as well as Item 8. Note 17 for more information regarding our collaboration agreements).
Recent Developments
We continue to experience a significant reduction in pricing expectations from historical levels in our RX segment due to competitive pressures. This softness in pricing is attributable to various factors, including increased focus from customers to capture supply chain productivity savings, competition in specific products, and consolidation of certain customers. We expect this softness to continue to impact the segment for the foreseeable future, and we are forecasting a high single digit pricing decline in this segment for the year ending December 31, 2018.
We are continuing our previously announced portfolio review process, which includes the ongoing comprehensive internal evaluation of the RX segment's market position, growth opportunities, and interdependencies with our manufacturing and shared service operations to determine if strategic alternatives should be explored related to this segment.
During the year ended December 31, 2017, we sold various ANDAs for a total gain of $23.0 million.
Perrigo Company plc - Item 1
RX
Products
Listed below are some of the generic prescription products, including authorized generic and ORx® products, that we manufacture and/or distribute:
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Generic Name (1)
| | Comparative Brand-Name Drug |
Adapalene cream | | Differin®
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Bacitracin ophthalmic ointment | | N/A |
Benzoyl peroxide 5% - clindamycin 1% gel | | BenzaClinTM
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Budesonide | | Entocort®
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Clindamycin foam | | Evoclin®
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Clindamycin phosphate and benzoyl peroxide gel | | Duac®
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Clobetasol foam, lotion and shampoo | | Olux®, Olux-E®, Clobex®
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Desonide cream, ointment | | Desonate®, Tridesilon®
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Dihydroergotamine injection | | D.H.E. 45 |
Halobetasol ointment and cream | | Ultravate®
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Hydrocortisone suppositories | | N/A |
Mupirocin ointment | | Bactroban®
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Nystatin topical powder | | Mycostatin®
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Olopatadine nasal spray | | Patanase®
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Permethrin cream | | Elimite®
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Scopolamine patch | | TransdermScop®
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Tacrolimus | | Protopic®
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Testosterone 1% gel | | Androgel |
Testosterone cypionate injection | | Depo®, Testosterone
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Testosterone solution | | Axiron®
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Triamcinolone acetonide nasal spray | | Nasacort® AQ
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Triamcinolone cream/ointment | | Triderm™/Kenalog™ |
(1)Contains the same active ingredients present in the same dosage form as the comparable brand-name drug
We launched a number of new RX products in the year ended December 31, 2017, most notably Scopolamine and Testosterone 2% topical (generic equivalent to Axiron®). During the year ended December 31, 2017, new product sales in the RX segment were $75.9 million.
During the year ended December 31, 2017, we, on our own or in collaboration with partners, received final approval from FDA health authorities for 12 Rx drug applications, and as of December 31, 2017, we had 21 Rx drug applications pending approval.
Sales and Marketing
Our customers include major wholesalers, including Cardinal Health, McKesson, and AmerisourceBergen; sourcing groups such as Red Oak and ClarusOne; national and regional retail drug, supermarket and mass merchandise chains, including Walgreens Boots Alliance, Rite Aid, Walmart, CVS, Kroger, and Safeway; hospitals; and pharmacies. ORx® products are sold to the consumer through the pharmacy counter of predominantly the same retail outlets as our OTC pharmaceutical products.
Competition
The market for Rx products is subject to intense competition from other generic drug manufacturers, brand-name pharmaceutical companies launching their own generic version of their branded products (known as an authorized generic), manufacturers of branded drug products that continue to produce those products after patent expirations, and manufacturers of therapeutically similar drugs. Among our generic drug manufacturer competitors are Par Pharmeceuticals, Apotex Corp., Glenmark Generics Inc., Impax Laboratories, Inc., Mylan, Prasco, LLC, Sandoz, Sun Pharmaceuticals, Taro Pharmaceuticals, Teva Pharmaceutical Industries Ltd., and Akorn.
Perrigo Company plc - Item 1
RX
We believe that one of our primary competitive advantages is our ability to introduce difficult to develop and/or manufacture topical generic versions to brand-name drug products. Generally, these products are exposed to less competition due to the relatively longer and more expensive development, clinical trial, and approval processes. In addition, we believe we have a favorable competitive position due primarily to our efficient distribution systems, topical production economies of scale, customer service, and overall reputation (refer to Item 1A. Risk Factors - Risks Related to Operations for more information and risks associated with competition).
SPECIALTY SCIENCES
Overview
The Specialty Sciences segment was comprised of assets focused on the treatment of multiple sclerosis, specifically in connection with the drug Tysabri® (natalizumab). We received contingent payments related to the Tysabri® financial asset until we disposed of it on March 27, 2017.
We were entitled to contingent payments from Biogen Idec Inc. ("Biogen") based on its Tysabri® sales in all indications and geographies. We received contingent payments that were based on royalties of 12% on worldwide Biogen sales of Tysabri® from December 18, 2013 through April 30, 2014. As of May 1, 2014, we received royalties of 18% on annual worldwide Biogen sales of Tysabri® up to $2.0 billion and 25% on annual sales above $2.0 billion. The cash received from Biogen for the royalty percentage on Tysabri® sales was recorded as cash flows from investing activities in our Consolidated Statements of Cash Flow.
We had recorded the Tysabri® royalty stream as a financial asset and elected to account for this asset using the fair value option method, which incorporates discounted cash flows related to the expected future cash flows to be received. We used significant judgment in determining our valuation inputs, including estimates as to the probability and timing of future sales of Tysabri®, as well as estimates of the expected future cash flows. The estimated fair value of the asset was subject to variation should those cash flows vary significantly from our estimates. We had performed evaluations at each reporting period to assess those estimates, discount rates utilized and general market conditions affecting fair value (refer to Item 8. Note 6).
The Specialty Sciences segment also included ongoing obligations under the sale agreement between Biogen and Elan for 50% of losses and litigation expenses arising out of any Tysabri® product liability claims, required insurance coverage and related expenses. Effective January 1, 2017, due to the sale of the Tysabri® financial asset, all the above mentioned expenses were moved to unallocated expenses.
On March 27, 2017, we announced the completed divestment of our Tysabri® financial asset to Royalty Pharma for up to $2.85 billion, consisting of $2.2 billion in cash and up to $250.0 million and $400.0 million in milestone payments if the royalties on global net sales of Tysabri® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we transferred the entire financial asset to Royalty Pharma and recorded a $17.1 million gain during the three months ended April 1, 2017. We elected to account for the contingent milestone payments using the fair value option method, and these were recorded at an estimated fair value of $134.5 million as of December 31, 2017 (refer to Item 8. Note 6 and Item 1A. Risk Factors - Risks Related to Operations).
OTHER
Recent Developments
We had an Other segment that was primarily comprised of sales of API products, which did not meet the quantitative threshold required to be a separate reportable segment. We developed, manufactured, and marketed API products, which were used worldwide by both generic and branded pharmaceutical companies. Certain of these ingredients were used in our own pharmaceutical products. The manufacturing of API occurred primarily in Israel with some production in India.
Perrigo Company plc - Item 1
Other
On April 6, 2017, we completed the sale of our India API business to Strides Shasun Limited. We received $22.2 million of proceeds, inclusive of an estimated working capital adjustment, which resulted in an immaterial gain recorded in Other expense (Income), net on the Consolidated Statements of Operations. Prior to closing the sale, we determined that the carrying value of the India API business exceeded its fair value less the cost to sell, resulting in an impairment charge of $35.3 million, which was recorded in Impairment charges on the Consolidated Statements of Operations for the year ended December 31, 2016 (refer to Item 8. Note 2).
On November 21, 2017, we completed the sale of our Israel API business, which was previously classified as held-for-sale to SK Capital, for a sale price of $110.0 million, which resulted in an immaterial gain recorded in Other expense (Income), net on the Consolidated Statements of Operations (refer to Item 8. Note 2 and Note 6).
INFORMATION APPLICABLE TO ALL REPORTABLE SEGMENTS
Research and Development
R&D is a key componentof our business strategy and is performed in various locations in the countries in which we operate. While we conduct a significant amount of our own R&D, we also enter into strategic alliance agreements to obtain the rights to manufacture and/or distribute new products. R&D investments were $167.7 million for the year ended December 31, 2017 (refer to Item 8. Note 17).
During the years ended December 31, 2017 and December 31, 2016, we wrote off capitalized in-process research and development from previous acquisitions totaling $12.7 million and $3.5 million, respectively, due to changes in the projected development and regulatory timelines for various projects.
The year ended December 31, 2017 included R&D expense related to new product development and clinical trial expenses in our CHCA, CHCI and RX segments. The year ended December 31, 2016 included R&D expense related to clinical trial expenses primarily in our CHCA and RX segments. The six months ended December 31, 2015 included incremental R&D expense due to the Omega acquisition. The six months ended December 27, 2014 included a $10.0 million payment made in connection with our entry into a collaboration arrangement. The year ended June 27, 2015 also included incremental R&D expense due to the Omega acquisition, as well as the payment made in relation to the collaboration arrangement noted above, and an R&D contractual arrangement under which we funded $18.0 million of R&D.
We anticipate that R&D expenditures will increase as a percentage of net salesfor the foreseeable future as we continue to cultivate our presence in the Rx-to-OTC switch and generic pharmaceutical markets,and develop our internal R&D capabilities (refer to Item 1A. Risk Factors - Risks Related to Operations for risks associated with innovation and R&D).
Trademarks and Patents
While we own certain trademarks and patents, neither our business as a whole, nor any of our segments, is materially dependent upon our ownership of any one trademark, or patent, or group of trademarks or patents.
Materials SourcingMATERIALS SOURCING
Affordable, high qualityhigh-quality raw materials and packaging components are essential to all of our business units due to the nature of the products we manufacture.units. Raw materials and packaging components are generally available from multiple suppliers. Supplies of certain raw materials bulk tablets, and packaging components, due to their technical specifications and product delivery systems, may be more limited, as they are available from one or only a few suppliers and may require regulatory approvalextensive compatibility testing before we can use them. Prior to the sale of our Israel and India API businesses, we had the ability to manufacture and supply certain API for our OTC and Rx products, which we now source from the companies that have acquired our API business. We have been purchasing an increasing number of components and select finished goods rather than manufacturing them because of the availability of goods, economic reasons, temporary production limitations, FDA restrictions, sale of our API business, and other factors.
Historically, we have been able to react effectively, yet not always immediately, to situations that require alternate sourcing. Should such alternate sourcing be necessary, FDA requirements placed on products approved through the ANDAAbbreviated New Drug Application ("ANDA") or NDA
Perrigo Company plc - Item 1
New Drug Application ("NDA") process could substantially lengthen the approval of an alternate source and adversely affect financial results. We believe we have good, cooperative working relationships with substantially all of our suppliers and have historically been able to capitalize on economies of scale in the purchase of materials and supplies due to our volume of purchases (referpurchases. Refer to Item 1A. Risk Factors - Operational Risks Related to Operations for risks associated with materials sourcing).sourcing. Refer to Item 7. Management's Discussion and
Perrigo Company plc - Item 1
ManufacturingAnalysis - Executive Overview for a detailed discussion of the impact of inflation and Distributionsupply chain disruption, the war in Ukraine, and the Israel-Hamas war on our material sourcing.
MANUFACTURING AND DISTRIBUTION
Our primary manufacturing facilities are in the U.S. We also have manufacturing facilities in the U.K., Belgium, France, Germany, Austria,
Israel, Mexico,China, and Australia, along with a joint venture in
China (refer to Item 1A. Risk Factors - Risks Related to Operations for risks associated with our manufacturing facilities).China. We supplement our production capabilities with the purchase of products from outside sources. TheWhile our business is not generally seasonal, the capacity of some facilities may be fully utilized at certain times for various reasons, such as consumer and customer demand, the seasonality of thecertain product categories (for example, cough/cold/flu and allergy or flea and tick seasons,products) and new product launches. We may utilize available capacity by performing contract manufacturing for other companies. We have logistics facilities in the U.S., Israel, Mexico, Australia, and numerous locations throughout Europe.Europe, and Australia. We use contract freight and common carriers to deliver our products.
In 2022, we initiated a Supply Chain Reinvention Program to reduce structural costs, improve profitability and our service levels to our retail partners, and strengthen our resiliency by streamlining and simplifying our global supply chain. Through this initiative, we plan to reduce portfolio complexity, invest in advanced planning capabilities, diversify sourcing, and optimize our manufacturing assets and distribution models. Significant Customers
Our primary customer base aligns withRefer to Item 7. Management's Discussion and Analysis - Executive Overview for a detailed discussion of the concentrationimpact of large drug retailers ininflation and supply chain disruption, and the current global retail drug industry marketplace. Walmart isSupply Chain Reinvention Program on our largest customermanufacturing and accounted for the following percentage of consolidated net sales: |
| | | | | | | | | | | | | |
| Year Ended | | Six Months Ended | | Year Ended |
December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | December 27,
2014 | | June 27,
2015 |
| 13 | % | | 13 | % | | 13 | % | | 19 | % | | 16 | % |
Salesdistribution, and refer to Walmart are primarily in the CHCA segment. As a percentage of our total U.S. OTC sales, our sales to Walmart generally align with Walmart's U.S. retail market share in the products we sell to them. In addition, while no other customer individually comprises more than 10% of net sales, we do have other significant customers. We believe we generally have good relationships with all of our customers (refer to Item 1A. Risk Factors - Operational Risks Related to Operations for risks associated with customers).our manufacturing facilities.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE ("ESG")
Sustainability
At Perrigo, we consider sustainability critical to our business and growth strategy. We are dedicated to conducting our business in a socially, environmentally, and fiscally responsible manner while maintaining transparency in our reporting. We believe that our short- and long-term success is directly linked to responsibly managing our environmental impact, respecting global human rights, creating an authentic work environment where our people can thrive, and producing high-quality, affordable products that make consumers' lives better.
Our corporate sustainability and climate strategy are centered on advancing the following business priorities:
•Operations and Climate: We are working to reduce our carbon footprint and implementing measures to transition our owned facilities to run with 100% renewable electricity by 2026, aligning with our objective to achieve net-zero emissions by 2040.
•Packaging and Plastics: We are taking steps to achieve our goals to reduce the use of virgin plastics and packaging, aiming to make our packaging as close to 100% recyclable, reusable, or compostable as possible by 2025.
•Supply Chain: We are committed to using only 100% sustainable certified palm oil and sustainably sourced paper. We continue to engage our key suppliers on sustainability, while better understanding and improving our scope 3 emissions.
•People: We are increasing our social impact through our Diversity, Equity and Inclusion ("DEI") strategy, the Health and Well-Being of our employees, and support of local communities through the Perrigo Company Charitable Foundation.
We report our progress against our commitments and programs each year in our annual sustainability report. Over the last few years, we have adopted multiple frameworks to guide our efforts, including:
•Sustainability Accounting Standards Board ("SASB") – Household and Personal Products Sector
•The Carbon Disclosure Project ("CDP")
•The Task Force on Climate-Related Financial Disclosures ("TFCD")
Additional information about our sustainability efforts and commitments, including our annual sustainability report, our Sustainability and Accounting Standards (SASB) Index, and Task Force on Climate-related Financial Disclosures (TCFD), can be found in the sustainability section of our website on the 'Our Commitment to the
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Environment page at www.Perrigo.com. References to our reports and the website are for informational purposes only, and neither the sustainability report nor the other information on our website is incorporated by reference into this Annual Report on Form 10-K.
Environmental Matters
WeOur facilities and operations are subject to various environmental laws and regulations. We undergo periodic internal audits related to environmental, health, and safety requirements in order to maintain compliance with applicable laws and regulations in each jurisdiction where we operate. We have made, and continue to make, expenditures necessary to comply with applicable environmental laws, butlaws; however, we do not believe that the costs for complying with such laws and regulations have been or will be material to our business. We do not have any material remediation liabilities outstanding.
While we believeWe’re committed to having Net Zero carbon emissions in our operations by 2040. As part of our climate strategy, we're in the process of integrating transitional and physical climate risks into our business strategy and disclosure efforts. We recognize that climate change could presentrisks may pose potential threats but also offer long term opportunities. We are dedicated to advancing the tools and methodologies for assessing climate impacts, tracking progress in reducing greenhouse gas emissions, and evaluating potential climate-driven risks to our business strategy.
Human Capital Resources
At Perrigo, we believe that the continuous personal and professional development of our people is an important component of our ability to attract, retain, and motivate top talent, which are all important aspects of our self-care strategy. Our global workforce consists of more than 9,140 full time and part time employees spread across 33 countries, of which approximately 20% were covered by collective agreements as of December 31, 2023. We continuously endeavor to provide a diverse, inclusive and safe work environment so our colleagues can bring their best to work every day. Each of us is responsible for upholding Perrigo’s four core values of Integrity, Respect, Responsibility and Curiosity and our Culture Framework.
Diversity, Equity and Inclusion
Consistent with our core values, we strive for our workforce to represent the diverse consumer base we wish to serve, enabling us to continue to deliver on our self-care promise. We believe that diverse representation, equitable practices, and inclusive behavior creates lasting benefits for Perrigo colleagues, our customers, consumers, and shareholders through enhanced individual well-being, retention, team performance, innovation, and leads to profitable growth. Our 2023-2026 DEI strategy focuses on building a winning culture through 'belonging'. The strategy focuses on three key areas:
•Educating our workforce and building inclusive mindsets;
•Strengthening our talent management practices through a lens of equity and belonging; and
•Enabling leaders, embedding accountability and strengthening our DEI governance practices.
Perrigo is committed to the well-being of the communities we serve and the individuals that make up our team of talented colleagues. Accordingly, we continue to take action to help address inequality based on multiple aspects of diversity and will be strengthening our focus on 'belonging'. Our goal is to nurture a culture where people can experience belonging, enabling them to be at their best at Perrigo.
Perrigo colleagues, including increased operating costs duesenior management, continually receive educational resources and information on how to additional regulatory requirements, physical risksbest support themselves and others as allies in support of underrepresented groups and to learn how we can contribute to healing our society's divisions. Colleagues are encouraged to practice self-care and are provided support resources such as our global Employee Assistance Program that includes staff members who identify with various underrepresented communities and speak multiple languages.
Compensation, Benefits, Health, Safety, and Well-being
Perrigo’s commitment to self-care starts with our own team. We are proactive in our approach to safety, working to eliminate hazards before any harm is incurred. As a multi-national company, we are subject to a broad range of foreign, federal, state and local laws and regulations relating to occupational safety and health, and our safety program is designed to meet all compliance requirements. We continuously evaluate opportunities to raise safety and health standards, visiting sites to identify and manage environmental health and safety risks; to evaluate and enhance workplace safety.
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Our Total Rewards philosophy is to continuously attract, engage and inspire our people by designing Total Rewards that reinforce 'belonging' at Perrigo and align with our values and winning culture, helping to fulfill Perrigo's Vision. Our total rewards package delivers competitive pay, cash-based incentives, broad-based stock grants, retirement benefits, leading healthcare, paid time off, and on-site services, among other benefits. Additionally, we are proud to continue our “HEALTHYyou” well-being program that supports our colleagues and their families in maintaining and improving their health as they navigate their own self-care and well-being journeys. This program is highly valued by our colleagues and it continues to be recognized externally by receiving the Best and Brightest in Wellness™ Award every year since 2017.
Growth, Development, and Engagement
The growth and development of our colleagues are essential to our facilities, water limitations,ability to meet future challenges and disruptionsare key components to attracting and retaining our talent. The primary means of development of our colleagues is through meaningful and challenging work. We have a robust process for identifying talent and matching them with opportunities to advance their skills and capabilities. We continue to cultivate our diverse internal talent to progress through the organization and have healthy rates of retention.
We also recognize that our colleagues need access to broad-based development tools to meet the new challenges they face in their roles. We start this process with our new colleagues who are all given a structured orientation and onboarding for faster integration. We also empower colleagues to take control of their own development by providing access to our 'GROWyou' personal development curriculum. This curriculum is supplemented by offering colleagues 24/7 access to on-demand self-study content. Personal development and learning are guided by ongoing conversations and feedback as part of our performance management philosophy.
We continue to invest in our leadership capability at all levels in the organization so they can provide the right environment within our culture to engage, grow and develop our colleagues.
Finally, we monitor our engagement across 23 dimensions multiple times a year to proactively shape an environment where colleagues are able to contribute their best, feel valued, and grow.
Human Rights
Perrigo is committed to the fight against modern slavery, child labor, unsafe working conditions and any other form of Human Rights abuse. We maintain a robust set of ethical standards that apply to all of Perrigo globally, as well as any contractors, suppliers, and other third parties doing business on our behalf. We conduct regular risk assessments and audits of our supply chain to ensure compliance with our internal standards and those of our customers.
Community Engagement
Improving the healthcare, education and access to basic needs within our local communities continue to be the primary focus for the Perrigo Company Charitable Foundation. We encourage all employees to volunteer in their local communities, which we do not believe has additional benefits on morale, mental health and goodwill as well as professional skills and network development.
More details on these risksand other Perrigo Company initiatives are material to our business in the near term.
Corporate Social Responsibility
We are committed to doing business in an ethical manner. We have a long history of environmentally sound and efficient operations, safe and healthy working conditions, and active participation in the communities where we are located. As reflected in our Corporate Social Responsibility Commitment Statement available on the 'Building Healthier Communities' page of our website we remain committed to:available at www.Perrigo.com.
Helping consumers access safe, effective and affordable healthcare products;
Strong corporate governance;
Complying with regulatory and legal requirements;
Demonstrating environmental stewardship;
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Continuously improving packaging sustainability;
Protecting human rights of our global employees and challenging our partners to do the same;
Diversity of thought, experience and perspective;
Providing a safe and healthy work environment for our employees; and
Establishing effective community partnerships.
Through these efforts, we strive to minimize our impact on the environment, drive responsible business practices, and ensure the welfare of our employees, their families, and the communities in which we operate now and into the future.
GOVERNMENT REGULATION AND PRICING
The manufacturing, processing, formulation, packaging, labeling, testing, storing, distributing, advertising, and saleselling of our products are subject to regulation by a variety of agencies in the localities in which our products are sold. In addition, we manufacture and market certain of our products in accordance with standards set by various organizations. We believe that our policies, operations, and products comply in all material respects with existing regulations to which we are subject (refersubject. Refer to Item 1A. Risk Factors - Operational Risks Related to Operations for related risks).risks.
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United States Regulation
U.S. Food and Drug Administration
TheUnder the Federal Food, Drug and Cosmetic Act, as amended ("FFDCA") FDA has jurisdiction over our Rx, OTC drug products, API,Active Pharmaceutical Ingredients ("API"), medical devices, cosmetics, and Infant Formula Foods.foods including dietary supplements and infant formula products. The FDA’s jurisdiction extends tocan include the manufacturing, testing, labeling, packaging, storage distribution, and promotiondistribution of these products. We are committed to consistently providing our customers with high quality products that adhere to "current Good Manufacturing Practices" ("cGMP")the various regulations promulgated by the FDA. The FDA conducts periodic compliance inspections of our facilities and processes. If the FDA or comparable regulatory authority becomes aware of new safety information about any of our products, these authorities may require further inspection, enhancement to manufacturing controls, labeling changes, additional testing requirements, restrictions of indicated uses or marketing, post-approval studies or post-market surveillance.
OTCActive Pharmaceutical Ingredients ("API")
Third parties develop and Rx Pharmaceuticals
All facilities where Rx and OTCmanufacture APIs for use in certain of our pharmaceutical products that are manufactured, tested, packaged, stored, or distributed forsold in the U.S. marketand other global markets. API manufacturers typically submit a drug master file to the FDA that provides proprietary information related to the API manufacturing process. The FDA inspects the manufacturing facilities to assess compliance and the facilities and procedures must comply with FDA cGMPsbe compliant before API may be imported into the U.S.
Medical Devices
We are subject to the Medical Device Amendments of 1976 to the FFDCA and regulations promulgated by competent authoritiesits subsequent amendments in the countries, states and localities where the facilities are located. All of our drug products are manufactured, tested, packaged, stored, and distributed according to cGMP regulations.U.S. The FDA performs periodic audits to ensure that our facilities remain in compliance with all appropriate regulations.
Many of our OTC products are regulated under the OTC monograph system and subject to certain FDA regulations. Under this system, selected OTC drugs are generally recognized as safe and effective and do not require the approval of an ANDA or NDA prior to marketing. Products marketed under the OTC monograph system must conform to specific quality, formula, and labeling requirements, including permitted indications, required warnings and precautions, allowable combinations of ingredients, and dosage levels. It is generally less costly to develop and bring to market a product regulated under the OTC monograph system.
We also market generic prescription drugs and non-prescription products that have switched from prescription to OTC status. Prior to commercial marketing, these products require approvalregulations issued thereunder provide for regulation by the FDA of an ANDAthe design, manufacture and marketing of medical devices, including some of our products marketed under our oral care and OTC businesses. All of our current medical devices fall under Class I or NDA that provides information on chemistry, manufacturing controls, clinical safety, efficacy and/or bioequivalence, packaging, and labeling. While the development process for these drugs generally requires less time and expense than the development process of a new drug, the size and duration of required studies can vary greatly. Prior to the onsetClass II of the Generic Drug User Fee Amendments of 2012 (“GDUFA”), the FDA approval of generic drug applications took approximately threeregulations. These devices are also subject to five times longer than approval of innovator drugs. Pursuant to GDUFA II, beginning October 1, 2017, year five of the program, the FDA pledged to complete a first cycle review on 90% of electronic generic applications within 10 months of submission.
Under the Federal Food, Drug and Cosmetic Act, as amended ("FFDCA") (the Hatch-Waxman amendments), a company submitting an NDA can obtain a three-year period of marketing exclusivity for a prescription or OTC product if it performs a clinical study that is essential to FDA approval. Longer periods of exclusivity are possible for new chemical entities, orphan drugs (those designated under section 526 of the FFDCA) and drugs under the Generating Antibiotic Incentives Now Act. During this exclusivity period, the FDA cannot
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approve any ANDAs for a similar or equivalent generic product, which can preclude another party from marketing a similar product during this period. A company may obtain an additional six months of exclusivity if it conducts pediatric studies requestedother general controls established by the FDA, on the product. This exclusivity can delay both the FDA approvalsuch as registration, listing, labeling, and sales of certain products.reporting obligations.
A company may be entitled to a 180-day generic exclusivity period for certain products. This exclusivity period often follows a patent certification and litigation process whereby the product innovator may sue for infringement. The legal action does not ordinarily result in material damages, but it generally triggers a statutorily mandated delay in FDA approval of the ANDA for a period of up to 30 months from when the innovator was notified of the patent challenge.
The Food and Drug Administration Safety and Innovation Act ("FDASIA") was signed into law on July 9, 2012. The law established, among other things, new user fee statutes for generic drugs and biosimilars, FDA authority concerning drug shortages, changes to enhance the FDA's inspection authority of the drug supply chain, and a limited extension of the 30-month stay provision described above. The FDASIA also reduced the time required for FDA responses to generic-blocking citizen petitions. We implemented new systems and processes to comply with the new facility self-identification and user fee requirements of the FDASIA, and we monitor facility self-identification and fee payment compliance to mitigate the risk of potential supply chain interruptions or delays in regulatory approval of new applications.
The U.S. government's Federal Drug Supply Chain Security Act ("DSCSA") requires development of an electronic pedigree to track and trace each prescription drug at the salable unit level through the distribution system, which will be effective incrementally over a 10-year period. The serialization of all Rx products distributed in the U.S. needed to be completed by November 26, 2018, with the requirement for tracking the products commencing on November 27, 2023. Requirements for the tracing of products at the lot level through the pharmaceutical distribution supply chain went into effect on January 1, 2015 for manufacturers, wholesale distributors, and re-packagers, and on July 1, 2015 for dispensers.
Infant Formula and Foods
The FDA’s Center for Food Safety and Applied Nutrition is responsible for the regulation of infant formula. The Office of Nutrition, Labeling and Dietary Supplements ("ONLDS") has labeling responsibility for infant formula, while the Office of Food Additive Safety ("OFAS") has program responsibility for food ingredients and packaging. The ONLDS evaluates whether an infant formula manufacturer has met the requirements under the FFDCA and consults with the OFAS regarding the safety of ingredients in infant formula and of packaging materials for infant formula.
All manufacturers of pediatric nutrition products must begin with safe food ingredients, which are either generally recognized as safe or approved as food additives. The Infant Formula Act provides specific requirements for infant formula to ensure the safety and nutrition of infant formulas, including minimum and, in some cases, maximum levels of specified nutrients.
Before marketing a particular infant formula, the manufacturer must provide regulatory agencies assurance of the nutritional quality of that particular formulation consistent with the FDA’s labeling, nutrient content, and manufacturer quality control requirements. A manufacturer must notify the FDA at least 90 days before the marketing of any infant formula that differs fundamentally in processing or in composition from any previous formulation produced by the manufacturer. We actively monitor this process and make the appropriate adjustments to remain in compliance with recentcurrent FDA rules regarding cGMP,current Good Manufacturing Practice ("cGMP"), quality control procedures, quality factors, notification requirements, and reports and records for the production of infant formulas.
In addition, the FFDCA requires infant formula manufacturers to test product composition during production and shelf-life; to keep records on production, testing, and distribution of each batch of infant formula; to use cGMP and quality control procedures; and to maintain records of all complaints and adverse events, some of which may reveal the possible existence of a health hazard. The FDA conducts yearly inspections of all facilities that manufacture infant formula, inspects new facilities during early production runs, and collects and analyzes samples of infant formula. Our infant formula manufacturing facilities have been inspected by the FDA after the effective date of the final rule and found to be in full compliance with the new GMP regulations with no corrective actions required.
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Our infant and toddler foods are subject to the Food Safety Modernization Act ("FSMA"), which protects the safety of U.S. foods by mandating comprehensive, prevention-based controls within the food industry. Under FSMA, the FDA has mandatory recall authority for all food products and greater authority to inspect food producers and is taking steps toward product tracing to enable more efficient product source identification in the event of a safety issue.
Active Pharmaceutical Ingredients
Third parties develop and manufacture API for use in certain of our products that are exported to the U.S. and other global markets. Before API can be commercialized in the U.S., the manufacturer and/or developer must submit a drug master file ("DMF") that provides the proprietary information related to the manufacturing process. The FDA inspects the manufacturing facilities to assess cGMP compliance, and the facilities and procedures must be cGMP compliant before API may be exported to the U.S.
The facilities and products are subject to regulation by the applicable regulatory bodies in the place of manufacture as well as the regulatory agency in the country from which the product is exported or imported. For API exported to European markets, the manufacturer must submit a European DMF and, where applicable, obtain a certificate of suitability from the European Directorate for the Quality of Medicines. The manufacturing facilities and production procedures for API marketed in Europe must meet EU-GMP and European Pharmacopeia standards.
U.S. Department of Agriculture
The Organic Foods Production Act enacted under Title 21 of the 1990 Farm Bill established uniform national standards for the production and handling of foods labeled as "organic." Our infant formula manufacturing sites in Vermont, Ohio and OhioWisconsin adhere to the standards of the U.S. Department of Agriculture ("USDA") National Organic Program for production, handling, and processing to maintain the integrity of organic products. Our infant formula manufacturing sites in Vermontproducts and Ohio are USDA-certified, enabling them to produce and label organic products for U.S. and Canadian markets.
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U.S. Environmental Protection Agency
The U.S. Environmental Protection Agency ("EPA") is the main regulatory body in the United States for veterinary pesticides. The EPA's Office of Pesticide Programs is responsible forgoverning environmental regulation. Laws administered by the regulation of pesticide products appliedEPA, often in partnership with state agencies, include but are not limited to animals. All manufacturers of animal health pesticides must show that their products will not cause “unreasonable adverse effects to man or the environment” as stated inClean Air Act; the Clean Water Act; the Resource Conservation and Recovery Act; the Comprehensive Environmental Response, Compensation and Liability Act; and the Federal Insecticide, Fungicide, and Rodenticide Act. Within the U. S., pesticide products that are approved by the EPA must also be approved by individual state pesticide authorities before distribution in that state. Post-approval monitoring of products is required, with reports provided to the EPA and some state regulatory agencies.
U.S. Drug Enforcement Administration
The U.S. Drug Enforcement Administration ("DEA") regulates certain drug products containing controlled substances such as morphine, hydromorphone, opium, testosterone, midazolam, and List I chemicals, such as pseudoephedrine, pursuant to the federal Controlled Substances Act ("CSA") and the Substance Use-Disorder Prevention that Promotes Opioid Recovery Treatment for Patients and Communities Act ("SUPPORT Act"). The CSA and DEA regulations impose registration, security, record keeping, suspicious order monitoring, reporting, storage, manufacturing, distribution, importation and other requirements upon legitimate handlers under the oversight of the DEA. The DEA categorizes controlled substances into Schedules I, II, III, IV, or V, with varying qualifications for listing in each schedule. We are subject to the requirements regarding the controlled substances in Schedules II - V and the List I chemicals. Our facilities that manufacture, distribute, import, or export any controlled substancesList 1 Chemicals must register annually with the DEA.
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The DEA inspects all manufacturing facilitiesand are subject to review security, record keeping, reporting,inspection and handling prior to issuing a controlled substance registration, and it also periodically inspects facilities for compliance with the CSA and its regulations. Failure to maintain compliance with applicable requirements, particularly as manifested in the loss or diversion of controlled substances, can result in enforcement action such as civil penalties, refusal to renew necessary registration, or the initiationif found out of proceedings to revoke those registrations. In certain circumstances, violations could lead to criminal prosecution. We are also subject to state laws regulating the manufacture and distribution of certain products.compliance.
Federal Healthcare Programs and Drug Pricing Regulation
WithinIn the U.S., government healthcare insurance and welfare programs such as the Medicare and Medicaid programs are important third partythird-party payers for patients who taketreated with our products. TheseWhile these programs include several indirect formsmay cover OTC products under some circumstances, utilization of price regulation applicable to our drug products as a condition to coverage and/or payment for our products and alsounder these programs is limited.When covering our products, these programs regulate the amount that pharmacies and other healthcare providers will beare paid for our products. Specifically, U.S. law requires that a pharmaceutical manufacturer, as a condition of having federal funds being made available for the manufacturer’s drugs under Medicaid and Medicare Part B, enter into three government pricing program agreements: (i) a Medicaid rebate agreement with the Secretary of Health and Human Services (“HHS”) to pay rebates to state MedicaidWe participate in multiple programs, for the manufacturer’s covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program; (ii) a 340B program agreement with the Secretary of HHS to provide discounts to certain “covered entity” safety net healthcare providers; and (iii) a Master Agreement with the Department of Veterans Affairs ("VA") under which discounts are available for purchases by federal agencies. We have such agreements in effect.
Medicaid Rebate Agreement
The Medicaid rebate agreement requires the drug manufacturer to remit rebates to each state Medicaid agency on a quarterly basis for both fee-for-service and Medicaid managed care organization utilization. Rebate amounts are based on pricing data reported by the manufacturer to the Centers for Medicare & Medicaid Services (“CMS”), including Average Manufacturer Price ("AMP") and, in the case of innovator products, Best Price ("BP"). U.S. law also requires that a company that participates in the Medicaid rebate program report average sales price ("ASP") information to CMS for each calendar quarter for certain categories of drugs that are paid under Part B of the Medicare program. CMS uses these submissions to determine payment rates for drugs under Medicare Part B.
Under the Medicaid rebate program, the minimum rebate amounts due are as follows: (i) for noninnovator products, in general generic drugs marketed under ANDAs, the rebate amount is 13% of the AMP for the quarter; and (ii) for innovator products, in general brand-name products marketed under NDAs, the rebate amount is the greater of 23.1% of the AMP for the quarter or the difference between such AMP and the BP for that same quarter. Manufacturers also pay an “additional rebate" on innovator drugs where price increases since launch have outpaced inflation. Beginning with the first quarter of 2017, an additional rebate is due for noninnovator products, which is calculated somewhat differently from the innovator product additional rebate, but likewise generally applies where and to the extent that a manufacturer’s AMP increases faster than the rate of inflation.
CMS issued a final regulation, generally effective April 1, 2016, to implement changes to the Medicaid rebate program under the 2010 health reform legislation (“Health Reform Law”) and otherwise to provide program guidance. In addition to guidance concerning rebate program administration matters, the regulation also addressed certain related Medicaid reimbursement matters. First, under the Health Reform Law, CMS has also begun to use manufacturer AMP data to calculate reimbursement limits for pharmacies for multiple source drugs under the Medicaid program, known as the federal upper limits ("FULs"). CMS also surveys and publishes retail community pharmacy acquisition cost information to provide state Medicaid agencies with a basis for comparing their own reimbursement and pricing methodologies and rates. Second, the regulation also directed states to update their Medicaid payment methodologies to provide for payment amounts designed to reflect pharmacies’ "actual acquisition costs" for drugs, a change from the prior "estimated acquisition" standard. The regulation also required states to provide the government with findings to support their compliance with this standard by April 1, 2017.
Pricing and rebate calculations are governed by statutory and regulatory requirements that are complex, vary among products and programs, can change over time, and are subject to interpretation by us, governmental or regulatory agencies, and the courts. In the case of the Medicaid rebate program, if we become aware of errors in
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our priorassociated price submissions, or a prior BP submission needs to be updated due to late arriving data, we must resubmit the updated data within specified time frames. Such restatements and recalculations increase our cost of compliance with the Medicaid rebate program, and corrections can result in an overage or underage of our rebate liability for past quarters, depending on the nature of the correction.
340B Program Agreement
The 340B drug pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. The ceiling price is derived from the data the manufacturer reports under the Medicaid rebate program and therefore any changes to statutory or regulatory requirements applicable to the Medicaid price figures may impact the 340B ceiling price calculation as well. 340B covered entities include a variety of community health clinicsreporting, payment, and other entities that receive health services grants from the Public Health Service, as well as certain hospitals that serve a disproportionate share of low-income patients.compliance obligations under each.
Master Agreement with the Department of Veterans Affairs
U.S. law also requires any company that participates in the Medicaid rebate program and Medicare Part B and that wants its covered drugs paid for by certain federal agencies and grantees to enter into a Master Agreement with the VA. Under the Master Agreement, the company must offer its innovator drugs for procurement under the Federal Supply Schedule (“FSS”) contracting program, and must charge certain agencies (VA, Department of Defense, Public Health Service and the Coast Guard) no more than a statutory Federal Ceiling Price (“FCP”). The FCP is calculated based on Non-Federal Average Manufacturer Price (“NFAMP”) data we submit to the VA. FSS contracts include extensive disclosure and certification requirements and standard government terms and conditions with which we must comply. Consistent with VA’s interpretation of the Master Agreement, we have also entered into an agreement to pay rebates on covered drug prescriptions dispensed to TRICARE beneficiaries by TRICARE network retail pharmacies.
Medicare Part D “Coverage Gap” Rebates
For certain innovator products, manufacturers must also enter into an agreement with the Secretary of HHS to provide rebates with respect to utilization of their products by certain Medicare Part D beneficiaries while those patients are within the Medicare Part D benefit “coverage gap.” Manufacturers are not required to submit separate pricing data under this program; the rebate amount is calculated by CMS based on Part D plans’ “negotiated prices” paid to pharmacies.
Other Price Regulation
In addition to these technical government pricing regulation programs, drug pricing has come under increasing public scrutiny arising out of general concerns about high drug costs or price increases, and transparency of pricing and discounting practices within the pharmaceutical distribution system. Several states, including Maryland, Nevada, and California, have recently enacted laws that prohibit “price gouging,” require manufacturers to report certain information concerning price increases exceeding certain amounts, and/or provide advance notice of price increases to certain entities (refer to Item 1A. Risk Factors - Risks Related to Operations for risks related to the above-mentioned programs).
Other U.S. Regulations and Organizations
We are subject to various other federal, state, non-governmental, and local agency rules and regulations.regulations, including among others: U.S. federal anti-bribery laws; Federal Trade Commission regulation of advertising and promotion of consumer goods; consumer product safety requirements; state and federal privacy laws and regulations; laws requiring certain pharmaceutical manufacturers to track and report payments to physicians and teaching hospitals; and non-governmental standard-setting organizations such as the International Organization for Standardization ("ISO") and the United States Pharmacopoeia Convention, Inc. ("USP"). Compliance with the laws and regulations regarding the manufacture and sale of our current products and the discovery, development, and introduction of new products requires substantial effort, expense and capital investment. Other regulatory agencies, organizations, legislation, regulation and laws that may impact our business include, but are not limited to:
Physician Payment Sunshine Act - This act requires certain pharmaceutical manufacturers to engage in extensive tracking of payments or transfers of value to physicians and teaching hospitals, maintenance of a payment database and public reporting of the payment data.
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Foreign Corrupt Practices Act of 1977 ("FCPA") - This act and other similar anti-bribery laws prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties or international organizations with the intent to obtain or retain business or seek a business advantage.
Federal Trade Commission ("FTC")- This agency oversees the advertising and other promotional practices of consumer products marketers. The FTC considers whether a product’s claims are substantiated, truthful and not misleading. The FTC also reviews mergers and acquisitions of companies exceeding specified thresholds and investigates certain business practices relevant to the healthcare industry.
International Organization for Standardization ("ISO") - The ISO Standards specify requirements for a Quality Management System that demonstrates the ability to consistently provide products that meet customer and applicable regulatory standards and includes processes to ensure continuous improvement. Our infant formula manufacturing sites are ISO 9001-2008 Certified for Quality Management Systems. ISO inspections are conducted at least annually.
United States Pharmacopeial Convention, Inc. ("USP") - The USP is a non-governmental, standard-setting organization. By reference, the FFDCA incorporates the USP quality and testing standards and monographs as the standard that must be met for the listed drugs, unless compliance with those standards is specifically disclaimed on the product’s labeling. USP standards exist for most Rx and OTC pharmaceuticals and many nutritional supplements. The FDA typically requires USP compliance as part of cGMP compliance.
Health Insurance Portability and Accountability Act ("HIPAA") - We could be subject to criminal penalties if we knowingly obtain individually identifiable health information from a covered entity in a manner that is not authorized or permitted by HIPAA or for aiding and abetting the violation of HIPAA.
Consumer Product Safety Commission ("CPSC") - The CPSC has published regulations requiring child resistant packaging on certain products including pharmaceuticals and dietary supplements. The manufacturer of any product that is subject to any CPSC rule, ban, standard or regulation must certify that, based on a reasonable testing program, the product complies with CPSC requirements.
Anti-Bribery Laws - Various jurisdictions in which we operate have laws and regulations, including the U.K. Bribery Act 2010, aimed at preventing and penalizing corrupt and anticompetitive behavior.
Other State Agencies - We are subject to regulation by numerous other state health departments, insurance departments, boards of pharmacy, state controlled substance agencies, state consumer health and safety regulations, and other comparable state agencies, each of which have license requirements and fees that vary by state.
Regulation Outside the U.S.
We develop and manufacture products and market third-party manufactured products in regions outside the U.S., including Easternprimarily Europe, Canada, and Western Europe, Israel, Mexico, Australia, countries in Asia, South America, and the Middle East, each of which has its own regulatory environment. The majority of our sales outside the U.S. are in the following categories: OTC/Rx pharmaceuticals, medical devices, dietary supplements and cosmetics. Other regulatory agencies, organizations and legislation that may impact our business include, but are not limited to:
Privacy Regulations - We are subject to numerous globalprivacy regulations, transparency laws, anti-bribery laws, and rules and regulations designed to protect personal data, such as the European Union Directive on Data Protection (which will be replaced by the European Union General Data Protection Regulation (“GDPR”) from May 2018 onward). The GDPR will introduce more stringent data protection requirements in the European Union ("EU"), as well as substantial fines for breaches of the data protection rules. The GDPR will increase our responsibility and potential liability in relation to personal data that we process, and we may be required to put in place additional mechanisms to ensure compliance with the GDPR.
infant formula.
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Transparency Laws - In various jurisdictions in which we operate, we are subject to the laws and regulations aimed at increasing transparency of financial relationships between healthcare professionals and pharmaceutical/medical device manufacturers.
European Union
OTC and Rx Pharmaceuticals
The European pharmaceutical industry is highly regulated and much of the legislative and regulatory framework is driven by the European Parliament and the European Commission. This has many benefits, including the potential to harmonize standards across the complex European market. However, obtaining regulatory agreement across member states presents complex challenges that can lead to delays in the regulatory process.
In the EU, as well as many other locations around the world, the manufacture and sale of medicinal products are regulated in a manner substantially similar to that of the U.S. requirements, which generally prohibit the handling, manufacture, marketing, and importation of any medicinal product unless it is properly registered in accordance with applicable law. However, obtaining regulatory approval across various EU member states can present complex challenges. The registration file relating to any particular product must contain data related to product efficacy and safety, including results of clinical testing and/or references to medical publications, as well as detailed information regarding production methods and quality control. Health ministries are authorized to cancel the registration of a product if it is found to be harmful or ineffective or if it is manufactured or marketed other than in accordance with registration conditions.
Between 1995 and 1998, the over-arching regulation that governs medicinal products was revised in an attempt to simplify and harmonize product registration. This revised legislation introduced the mutual recognition procedure (“MRP”), whereby after approval of a marketing authorization by regulatory authorities in the reference member state (“RMS”), additional marketing authorizations could be submitted to other concerned member states to obtain a product license. In November 2005, the medicinal product legislation was further revised to introduce the decentralized procedure (“DCP”), whereby marketing authorizations are submitted simultaneously to the RMS and select concerned member states. In 2005, the EMA also opened up the centralized procedure to sponsors of marketing authorizations for generic medicinal products. Unlike the MRP and DCP, the centralized procedure results in a single marketing authorization and product labeling across all member states that will allow a sponsor to file for individual country reimbursement and make the medicine available in all the EU countries listed on the application. Marketing authorizations and subsequent product licenses are granted to applicants only after the relevant health authority issues a positive assessment of quality, safety and efficacy of the product.
In addition to obtaining marketing authorization for each product, all member states require that a manufacturer’s facilities obtain approval from an EU Regulatory Authority. The EU has a code of GMP that each manufacturer must follow and comply with. Regulatory authorities in the EU may conduct inspections of the manufacturing facilities to review procedures, operating systems and personnel qualifications. We believe that our policies, operations and products comply in all material respects with existing regulations to which our operations are subject.
EU Member States had to transpose the European Falsified Medicines Directive (the “Directive”) into national law by January 2, 2013. The transposition process is now complete. The provisions of the Directive are intended to reduce the risk of counterfeit medicines entering the supply chain and also to ensure the quality of API manufactured outside of the EU. The Directive required the serialization of all Rx and some OTC products, similar to the DSCSA in the U.S.
In the EU, member states regulate the pricing of prescription medicinal products, and in some cases, the formulation and dosing of products. This regulation is handled by individual member state national health services. These individual regulatory bodies can result in considerable price differences and product availability among member states. The implementation of tendering systems for the pricing of pharmaceuticals in several countries generally impacts drug pricing for generics; generally “tendering” refers to a system that requires bids to be submitted to the government by competing manufacturers to be the exclusive, or one of a few, suppliers of a product in a particular country.
Data exclusivity provisions exist in many countries, although the application is not uniform. In general, these exclusivity provisions prevent the approval and/or submission of generic drug applications to the health authorities
Perrigo Company plc - Item 1
Regulation
for a fixed period of time following the first approval of the brand-name product in that country. As these exclusivity provisions operate independently of patent exclusivity, they may prevent the submission of generic drug applications for some products even after the patent protection has expired.
The requirements deriving from European pharmacovigilance regulation are constantly expanding due to increasing guidance on good vigilance practices and increased communication on inspectors’ expectations. Pharmacovigilance fee regulation became effective in late 2014 to support health authority assessment of pharmacovigilance safety evaluation reports, study protocols for post authorization safety studies and referrals. Once approved, the advertising of pharmaceuticals in the EU is governed by national regulations and guidelines. Within certain member states this is overseen by a self-certification process whereas in others national governance bodies approve material prior to release.
The wholesale distribution of medicinal products is an important activity in the integrated supply chain management. The quality and the integrity of medicinal products can be affected by a lack of adequate control. To this end, the EU Commission has published guidelines on Good Distribution Practice of medicinal products for human use in 2013. The present guidelines are based on Articles 84 and 85b(3) of medicinal products for human use directive.
Medical Devices
The EU has enacted into law numerous directives and adopted many harmonizing standards pertaining to a wide range of industrial products, including medical devices. Medical devices that comply with the requirements of applicable directives are entitled to bear the CE marking of conformity, which indicates that the device conforms to the applicable requirements of the directives and, accordingly, can be commercially distributed throughout Europe. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a Notified Body, an organization accredited by a member state.state under the EU's Medical Device Regulation ("MDR"). Assessment by a Notified Body includes an audit of the manufacturer’s quality system and may also include specific testing of the product. This assessment is a prerequisite for a manufacturer to commercially distribute the product throughout the EU. All medical devices will need to be approved under the MDR with transition periods until 2027-28, and the possibility to sell off existing medical device products until end of shelf-life.
Dietary Supplements
Dietary supplements are subject to several regulations that inform the selection of ingredient levels and how products can be described on packaging and in advertising. These regulations include: Food Supplements Directive 2002/46/EC, Food Information to Consumers Regulation (EU) No 1169/2011, Permitted Vitamins and Minerals Regulation (EC) 1170/2009, Food Additives Regulation (EC) 1333/2008, Nutritional & Health Claims Regulation (EC) No 1924/2006, the Foods Intended for Particular Nutritional Uses Directive 2009/39/EC, and Regulation (EU) 609/2013.
EU rules on nutrition2013, and health claims, which were established by Regulation EC 1924/2006, apply to any nutritional or health claim by a manufacturer. The objective of the regulation is to ensure that claims made in food labeling or advertising are clear, accurate and based on scientific evidence. The European Food Safety Authority, an advisory panel to the European Commission, performs all scientific assessments of health claims on food and supplement labels. An EU register of nutrition and health claims exists to document approved, pending, and rejected claims.2006.
Cosmetics
Cosmetic products in the EU market must comply with Regulation EC No. 1223/2009. This regulation requires manufacturers to prepare a product safety report prior to placing a cosmetic product in the market. In addition, for each cosmetic product placed in the market, a “responsible person” must be designated to oversee compliance with the regulation’s reporting requirements. Commission Regulation EU No. 655/2013 establishes the common criteria and justification for claims to be used in the packaging and advertising of cosmetics products.
Biocides
Biocides in the EU market must comply with Regulation EU No. 528/2012 ("EU BPR") overseen by the European Chemicals Agency. Contrary to medicines, biocides are not exempted from chemical legislation such as the Regulation on Registration, Evaluation, Authorization and Restriction of Chemicals No. 1907/2006 and the Regulation on Classification, Labelling and Packaging Regulation of substances and mixtures EC No. 1272/2008.
General Product Safety Directive
The General Product Safety Directive (2001/95/EC) complements sector-specific legislation such as rules that apply to electrical and electronic goods, chemicals, and other specific product groups. Together, the General Product Safety Directive and sector specific legislation ensure the safety and traceability of products in the market (other than pharmaceuticals, medical devices, and food which are regulated under separate legislation). If our products fail to meet the General Product Safety Directive, we may incur fines.
Perrigo Company plc - Item 1
Regulation
Additional Global Regulations and Considerations
Employees
We must comply with a variety of U.S. laws related to doing business outside of the U.S., including but not limited to, Office of Foreign Asset Controls; United Nations and EU sanctions; the Iran Threat Reduction and Syria Human Rights Act of 2012; rules relating to the use of certain “conflict minerals” under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act; and regulations enforced by the U.S. Customs and Border Patrol. Changes in laws, regulations, and practices affecting the pharmaceutical industry and the healthcare system, including imports, exports, manufacturing, quality, cost, pricing, reimbursement, approval, inspection, and delivery of healthcare, may affect our business and operations. International sanctions and boycotts of our products could also impact our sales and ability to export our products.
As
Tax Regulations
Recent Changes to Tax Laws, Regulations and Related Interpretations
The Organization for Economic Co-operation and Development (“OECD”), which represents a coalition of December 31, 2017,member countries, has recommended changes to numerous long-standing tax principles. In particular, the OECD's Pillar Two initiative introduces a global per-country minimum tax of 15%. Pillar Two legislation has been enacted or substantively enacted in many of the jurisdictions in which we had approximately 10,400 full-timeoperate. The legislation will be effective for our financial year beginning January 1, 2024. We are in scope of the enacted or substantively enacted legislation and temporary employees worldwide,have performed an assessment of our potential exposure to Pillar Two income taxes.
The assessment of the potential exposure to Pillar Two income taxes is based on the most recent tax filings, country-by-country reporting and financial statements for our constituent entities. Based on the assessment, the Pillar Two effective tax rates in most of the jurisdictions in which approximately 24% were covered by collective bargaining agreements.we operate are above 15%. However, there are a limited number of jurisdictions where the transitional safe harbor reliefs do not apply and the Pillar Two effective tax rate is below 15%. We consider our employee relations generally satisfactory.do not expect a material exposure to Pillar Two income taxes in those jurisdictions.
Available InformationAVAILABLE INFORMATION
Our principal executive offices are located at TreasuryThe Sharp Building, Lower Grand Canal Street,Hogan Place, Dublin 2, Ireland,D02 TY74, and our North American base of operations is located at 515 Eastern430 Monroe Avenue Allegan,NW, Grand Rapids, Michigan 49010.49503. Our telephone number is +353 1 7094000. Our website address is www.perrigo.com, where we make available free of charge our reports on Forms 10-K, 10-Q and 8-K, including any amendments to these reports, as soon as reasonably practicable after they are electronically filed with or furnished to the U.S. Securities and Exchange Commission ("SEC"). These filings are also available to the public at www.sec.gov and www.isa.gov.il.
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ITEM 1A. | ITEM 1A. RISK FACTORS |
Risks Related to Operations
SUMMARY OF RISK FACTORS
Operational Risks
•We face vigorous competition from other pharmaceutical and consumer packaged goods companies, thatwhich may threaten the commercial acceptancedemand for and pricing of our products.
•If we do not continue to develop, manufacture, and market innovative products, introduce new line extensions, and expand into adjacent categories that meet customer demands, our net sales may be negatively impacted and we may lose market share.
•We operate in highly regulated industries, and any inability to timely meet current or future regulatory requirements could have a material adverse effect on our business and operating results.
•Limitations on reimbursement, continuing healthcare reforms, and changes to reimbursement methods in the United States and other countries may have an adverse effect on our financial condition and operating results.
•Unfavorable publicity or consumer perception of the safety, quality, and efficacy of our products could have a material adverse effect on our business.
•Lack of availability, or significant increases in the cost, of raw materials used in manufacturing our products could have a material adverse effect on our profit margins and operating results.
•The effects of public health outbreaks, including pandemics such as COVID-19 and epidemics, and related public and governmental actions could have a material adverse impact on our operations and our business and financial condition in the future.
Perrigo Company plc- Item 1A
Risk Factors
•Disruption of our supply chain, including as a result of pandemics, global health crises, or wars or other civil unrest, including war in Ukraine, or in Gaza, could have a material adverse effect on our businesses, financial condition, results of operations and cash flows.
•A disruption at any of our main manufacturing facilities could have a material adverse effect on our business, financial position, and results of operations.
•Our business could be negatively affected by the performance of our collaboration partners and suppliers, and any such adverse impact could be material.
•Our business depends upon certain customers for a significant portion of our sales, therefore our business would be adversely affected by a disruption of our relationship with these customers or any material adverse change in these customers' businesses.
•Our businesses could be adversely affected by deteriorating economic conditions in the countries in which we operate, and our results may be volatile due to these or other circumstances beyond our control.
•A cybersecurity breach, disruption or misuse of our information systems, or our external business partners’ information systems could have a material adverse effect on our business.
•Management transition creates uncertainties, and any difficulties we experience in managing such transitions may negatively impact our business.
Strategic Risks
•We may not realize the benefits of business acquisitions, divestitures, and other strategic transactions, which could have a material adverse effect on our operating results.
•We have acquired significant assets that could become impaired or subject us to losses and may result in an adverse impact on our results of operations, which could be material.
•There can be no assurance that our strategic initiatives, including restructurings, will achieve their intended effects.
•The synergies and benefits expected from acquiring HRA Pharma and Gateway may not be realized in the amounts anticipated or at all and integrating HRA Pharma and Gateway's business may be more difficult, time consuming or costly than expected.
•Failure to effectively monitor and respond to ESG matters, including our ability to set and meet reasonable goals related to climate change and sustainability efforts, may negatively affect our business and operations.
Global Risks
•Our business, financial condition, and results of operations are subject to risks arising from the international scope of our operations.
•We operate in jurisdictions that could be affected by economic and geopolitical instability, which could have a material adverse effect on our business.
•The international scope of our business exposes us to risks associated with foreign exchange rates.
Litigation and Insurance Risks
•We are or may become involved in lawsuits and may experience unfavorable outcomes of such proceedings.
•Increased scrutiny on pricing practices and competition in the pharmaceutical industry, including antitrust enforcement activity by government agencies and class action litigation, may have an adverse impact on our business and operating results, which could be material.
•Third-party patents and other intellectual property rights may limit our ability to bring new products to market and may subject us to potential legal liability, which could have a material adverse effect on our business and operating results.
•The success of certain of our products depends on the effectiveness of measures we take to protect our intellectual property rights and patents.
•Our ability to achieve operating results in line with published guidance is inherently subject to numerous risks and other factors beyond our control. Publishing earnings guidance subjects us to risks, including increased stock volatility, that could lead to potential lawsuits by investors.
•Significant increases in the cost or decreases in the availability of the insurance we maintain could adversely impact our operating results and financial condition. Disputes with insurers on the scope of existing policies may limit the coverage available under such policies.
Perrigo Company plc- Item 1A
Risk Factors
Tax Related Risks
•The resolution of uncertain tax positions and ongoing disputes with U.S. and foreign tax authorities could be unfavorable which could have a material adverse effect on our business.
•Changes to tax laws and regulations or the interpretation thereof could have a material adverse effect on our results of operations and the ability to utilize cash in a tax efficient manner.
•Our effective tax rate or cash tax payment requirements may change in the future, which could adversely impact our future results of operations.
Capital and Liquidity Risks
•Our indebtedness could adversely affect our ability to implement our strategic initiatives.
•We cannot guarantee that we will buy back our ordinary shares pursuant to our announced share repurchase plan or that our share repurchase plan will enhance long-term shareholder value.
•Any additional shares we may issue could dilute your ownership in the Company.
•We are incorporated in Ireland; Irish law differs from the laws in effect in the United States and may afford less protection to, or otherwise adversely affect, our shareholders.
•We may be limited in our ability to pay dividends in the future.
Operational Risks
We face competition from other pharmaceutical and consumer packaged goods companies, which may threaten the demand for and pricing of our products.
We operate in a highly competitive environment. Our Perrigo-branded products compete against store brand, generic, and branded pharmaceuticals. Competition is also impacted by changes in regulationshealth and governmentwellness products. In addition, our products sold under labels of others (store brand) compete against other store brands, generic, and branded health and wellness products. If we or our store brand customers are unable to compete successfully, our business may lose customers or face negative pricing programs that may give competitors an advantage.pressures. In particular:
As a manufacturer of generic versions of brand-name drugs through our CHCA•Our CSCA and RXCSCI segments we experience direct competition from brand-nameother drug companies, including brand name companies, that may try to prevent, discourage or delay the use of generic versionsour products through various measures, including introduction of new branded products, legislative initiatives, changing dosage forms or dosing regimens, regulatory processes, filing new patents or patent extensions, lawsuits, citizens’ petitions, and attempts to generate negative publicity prior to our introduction of a genericnew competitive product. In addition, brand-name competitorsMoreover, other companies may lower their prices to compete with generic products, increase advertising, or launch, either through an affiliate or licensing arrangements with another company, an authorized generic at or near the time the first generic product is launched, depriving the generic product potential market exclusivity.
Our CHCA and RX segments may experience increased price competition as other generic companies produce the same product,products as us, sometimes forsold at dramatically lower margins in order to gain market share. Other generic companies may also introduce new drugs and/or drug delivery techniques that make our current products less desirable. A drug may be subject to competition from alternative therapies during the period of patent protection or regulatory exclusivity, and thereafter, we may be subject to further competition from generic products or biosimilars.
The pharmaceutical industry is consolidating. This creates larger competitors and places further pressure on prices, development activities, and customer retention. •Our animal health category within the CHCA segment has seen an increase in direct to consumer advertising by several branded competitors, which may increase in the future, and our nutritionals category has experienced increased competition through alternative channels such as health food stores, direct mail and direct sales.
We develop and distribute branded products primarily through our CHCI segment. We experience competition from other brand-name drug companies, many of which are larger and have more resources to devote to advertising and marketing. These direct competitors may be able to adapt more quickly to changes in customer requirements. Our current and future competitors mayrequirements or develop products comparable or superior to those offered by us at more competitive prices.
•Competition in the pharmaceutical space may also be impacted by changes in regulations and government pricing programs that may give certain competitors an advantage.
Perrigo Company plc- Item 1A
Risk Factors
Our CHCA and RX segments also experience competition from our generic competitors, some of whom are significantly larger than we are, who may develop their products more rapidly or complete regulatory approval processes sooner, or may market their products earlier than we do.
If we are unable to compete successfully, our business will be harmed through loss of customers or increased negative pricing pressure that would adversely affect our ability to generate revenue and adversely affect our operating results.
If we do not continue to develop, manufacture, and market innovative products, introduce new line extensions, and expand into adjacent categories that meet customer demands, we may lose market share and our net sales may be negatively impacted.impacted and we may lose market share.
Our continuedThe growth of our business is due in large part to our ability to develop, manufacture, and market products that meet customer requirements for quality, safety, efficacy, and cost effectiveness. Continuous introductionscost-effectiveness. Margins for existing products tend to decline over time due to aging product life cycles, changes in consumer preferences, pricing pressure from customers, and increased competition. Accordingly, our business model relies heavily on the continuous introduction of newinnovative products and new product categories are critical to our business.categories. If we do not continue to develop, manufacture, and market new products, we could lose market share, and our net sales may be negatively impacted. See Item 1. Business - Research and Development for more information.
We maintain a diversified product line to function as a primary supplier for our customers. Capital investments are driven by growth, technological advancements, cost improvement and the need for manufacturing flexibility. Our future capital expenditures could vary materially due to the uncertainty of these factors. In addition,or if we fail to stay current with the latest manufacturing information, and packaging technology, we may be unable to competitively support the launch of new product introductions.
Our product margins may decline over time due to our products' aging life cycles, changes in consumer choice, changes in competition for our existing products, or the introduction of next generation innovative products; therefore, new product introductions are necessary to maintain our current financial condition. If we are unable to continue to create new products, we maycould lose market share, or experience pricing pressure, and our net sales may be negatively impacted.affected.
We must prove that the regulated generic drug products in our CHCA and RX segments are bioequivalent to their branded counterparts, which may require bioequivalence studies, and in the case of topical products, even more extensive clinical endpoint trials to demonstrate their efficacy. The development and commercialization process, particularly with respect to innovative products, is both time consuming and costly, and subject to a high degree of business risk. Products currently under development may require re-design to meet evolving FDAregulatory standards, may not perform as expected, may not pass required bioequivalence studies, or may be the subject of intellectual property challenges. Necessary regulatory approvals may not be obtained in a timely manner, if at all. Any of these events may negatively impact our net sales.
Even if we are successful in developing a product, our customers'
Perrigo Company plc- Item 1A
Risk Factors
failure to launch one of our products successfully, or delays in manufacturing developed products, could adversely affect our operating results. In addition, the FDA or similar regulatory agency couldagencies may impose higher standards andor additional requirements, as a condition to clearing new products, such as requiring more supporting data and clinical data than previously required, in order to gain regulatory clearance to launch new formulations into the market, which could negatively impact our future net sales.
Our CHCA and CHCI segments are impacted by changes in consumer preferences. If In our CSCA segment, we are unable to adapt to these changes, we may lose market share and our net sales may be negatively impacted.
While the market for store brand products has grown in recent years, there can be no assurancemust prove that the paceregulated generic drug products are bioequivalent to their branded counterparts, which may require bioequivalence studies, and, in the case of this growth will continue. Consumer preferences relatedtopical products, even more extensive clinical endpoint trials to healthdemonstrate their efficacy, and nutritional concerns may change, whichthe failure to do so could negatively impact demand for our CHCA and CHCI products or cause us to incur additional costs to change our products or product packaging.
The future growth and stability of U.S. store brand market share will be impacted, in part, by general economic conditions, which can influence consumers to switch to and from store brand products. Our CHCA segment sales could be negatively affected if economic conditions improve and consumers return to purchasing higher-priced brand-name products. Conversely, while store brand products present an
Perrigo Company plc- Item 1A
Risk Factors
alternative to higher-priced branded products, if economic conditions deteriorate, our CHCA segment sales could be negatively impacted if consumers forgo obtaining healthcare or reduce their healthcare spending.
Our CHCI segment's success is dependent on the continued growth in demand for its lifestyle products, which include weight-loss products and various dietary supplements. If demand for these products decreases, our CHCI segment's results of operations would be negatively impacted.
Our CHCA customers may request changes in packaging to meet consumer demands, which could cause us to incur inventory obsolescence charges and redesign costs, which in turn wouldalso negatively impact our CHCA segment's results of operations.
sales.
Our infant formula product category within our CHCA segment is subject to changing consumer preferences and health and nutrition-related concerns. Our business depends, in part, on consumer preferences and choices, including the number of mothers who choose to use infant formula products rather than breastfeed their babies. To the extent that private, public, and government sources may promote the benefits of breastfeeding over the use of infant formula, there could be a reduced demand for infant formula products. We could also be adversely impacted by an increase in the number of families that are provided with infant formula by the U.S. federal government through the Women, Infants and Children program, as we do not participate in this program.
We operate in highly regulated industries, and any inability to timely meet current or future regulatory requirements could have a material adverse effect on our business financial position, and operating results.
We operate in highly regulated industries in numerous countries and are subject to the regulations of a variety of U.S. and non-U.S. agencies related to the manufacturing, processing, formulation, packaging, labeling, testing, storing, distribution, import, export, advertising, and sale (including cost, pricing and reimbursement) of our products, as described in detail in Item 1. Business - Government Regulation and Pricing. Government regulationChanges in laws, regulations, and practices in the marketscountries in which we operate, impactsincluding changes in interpretation of existing regulations (which may have retroactive effect), may be difficult or expensive for us to comply with, could restrict or delay our business,ability to manufacture, distribute, sell or market our products, and may adversely affect our revenue, operating results, and financial condition or impose significant administrative burdens. Moreover, changes in the interpretation of existing regulations or practices by such regulators could result in changes in the legal requirements affecting us (including with retroactive effect). Divergence in regulatory approach from country to country, and between the EU and individual member states, adds cost and complexity to the compliance framework; and differences in requirements and/or implementation dates in different jurisdictions may provide competitive advantages to manufacturers that operate in other locations. If our products fail to meet regulatory requirements, our sales may be adversely affected, we may incur fines and penalties, and our future results could be materially adversely affected by changes in such regulations or policies.exposure to liability relating to product-based claims may increase. Below are some examples of the ways in which government regulationregulatory risk may impact us:
•On July 14, 2021, the European Commission adopted a set of proposals to ensure polices are aligned with the goal of reducing net greenhouse gas emissions by at least 55% by 2030 (the "EU Green Deal"). There is a growing focus on environmental impact of self-care products, their ingredients, components, packaging, manufacturing, and disposal. This focus could impact our business and/or financial results:
We must obtain approval from the appropriate regulatory agencies in orderlead to manufacturenew requirements and sell our productsrestrictions in the regions in which we operate. Obtaining this approval can be time consuming and costly. There can be no assurance that, in the event we submit an application for a marketing authorization to any global regulatory agency, we will obtain the approval to market acoming years across all product and/or that we will obtain it on a timely basis. Laws unique to the categories.
•U.S. regulatory framework encouragelaw encourages generic competition by providing eligibility for first generic marketing exclusivity if certain conditions are met. If we are granted generic exclusivity, the exclusivity may be shared with other generic companies, including authorized generics;companies; or it is possible that we may forfeit 180-day exclusivity if we do notfail to obtain regulatory approval orand begin marketing the product within the statutory requirements. Finally, ifIf we are not the first to file our ANDA, the FDA may grant 180-day exclusivity to another company, thereby effectively delaying the launch of our product and/or possibly reducing our market share.
Global•U.S. and global regulatory agencies regularly inspect our manufacturing facilities and the facilities of our third-party suppliers.suppliers for good manufacturing practices ("GMP") and other regulatory compliance. The failure of one of ourthese facilities or a facility of one of our third-party suppliers, to comply with applicable laws and regulations may lead to a breach of representations made to our customers, or to regulatory or government action against us related to the products made in that facility. Such action could includefacility, including suspension of or delay in regulatory approvals. If the compliance violations are severe, agencies of the government may initiateapprovals and product seizure, injunction, recall, suspension of production or distribution of our products, a total or partial shutdown of production in one or more facilities, loss of certain licenses or other governmental penalties, or civil or criminal prosecution, thereby impactingwhich could result in increased cost, lost revenue, or reputational damage.
•Regulatory agencies globally, including the reputation of allFDA and the European Medicines Agency, have issued guidance on assessing and controlling nitrosamine impurities in medicine products. We are continuing to undertake a review of our products.product portfolio in accordance with regulatory guidance to assess the risk of the presence of nitrosamine impurities. Any finding of nitrosamine impurities exceeding levels set by regulatory authorities may require us to adopt modified product sourcing and/or manufacturing processes or to initiate product withdrawal.
In the U.S., the DSCSA requires development of an electronic pedigree to track and trace each prescription drug at the salable unit level through the distribution system, which will be effective incrementally over a 10-year period beginning on January 1, 2015, for manufacturers, wholesale distributors, and re-packagers, and on July 1, 2015 for dispensers. Similarly, the European Commission passed legislation requiring new product packaging ‘safety features’ to prevent falsification of medicinal products primarily within the
Perrigo Company plc- Item 1A
Risk Factors
prescription medicines sector. The act was adopted February 9, 2016. EU member states (with the exception of Belgium, Italy and Greece), and EEA members Norway, Iceland, Liechtenstein and Switzerland must be in compliance within three years, or by February 9, 2019. Belgium, Italy, and Greece have until February 9, 2025 to comply. Marketing Authorization holders will have three years from the publication date to implement the necessary changes or risk forfeiting their product licenses. Compliance with the new U.S. and EU electronic pedigree requirements may increase our operational expenses and impose significant administrative burdens.
Global regulatory agencies highly scrutinize any product application submitted to switch a product from physician prescribed Rx to unsupervised OTC use by the general public. The expansion of •Rx-to-OTC switches is critical toare part of our future growth. Reluctance ofIf regulatory agencies fail to approve Rx-to-OTC switches in new product categories or reassess the terms of existing OTC classifications, our growth prospects and product mix would be impaired. Further, regulatory agencies may reassess the terms of OTC classification if they perceive a shift in the previously assessed benefit/risk profile. Any such reassessment could impact that growth.lead to OTC products reverting to prescription. For example, as described in Item 1. Business - Government Regulation and Pricing, Irish regulators are undertaking a formal review of non-prescription codeine
Perrigo Company plc- Item 1A
Risk Factors
products, which could result in the reclassification of codeine to prescription only after a brief transition period. A final opinion is expected in the first quarter of 2024. Sales of products containing codeine in Ireland were approximately $18 million in 2023. Moreover, a reclassification by Ireland could lead to reviews in other jurisdictions as well.
•Our infant formula products may be subject to barriers or sanctions imposed by countries or international organizations limiting international trade and dictating the specific content of infant formulasuch products. Governments couldIf governments enhance regulations on the infant formula industry aimed at ensuring the safety and quality of dairy products, including, but not limited to,through actions such as requiring additional testing or compulsory batch-by-batch inspection, or impose additional requirements on manufacturing practices, our sales and testingoperating margins in this category could be adversely affected as it is costly to comply with such new regulations or requirements, and to develop compliant products and processes for additional safety and quality issues. Such inspections and testing may increase our operating costs related to infant formula products. For example, in March 2023, the FDA released its "Immediate National Strategy to Increase the Resiliency of the U.S. Infant Formula Market" and issued a letter to the powdered infant formula industry to share information to assist the industry in improving the microbiologic safety of powdered infant formula and resiliency of the infant formula market. We have been experiencing increased costs and lower production volumes associated with compliance with the FDA's evolving regulatory expectations and expect higher compliance costs moving forward.
If we are unable to successfully obtain the necessary quota for controlled substances and•The regulation of List I chemicals we risk having delayed product launches or failing to meet commercialcomplicate our supply obligations. If we are unable to comply with regulatory requirements for controlled substanceschain, and List I chemicals, the DEA, or similar regulatory agency, may takeadverse regulatory actions resultingmay result in temporary or permanent interruption of distribution of our products, withdrawal of our products from the market, or other penalties. If we are unable to obtain necessary quotas for List I chemicals, we risk having delayed product launches or failing to meet commercial supply obligations.
•In order2023, the European Parliament voted on a proposal to commercially distribute ourextend the EU's Medical Device Regulation ("MDR") transition periods until 2027-2028, together with an extended validity of existing medical device certificates and the possibility to sell off existing medical device products until end of shelf-life. With this decision the European Parliament took into account that there is currently a shortage in the EU, they neednumber of Notified Bodies authorized to conform withcarry out conformity assessments required under MDR.
•Increased scrutiny of product classifications by government agencies can result in investigations and prosecutions, which carry the requirementsrisk of applicable EU directives. The method of assessing conformity varies depending on the class of the product,significant civil and criminal penalties, including but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a Notified Body, an organization accredited by a member state, which includes an audit of the manufacturer’s quality system and, for some products, specific product testing. If our products failnot limited to, meet the applicable EU directives, then we may not meet our projected growth targets and/or incur fines and penalties.
Our operations extend to numerous countries outside the U.S. and are subject to the risks inherent in conducting business globally and under the laws, regulations, and customs of various jurisdictions. These risks include compliance with a variety of national and local laws of countries in which we do business, such as restrictions on the import and export of certain intermediates, drugs, and technologies. We must also comply with a variety of U.S. laws related to doing business outside of the U.S., including Office of Foreign Asset Controls; United Nations and EU sanctions; the Iran Threat Reduction and Syria Human Rights Act of 2012; and rules relating to the use of certain “conflict minerals” under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Further changes in laws, regulations, and practices affecting the pharmaceutical industry and the healthcare system, including imports, exports, manufacturing, quality, cost, pricing, reimbursement, approval, inspection, and delivery of healthcare, may affect ourdebarment from government business and operations.prohibition to continue the business.
Changes in existing regulations or the adoption of new regulations in the countries in which we operate could impose restrictions or delaysLimitations on our ability to manufacture, distribute, sell or market our products, may be difficult or expensive for us to comply with, and may adversely affect our revenues, results of operations, or financial condition.
Perrigo Company plc- Item 1A
Risk Factors
Continuing Healthcarereimbursement, continuing healthcare reforms, and related changes to reimbursement methods in and outside of the United States and other countries may have an adverse effect on our financial condition and results of operations.operating results.
Increasing healthcare expenditures have received considerable public attention in many of the countries in which we operate. In the U.S., government programs such as Medicare and Medicaid, as well as private insurers, have been focused on cost containment. In some markets in the EU and outside the U.S., the government provides healthcare at low direct cost to consumers and regulates pharmaceutical prices or patient reimbursement levels to control costs for the government-sponsored healthcare system. Both private and governmental entities are seeking ways to reduce or contain healthcare costs.
Our RX segmentcosts through legislative and regulatory efforts, as further described in particular could be materially adversely impacted by measures taken by governmental entities or private insurers to restrict patients' access to our products or increase pressure on drug pricing, including denial of price increases, prospective and retrospective price decreases, and increased mandatory discounts or rebates. These actions may drive us and our competitors to decrease prices or may reduce the ability of customers to pay for our products, which could materially negatively impact the RX segment's results of operations.
If we fail to comply with the reporting and payment obligations under the Medicaid rebate program or other governmental purchasing and rebate programs, we could be subject to fines or penalties, which could have an adverse effect on our financial condition and results of operations.
By their nature, these programs require us to provide discounts and rebates and therefore reduce our net product revenues. Further, because the amounts of these discounts are basedpressure on our commercial sales practicesproducts and can be adversely affected by both significant discounts and price increases, it is important that we maintain pricing practices that appropriately take into account these government pricing programs.could negatively impact our operating results.
We are required to report pricing data to CMS, including AMP, onUnder the MDRP, a monthly and quarterly basis and BP and ASP on a quarterly basis. We also are required to report quarterly and annual Non-FAMPs to the VA. If we fail to submit required information on a timely basis, make misrepresentations, or knowingly submit false information to the government as to AMP, ASP, or BP, we may be liable for substantial civil monetary penalties or subject to other enforcement actions, such as under the False Claims Act, and CMS may terminate our Medicaid drug rebate agreement. In that event, U.S. federal payments may not be available under Medicaid or Medicare Part B for our covered outpatient drugs.
Because manynumber of our products may beare considered non-innovator products and therefore subject to Medicaid FULs or CMS’s newfederal upper limits ("FUL"), which restrict the amount state Medicaid “actual acquisition cost”programs reimburse for non-innovator covered outpatient drugs. While utilization of our products under the Medicaid program is limited, our products generally are subject to state Medicaid program payment methodology standard, our productsmethodologies, and may be subject to reimbursement pressures beyond our control.
Unfavorable publicity or consumer perception of the safety, quality, and in some cases, those pressures may result from practices outsideefficacy of our control, including how our competitors price their equivalent products. Based on our initial evaluation, we do not believe that the changes have had a material impact on our business. However, states are continuing to evaluate their payment methods, and we cannot predict how the new FUL or state payment methodologies will affect our pharmacy customers or to what extent these customers may seek additional discounts in light of reimbursement changes. We also cannot predict how the sharing of FUL data and retail survey prices may impact competition in the marketplace in the future.
Under the 340B program, if we fail to provide required discounts to covered entities, we may be subject to refund claims or civil money penalties under that program.
If we inadvertently overcharge the government in connection with our FSS contract or TriCare Agreement, whether due to a misstated FCP or otherwise, we would be required to refund the difference. Failure to make necessary disclosures and/or to identify contract overcharges can result in False Claims Act allegations or potential violations of other laws and regulations. Unexpected refunds to the government, and responses to a government investigation or enforcement action, are expensive and time-consuming, andproducts could have a material adverse effect on our business, financial condition, resultsbusiness.
We are dependent upon consumers' perception of operations,the safety, quality, and growth prospects.efficacy of our products. Negative consumer perception may arise from media reports, social media posts, product liability claims, regulatory investigations, or recalls affecting our products or our industry, any of which may reduce demand or could damage our reputation and adversely affect our business.
•Our products involve risks such as product contamination, spoilage, mislabeling, and tampering that could require us to recall one or more of our products or could result in death or injury to consumers. Serious product quality concerns could also result in governmental actions against us that, among other things,
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Our reporting and payment obligations under the Medicaid rebate program and other governmental purchasing and rebate programs are complex and may involve subjective decisions. Our calculations and methodologies are subject to review by the governmental agencies, and it is possible that these reviews could result in challengesthe suspension of production or distribution of our products, product seizures, loss of certain licenses, delays in the issuance of governmental approvals for new products, or other governmental penalties.
•We cannot guarantee that counterfeiting, imitation or other tampering with our products will not occur or that we will be able to detect and resolve it, which could lead to death or injury of consumers and negatively impact our submissions. Ifreputation.
•Our nutritional product category is subject to certain consumer preferences and concerns, including the number of mothers who choose to use infant formula products rather than breastfeed their babies, which could change based on factors including increased promotion of the benefits of breastfeeding over the use of infant formula by private, public and government sources and changes in the number of families that are provided with infant formula by the U.S. federal government through the Women, Infants and Children program which we do not participate in.
•With respect to our powdered infant formula products, a risk of contamination or deterioration may exist at each stage of the production cycle, including the purchase and delivery of raw materials, the processing and packaging of food products, and the use and handling by consumers, hospital personnel, and healthcare professionals. If certain of our infant formula products are found or alleged to have suffered contamination or deterioration, whether or not under our control, our reputation and our infant formula product category sales could be materially adversely affected. As described in Part II. Item 7, we have continued to work with the FDA to address additional inspection observations at our Wisconsin infant formula facility. We have implemented new procedures to address these observations, but if we are unable to address these observations to the satisfaction of the FDA, or if we are perceived to not be in compliance with the FDA's evolving regulatory framework for infant formula products, our reputation could be adversely affected. •Our financial success is dependent on positive brand recognition, which results in part from large investments in marketing over a period of years. The success of our brands may suffer if we do not continue to invest in marketing, or if our marketing plans or product initiatives are unsuccessful. In addition, an issue with one of our products could negatively affect the reputation of other products, potentially hurting our financial results.
•Negative social media posts or comments about us, store brands or generic pharmaceuticals, or our products could damage our reputation and adversely affect our business. Negative posts or comments about our products could result in increased pharmacovigilance reporting requirements, which may give rise to liability if we fail to fully comply with those reporting and payment obligations, we could be subject to civil and/or criminal sanctions, including fines, penalties, and possible exclusion from U.S. federal healthcare programs.such requirements.
Lack of availability, or significant increases in the cost, of raw materials used in manufacturing our products could adversely impacthave a material adverse effect on our profit margins and operating results.
Affordable high qualityWe rely on third parties to source many of our raw materials and packaging components are essential to all of our business units duemanufacture certain dosage forms that we distribute. Refer to the nature of the products we manufacture. In addition, maintaining good supply relationships is essential to our ongoing operations. SeeItem 1. Business - Materials Sourcingfor more information.
. Certain raw materials may experience rapid cost increases due to increased labor, relevant commodities, energy costs and other inflationary pressures, and this may have a material negative impact on our financial results, whether or not we are able to pass on such increases to our customers. We maintain several single-source supplier relationships, either because alternative sources are not available or because the relationship is advantageous due to regulatory, performance, quality, support, or price considerations. Unavailability or delivery delays of single-source components or products could adversely affect our ability to ship the related product in a timely manner. Themanner, a particularly severe effect of unavailability or delivery delays would be more severe if associated with our higher-volumefor higher volume or more profitable products. Even whereIt can take substantial time and investment to qualify an alternative supplier or material sources of supply are available, qualifying the alternate suppliers and establishingestablish reliable supplies could cost more or result in delays and a loss of net sales. Additionally, global regulatory requirements for obtaining product approvals could substantially lengthen the approval of an alternate material source. As a result, the loss of a single-source supplier could have a material adverse effect on our results of operations.supply.
The rapid increase in cost of many raw materials from inflationary forces, such as increased energy costs, and our ability or inability to pass on these increases to our customers could have a negative material impact on our financial results.
Our infant formula products require certain key raw ingredients that are derived from raw milk, such as skim milk powder, whey protein powder, and lactose. Our supply of milk-based ingredients may be limited by the ability of individual dairy farmers and cooperatives to provide raw milk in the amount and quality we deem necessary. Raw milk production is influenced by factors beyond our control including seasonal and environmental factors, governmental agricultural and environmental policy, and global demand. We cannot guarantee that there will be sufficient supplies of these key ingredients necessary to produce infant formula.
Our products, and the raw materials used to make the products mentioned above, generally have limited shelf lives. Our inventory levels are based, in part, on expectations regarding future sales. We may experience build-ups in inventory if sales slow. Any significant shortfall in sales may result in higher inventory levels of raw materials and finished products, thereby increasing the risk of inventory spoilage and corresponding inventory write-downs and write-offs. Cargo thefts and/or diversions, and economically or maliciously motivated product tampering on store shelves may occur, causing unexpected shortages and harm to our reputation, which may have a material impact on our operations.
We rely on third parties to source many of our raw materials, as well as to manufacture sterile, injectable products that we distribute. We maintain a strict program of verification and product testing throughout the ingredient sourcing and manufacturing process to identify potential counterfeit ingredients, adulterants, and toxic substances. Nevertheless, discovery of previously unknown problems with the raw materials, or product manufacturing processes, or new data suggesting an unacceptable safety risk, associated therewith, could result in a voluntary or mandatory withdrawal of the contaminated product from the marketplace, either temporarily or permanently. Any future recall or removal would result in additional costs and lost revenue, harm our reputation, and may give rise to product liability litigation.
Changes in regulation could impact the supply of the API and certain other raw materials used in our products. For example, the EU recently promulgated new standards requiring all API imported into the EU be certified as complying with GMPGood Manufacturing Practices established by the EU. The regulations placed the certification
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requirement on the regulatory bodies of the exporting countries, which led to an API supply shortage in Europe as certain governments
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were not willing or able to comply with the regulation in a timely fashion, or at all. A shortage in API or other raw ingredients could cause us to have to cease manufacture of certain products, or to incur costs and delays to qualify other suppliers to substitute for those API manufacturers who are unable to export. This could have a material adverse effect on our business, results of operations, financial condition, and cash flow.
Moreover, our infant formula products require certain key raw ingredients that are derived from raw milk, which is influenced by factors beyond our control including seasonal and environmental factors, governmental agricultural and environmental policy, and global demand. Due to these factors, we cannot guarantee that there will be sufficient supplies of these key ingredients to produce infant formula.
The effects of public health outbreaks, including pandemics such as COVID-19 and epidemics, and related public and governmental actions could have a material adverse impact on our operations and our business and financial condition in the future.
As the COVID-19 pandemic has shown, the global economy and the self-care markets in which we compete are susceptible to impacts from public health crises.
Going forward, variants of the COVID-19 disease or other public health incidents and the actions taken to slow their spread could have an adverse impact on our financial condition, our supply chains and other operations, our results of operations, consumer demand for our products and our ability to access capital. The magnitude of any such adverse impacts are not determinable, but could be material, depending on: the duration, intensity, and continued spread of the disease, including the emergence of new strains or variants of the virus, some of which may be more contagious or more severe; the imposition or reimposition of business or movement restrictions in various jurisdictions; the timing of widespread availability and acceptance of vaccines and the efficacy of current vaccines against evolving strains or variants of the virus; the severity and duration of any economic downturn resulting from the pandemic or other public health incidents; the effect of global supply chain and shipping challenges on the Company; the effectiveness of the Company's efforts at mitigation; and other factors, both known and unknown, many of which are likely to be outside our control. It is also possible that a change in the course of the pandemic or other public health incidents may affect consumer demand for products or impact our operations in future periods in ways we do not currently anticipate.
Disruption of our supply chain, including as a result of the pandemics, global health crises, or wars or other civil unrest, including the war in Ukraine, or in Gaza, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our ability to manufacture, deliver and sell our products is critical to our success. Damage or disruption to our collective supply or distribution capabilities resulting from pandemics (including the COVID-19 pandemic and government responsive actions), labor shortages, armed hostilities, border closures, weather conditions, freight carrier availability, any potential effects of climate change, natural disasters, strikes or other labor unrest or other reasons could impair our ability to source inputs or ship, sell or timely deliver our products. Competitors can be affected differently by any of these events depending on a number of factors, including the location of their suppliers and operations. Failure to take adequate steps to reduce the likelihood or mitigate the potential impact of any of these events, or to effectively manage such events if they occur, particularly when a commodity or raw material is sourced from or a product is manufactured at a single location, could adversely affect our business, financial condition, results of operations and cash flows and require additional resources to restore our supply chain.
Over the course of 2022 and 2023, supply chain disruptions, including volatility in both cost and availability of agricultural, oil and paper-based commodities driven by the war in Ukraine, have led to higher input costs. Additionally, we experienced employment vacancies and attrition as the labor market negatively impacted productivity and drove the need for wage rate increases and other retention benefits. We implemented a series of actions to substantially mitigate these and other inflationary cost pressures such as strategic pricing and our Supply Chain Reinvention Program. Benefits from our actions have begun to substantially offset inflationary pressures, and the global freight constraints in availability of freight containers and truck drivers are normalizing. While we believe these actions will continue to improve our ability to ship, however, there can be no assurances that we will be able to meet demand due to supply chain constraints. Moreover, if these supply chain disruptions worsen, our results of operations could be further impacted.
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A disruption at any of our main manufacturing facilities could materially and adversely affecthave a material adverse effect on our business, financial position, and results of operations.
Our manufacturing operations are concentrated in a few locations. SeeRefer toItem 1. Business - Manufacturing and Distribution for more information on our significant operations.information. A significant disruption at one or more of these facilities, whether it be due to fire, natural disaster, power loss, intentional acts of vandalism, climate change, war, terrorism, insufficient quality, or pandemic could materially and adversely affect our business.
Additionally, regulatory authorities routinely inspect all of our manufacturing facilities for cGMP compliance. While our manufacturing sites are cGMP compliant, if a regulatory authority were to identify serious adverse findings not corrected upon follow up inspections, we may be required to issue product recalls, shutdown manufacturing facilities, and take other remedial actions. If any manufacturing facility were forced to cease or limit production, our business could be adversely affected.
Any breach, disruption or misuse of our information systems, cyber security efforts or personal data could have a material adverse effect on our business.
We are increasingly dependent upon information technology systems to operate our business. Our systems, information, and operations, as well as our independent vendor relationships (where they support information technology and manufacturing infrastructure), are highly complex. These systems may contain confidential information (including trade secrets or other intellectual property or proprietary business information). The size and complexity of these systems makes them potentially vulnerable to disruption or damage from security breaches, hacking, data theft, denial of service attacks, human error, sabotage, industrial espionage, and computer viruses. Such events may be difficult to detect, and once detected, their impact may be difficult to assess. While we continue to employ resources to monitor our systems and protect our infrastructure, these measures may prove insufficient depending upon the attack or threat posed.
We are subject to numerous laws and regulations designed to protect personal data, such as the national laws implementing the European Union Directive on Data Protection (which will be replaced by the EU GDPR from May 2018 onward). The EU GDPR will introduce more stringent data protection requirements in the EU, as well as substantial fines for breaches of the data protection rules. The EU GDPR will increase our responsibility and liability in relation to personal data that we process, and we may be required to put in place additional mechanisms to ensure compliance with the new EU data protection rules.
These risks include:
Breaches or disruptions could impair our ability to develop, meet regulatory approval efforts, produce, and/or ship products, take and fulfill orders, and/or collect and make payments on a timely basis;
Any system issue, whether as a result of an intentional breach or a natural disaster, could damage our reputation and cause us to lose customers, experience lower sales volume, and incur significant liabilities;
We could incur significant expense by ensuring compliance with any required disclosures mandated by the numerous global privacy and security laws and regulations; and
Any interruption, security breach, or loss, misappropriation, or unauthorized access, use or disclosure of confidential information, could result in financial, legal, business, and reputational harm to us and could have a material adverse effect on our business, financial condition, and results of operations.
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Because our business depends upon certain customers for a significant portion of our sales, our business would be adversely affected by a disruption of our relationship with these customers or any material adverse change in these customers' businesses.
Sales to our largest customer, Walmart, comprised approximately 13% of our net sales for the year ended December 31, 2017. While no other customer individually comprised more than 10% of net sales, we do have other significant customers. If our relationship with Walmart or any of our other significant customers, including the terms of doing business with the customers, changes significantly, it could have a material adverse impact on us (refer toItem 1. Business - Significant Customers).
Many of our customers, which include chain drug stores, wholesalers, distributors, hospital systems, and group purchasing organizations, continue to merge or consolidate. Such consolidation has provided, and may continue to provide, customers with additional purchasing leverage, and consequently may increase the pricing pressures we face. The emergence of large buying groups representing independent retail pharmacies enable those groups to extract price discounts on our products. In addition, a number of our customers have instituted sourcing programs limiting the number of suppliers of generic pharmaceutical products carried by that customer. These developments have resulted in heightened pricing pressure on our products, as well as competition among generic drug producers for business from a smaller and more selective customer base.
Additionally, if we are unable to maintain adequately high levels of customer service over time, customers may choose to assess penalties, obtain alternate sources for products, and/or end their relationships with us.
Although we have divested our rights to the Tysabri® royalty stream, we are entitled to additional milestone payments if certain specified thresholds are met, and any negative developments related to Tysabri® could have a material adverse effect on our receipt of those payments.
We occasionally enter into arrangements that entitle us to potential royalties from third parties. Our most significant royalty has been the Tysabri® royalty stream which we received quarterly from Biogen. During the year ended December 31, 2016, $84.4 million of cash was earned, which was received during the year ended December 31, 2017. On March 27, 2017, we divested our rights to the Tysabri® royalty stream to Royalty Pharma for $2.2 billion in cash at closing and up to $250.0 million and $400.0 million in milestone payments if global net sales of Tysabri® meet specific thresholds in 2018 and 2020, respectively. Our receipt of these milestone payments may be negatively impacted if the royalty streams decrease and are insufficient to meet the specified thresholds. Given the fact these milestone payments are recorded at fair value, if it is determined that Tysabri® global sales levels do not meet specific thresholds, we would recognize a material charge in the Consolidated Statement of Operations. Factors that may have an adverse effect on the Tysabri® royalty stream include:
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• | Companies working to develop new therapies or alternative formulations of products for multiple sclerosis that, if successfully developed, would compete with, or could gain greater acceptance than, Tysabri® and damage it’s market share. In February 2016, a competitor's pipeline product, Ocrevus®, received breakthrough therapy designation from the FDA, this product was launched in 2017. The product is expected to compete with Tysabri® and have a significant negative impact on the Tysabri® royalty stream;
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• | Biogen is the owner of the patents on Tysabri®. The loss of protection of these patents, such as a patent invalidation, could adversely affect the royalty stream from Tysabri®. In addition, once the Tysabri® patents expire, other generic companies may introduce products similar to Tysabri® that could adversely affect the royalty stream;
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• | Foreign currency movement, which could have a negative impact on Biogen's Tysabri® sales, thereby reducing the royalties;
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• | Any negative developments relating to Tysabri®, such as safety, efficacy, or reimbursement issues, could reduce demand for Tysabri®; and
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• | Adverse regulatory or legislative developments could limit or prohibit the sale of Tysabri®, such as restrictions on the use of Tysabri® or safety-related label changes, including enhanced risk management
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programs, which may significantly reduce expected royalty revenue and require significant expense and management time to address the associated legal and regulatory issues.
Additionally, Tysabri® sales growth cannot be assured given the significant restrictions on its use and the significant safety warnings on the label, including the risk of developing Progressive Multifocal Leukoencephalopathy ("PML"), a serious brain infection. The risk of developing PML mayincrease with prior immunosuppressant use, longer treatment duration, or the presence of certain antibodies. Increased incidence of PML could limit sales growth, prompt regulatory review, require significant changes to the label, or result in market withdrawal. In addition, the result of ongoing or future clinical trials involving Tysabri® or other adverse events reported in association with the use of Tysabri® may have an adverse impact on prescribing behavior and reduce sales of Tysabri®.
Furthermore, there can be no assurance that Royalty Pharma will pay either or both of the milestone payments even if the specified thresholds are met.
We are dependent on the services of certain key members of management. Our inability to successfully manage transition, or the failure to attract and retain other key members of management, may have a material adverse impact on our results of operations.
We are dependent on the services of certain key employees, and our future success will depend in large part upon our ability to attract and retain highly skilled employees. Key functions for us include executive managers, operational managers, R&D scientists, information technology specialists, financial and legal specialists, regulatory professionals, quality compliance specialists, and sales/marketing personnel. If we are unable to attract or retain key qualified employees, our future operating results may be adversely impacted.
Management transition creates uncertainties, and any difficulties we experience in managing such transitions may negatively impact our business.
Recently, we have experienced changes in our executive leadership. In June 2017, we announced the forthcoming retirement of John T. Hendrickson as our Chief Executive Officer. On January 8, 2018, we announced the appointment of Uwe Roehrhoffas President and Chief Executive Officer and member of our Board. Mr. Hendrickson will continue to serve in an advisory role until March 15, 2018. In addition, in February 2017, we announced the resignation of Judy L. Brown as our Executive Vice President, Business Operations and Chief Financial Officer, effective February 27, 2017. Ronald L. Winowiecki, who had been with the Company in various treasury and senior finance roles since October 2008, most recently as our Senior Vice President of Business Finance, served as acting Chief Financial Officer from February 27, 2017 until his appointment as Chief Financial Officer on February 20, 2018. Changes in executive management create uncertainty. Moreover, changes in our company as a result of management transition could have a disruptive impact on our ability to implement, or result in changes to, our strategy and could negatively impact our business, financial condition and results of operations.
Unfavorable publicity or consumer perception of the safety, quality, and efficacy of our products could have a material adverse impact on our business.
We are dependent upon consumers' perception of the safety, quality, and efficacy of our products, and may be affected by changing consumer preferences. Negative consumer perception may arise from media reports, product liability claims, regulatory investigations, or recalls, regardless of whether they involve us or our products. The mere publication of information asserting defects in products or ingredients, or concerns about our products or the materials used in our products, could discourage consumers from buying our products, regardless of whether such information is scientifically supported.
Our products involve risks such as product contamination, spoilage, mislabeling, and tampering that could require us to recall one or more of our products. Serious product quality concerns could also result in governmental actions against us that, among other things, could result in the suspension of production or distribution of our products, product seizures, loss of certain licenses, delays in the issuance of governmental approvals for new products, or other governmental penalties, all of which could be detrimental to our reputation and reduce demand for our products.
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We cannot guarantee that counterfeiting, imitation or other tampering with our products will not occur or that we will be able to detect and resolve it. Any counterfeiting or contamination of any products could negatively impact our reputation and sales, particularly if counterfeit or imitation products cause death or injury to consumers.
Many of the brands we acquired from Omega have European recognition. This recognition is the result of the large investments Omega has made in its products over many years. The quality and safety of the products are critical to our business. If we are unable to effectively manage real or perceived issues, including concerns about safety, quality, efficacy, or similar matters, sentiments toward us and our products could be negatively impacted.
Our CHCI segment's financial success is dependent on the success of its brands, and the success of these brands can suffer if marketing plans or product initiatives do not have the desired impact on a brand’s image or its ability to attract consumers and the performance of the segment may be negatively impacted if spending on such plans and initiatives does not generate the returns we anticipate. In addition, given the association of individual products within the commercial network of our CHCI segment, an issue with one of our products could negatively affect the reputation of other products, thereby potentially hurting our financial results.
Powdered infant formula products are not sterile. All of our infant formula products must be prepared and maintained according to label instruction to retain their flavor and nutritional value and avoid contamination or deterioration. Depending on the product, a risk of contamination or deterioration may exist at each stage of the production cycle, including the purchase and delivery of raw materials, the processing and packaging of food products, and the use and handling by consumers, hospital personnel, and healthcare professionals. In the event that certain of our infant formula products are found or alleged to have suffered contamination or deterioration, whether or not under our control, our reputation and our infant formula product category sales could be materially adversely affected.
Increasing use of social media could give rise to liability, breaches of data security, or reputation damage.
The Company and our employees increasingly utilize social media as a means of internal and external communication.
To the extent that we seek to use social media tools as a means to communicate about our products and/or business, there are uncertainties as to the rules that apply to such communications, or as to the interpretations that authorities will apply to the rules that exist. As a result, despite our efforts to monitor evolving social media communication guidelines and comply with applicable rules, there is risk that our use of social media for such purposes may cause us to be found in violation of them. A violation of such guidelines may damage our reputation as well as cause potential lawsuits and adversely affect our operating activities.
Our employees may knowingly or inadvertently make use of social media tools in ways that may not be aligned with our social media strategy, may give rise to liability, or could lead to the loss of trade secrets or other intellectual property, or public exposure of personal information (including sensitive personal information) of our employees, clinical trial patients, customers, and others.
Negative posts or comments about us, store brands or generic pharmaceuticals, or our products in social media could seriously damage our reputation and could adversely affect the price of our securities. In addition, negative posts or comments about our products could result in increased pharmacovigilance reporting requirements, which may give rise to liability if we fail to fully comply with such requirements.
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Our quarterly results are impacted by a number of factors, some of which are beyond the control of our management, that may result in significant quarter-to-quarter fluctuations in operating results.
Some of the factors that may impact our quarterly results include the severity, length and timing of the cough/cold/flu and allergy seasons, the flea and tick season, the timing of new product approvals and introductions by us and our competitors, price competition, changes in the regulatory environment, changes in accounting pronouncements, changes in the levels of inventories maintained by our customers, and the timing of retailer promotional programs. These and other factors may result in significant variations in our operating results from quarter to quarter.
We may not be able to sustain or improve operating results in our business segments.
We have experienced a reduction in pricing expectations during 2017 in comparison to historical patterns in our U.S. businesses, in particular in our RX segment, due to competitive pressures in the sector. The reduced pricing is attributable to a variety of factors including increased focus from customers to capture supply chain productivity savings, competition in specific product categories, the loss of exclusivity on certain products, the recent increase in the speed and number of approvals from the FDA, and consolidation of certain customers in the RX segment. We expect this pricing environment to continue to impact the Company for the foreseeable future.
The CHCI segment has been positively impacted by market dynamics in countries such as the Nordics, Italy, and Portugal offset by softness in certain brand categories in France and Germany, as well as by unfavorable foreign currency impacts primarily in the U.K. related to Brexit. In addition, the segment had been impacted in Belgium due to cancellations of unprofitable distribution agreements. The CHCI segment has restructured its approach to addressing these markets including: (1) the implementation of a brand prioritization strategy to address these market dynamics, with an objective to balance the cost of advertising and promotional investments with expected contributions from category sales, and (2) restructured its sales force in each of these markets to more effectively serve customers. The combination of these actions is expected to improve the segment's focus on higher value OTC products, reduce selling costs and improve operating margins in the segment.
We continue to experience a reduction in pricing expectations within our CHCA segment, primarily in the cough/cold, animal health, and analgesics categories due to various factors, including focus from customers to capture supply chain productivity savings and competition in specific product categories. We expect this pricing environment to continue to impact our CHCA segment for the foreseeable future.
There can be no assurance that we will not continue to experience challenges related to our segments, and these challenges could have a material impact on our business, cash flows, and results of operations or result in impairment charges, and the market value of our ordinary shares and/or debt securitiesmay decline.
We may not realize the benefits of business acquisitions and divestitures we enter into, which could have a material adverse effect on our operating results.
In the normal course of business, we engage in discussions relating to possible acquisitions and divestitures. These transactions are accompanied by a number of risks. Many of these risks are beyond our control, and any one of them could result in increased cost, decreased net sales and diversion of management’s time and energy, any or all of which could materially impact our business, financial condition, and results of operations.
Acquisitions
One of our strategies is inorganic growth through the acquisition of products and companies that we expect will benefit the Company. This strategy comes with a number of financial, managerial, and operational risks. We may not realize the benefits of an acquisition because of integration and other challenges, including, but not limited to the following:
Difficulty involved with managing the expanded operations of the respective parties, as well as identifying the extent of all weaknesses, risks, and contingent and other liabilities;
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Uncertainties involved in assessing the value, strengths, and potential profitability of the respective parties, as well as identifying the extent of all weaknesses, risks, and contingent and other liabilities of acquisition targets;
Unanticipated changes in the business, industry, market or general economic conditions different from the assumptions underlying our rationale for pursuing the transaction;
Difficulties due to a lack of, or limited experience in, any new product or geographic markets we enter;
Inability to achieve identified operating and financial synergies, or return on investment, from an acquisition in the amounts or on the time frame anticipated;
Substantial demands on our management, operational resources, technology, and financial and internal control systems, which could lead to dissatisfaction and potential loss of key customers, management, or employees;
Integration activities that may detract attention from our day-to-day business, and substantial costs associated with the transaction process or other material adverse effects as a result of these integration efforts; and
Difficulties, restrictions or increased costs associated with raising future capital in connection with an acquisition may impact our liquidity, credit ratings and financial position, thereby making it more difficult, restrictive or expensive to raise future capital. In addition, the issuance of equity to pay a portion of the purchase price for an acquisition would dilute our existing shareholders.
Divestitures
We may evaluate potential divestiture opportunities with respect to portions of our business (including specific assets or categories of assets) from time to time, and may proceed with a divestiture opportunity if and when we believe it is consistent with our business strategy and initiatives. Any future divestitures could expose us to significant risk, including without limitation:
Our ability to effectively transfer liabilities, contracts, facilities and personnel to any purchaser;
Fees for legal and transaction-related services;
Diversion of management resources; and
Loss of key personnel and reduction in revenue.
If we do not realize the expected strategic, economic or other benefits of any divestiture transaction, it could adversely affect our financial condition and results of operations.
Our business could be negatively affected by the performance of our collaboration partners and suppliers.suppliers, and any such adverse impact could be material.
We have entered into strategic alliances with partners and suppliers to develop, manufacture, market and/or distribute certain products, or components of our products in various markets. We commit substantial effort, funds and other resources to these various collaborations. There is a risk that our investments in these collaborative arrangements will not generate the anticipated financial returns. While we believe our relationships with our partners and suppliers generally are successful, disputes, conflicting priorities or regulatory or legal intervention could be a source of delay or uncertainty as to the expected benefit of the collaboration (refercollaboration. Refer to Item 8. Note 171 for additional detail on our collaborative agreements and other contractual arrangements). A failure or inability of our partners or suppliers to fulfill their collaboration obligations, or the occurrence of any of the risks above, could have an adverse effect on our business, financial condition, and results of operations.
Our business depends upon certain customers for a significant portion of our sales, therefore our business would be adversely affected by a disruption of our relationship with these customers or any material adverse change in these customers' businesses.
We have one significant customer that represented 11.8% of our consolidated net sales for the year ended December 31, 2023. While we have other important customers, no other individual customer represents more than 10% of net sales. However, the loss of one or more of our customers could be material. We believe we have good relationships with all our customers. If our relationship with any of our significant customers, including the terms of doing business with the customers, changes significantly, or if one or more such customers were to experience difficulty in paying us on a timely basis, it could have a material adverse impact on us. The risk of such impacts would be increased by continued consolidation in the sector in which our customers operate. Refer toItem 1. Business - Significant Customers.
Additionally, if we are unable to maintain adequately high levels of customer service over time, customers may choose to assess penalties (where such penalties are contractually permitted), obtain alternate sources for products, and/or end their relationships with us.
Our businesses could be adversely affected by deteriorating economic conditions in the countries in which we operate, and our results may be volatile due to these or other circumstances beyond our control.
Our customers could be adversely impacted if economic conditions worsen in the U.S. or other countries in which we operate. In the U.S., our consumer self-care business does not advertise our store brand products like national brand companies and thus, is largely dependent on retailer promotional activities to drive sales volume and increase market share. If our customers do not have the ability to invest in store brand promotional activities, our sales may suffer. Additionally, while we actively review the credit worthiness of our customers and suppliers, we cannot fully predict to what extent they may be negatively impacted by slowing economic growth. Our stock price may decline due to any earnings release or guidance that does not meet market expectations or other circumstances, which may be beyond our control, such as the severity, length and timing of the cough/cold/flu and allergy seasons, the timing of new product approvals and introductions by us and our competitors, and the timing of retailer promotional programs.
A cybersecurity breach, disruption or misuse of our information systems, or our external business partners’ information systems could have a material adverse effect on our business.
Our business operations are increasingly dependent upon information technology systems that are highly complex, interrelated with our external business partners, and may contain confidential information (including personal data, trade secrets or other intellectual property, or proprietary business information). The nature of digital systems, both internally and externally, makes them potentially vulnerable to disruption or damage from human error and/or security breaches, which include, but are not limited to, ransomware, data theft, denial of service attacks, sabotage,
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Risk Factors
industrial espionage, interruptions or other system issues, unauthorized access and computer viruses. Such events may be difficult to detect, and once detected, their impact may be difficult to assess and address.
Cyber-attacks have become increasingly common. We have experienced immaterial business disruption, monetary loss and data loss as a result of phishing, business email compromise and other types of attacks. In addition, the rapid evolution and increased adoption of new technologies, such as artificial intelligence, may intensify our cybersecurity risks. While we continue to employ resources to monitor our systems and protect our infrastructure, these measures may prove insufficient, and that could subject us to significant risks, including, without limitation:
•Ransomware attacks, other cyber breaches or disruptions that impair our ability to develop products, meet regulatory approval requirements or deadlines, produce or ship products, take or fulfill orders, and/or collect or make payments on a timely basis;
•System issues, whether as a result of an intentional breach, a natural disaster or human error that damage our reputation and cause us to lose customers, experience lower sales volume, and/or incur significant liabilities;
•Significant expense to remediate the results of any attack or breach and to ensure compliance with any required disclosures mandated by the numerous global privacy and security laws and regulations; and
•Interruptions, security breaches, or loss, misappropriation, or unauthorized access, use or disclosure of confidential information,
which, individually or collectively, could result in financial, legal, business or reputational harm to us and could have a material adverse effect on our business, financial condition and results of operations.
We are also subject to numerous laws and regulations designed to protect personal data, such as the California Consumer Privacy Act in the U.S. and the European General Data Protection Regulation ("GDPR"). These data protection laws introduced more stringent data protection requirements and significant potential fines, as well as increased our responsibility and potential liability in relation to personal data that we process and possess. We have put mechanisms in place to ensure compliance with applicable data protection lawsbut there can be no guarantee of their effectiveness.
Management transition creates uncertainties, and any difficulties we experience in managing such transitions may negatively impact our business.
During 2023, Patrick Lockwood-Taylor was appointed President, Chief Executive Officer and Board Member. Additionally, Catherine "Triona" Schmelter joined the Company as Executive Vice President and President Consumer Self-Care Americas. Changes in executive management create uncertainty. Moreover, changes in our company as a result of management transition could have a disruptive impact on our ability to implement, or result in changes to, our strategy and could negatively impact our business, financial condition and results of operations.
Strategic Risks
We may not realize the benefits of business acquisitions, divestitures, and other strategic transactions, which could have a material adverse effect on our operating results.
In the normal course of business, we engage in discussions relating to possible acquisitions, divestitures, and other strategic transactions, some of which may be significant in size or impact. Transactions of this nature create substantial demands on management, operational resources, technology, and financial and internal control systems, and can be subject to government approvals or other closing conditions beyond the parties' control. In the case of acquisitions, including the acquisition of HRA Pharma, we may face difficulties with integrating these businesses, managing expanded operations, achieving operating or financial synergies in expected timeframes or in new products or geographic markets. In the case of divestitures, including the separation of the Rx business, we may face difficulty in effectively transferring contracts, obligations, facilities, and personnel to the purchaser, while minimizing continued exposure to risks and liabilities of the divested business.
There are inherent uncertainties involved in identifying and assessing the value, strengths, and profit potential, as well as the weaknesses, risks, and contingent and other liabilities of acquisition targets, which can be affected by risks and uncertainties relating to government regulations and oversight as well as changes in business, industry, market or general economic conditions. Moreover, the financing of any acquisition can have a material impact on our liquidity, credit ratings and financial position. Alternatively, issuing equity to pay all or a portion of acquisition purchase price would dilute our existing shareholders.
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Risk Factors
Acquisitions and divestitures also involve costs, including fees and expenses of financial advisors, lawyers, accountants, and other professionals, and can involve retention bonuses and other additional compensation of employees or increase turnover in personnel. Any of these risks or expenses could have a negative effect on our financial condition or results of operations.
We have acquired significant assets that could become impaired or subject us to losses and may result in an adverse impact on our results of operations.
operations, which could be material.
We have recorded significant goodwill and intangible assets and goodwill on our balance sheet as a result of previous acquisitions, which could become impaired and lead to material charges in the future.
As of the year ended December 31, 2017, we recorded definite-lived intangible asset impairment charges of $19.7 million related to developed product technology/formulation and product rights, and distribution and license
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Risk Factors
agreements primarily in our RX segment and $12.7 million of impairment charge related to certain IPR&D assets primarily in our RX segment.
As of the year ended December 31, 2016, we recorded the following impairments:
Goodwill impairment charges of $1.1 billion related to our Specialty Sciences, Branded Consumer Healthcare-Rest of World ("BCH-ROW"), BCH-Belgium, and Animal Health reporting units.
Indefinite-lived and definite-lived intangible asset impairment charges of $1.5 billion related to: Trademarks, trade names and brands, developed product technology/formulation and product rights, distribution and license agreements, and supply agreements.
We perform an impairment analysis on intangible assets subject to amortization when there is an indication that the carrying amount of any individual asset may not be recoverable. Any significant change in market conditions, estimates or judgments used to determine expected future cash flows that indicates a reduction in carrying value may give rise to impairment in the period that the change becomes known. Goodwill, indefinite-lived intangible asset, and definite-lived intangible asset impairments are recorded in Impairment charges on the Consolidated Statement of Operations. As of December 31, 2017,2023, the net book value of our goodwill and intangible assets and goodwill were $3.4$3.5 billion and $4.2$3.0 billion, respectively. SeeIn the past three years, we have recognized a total of $263.1 million in asset impairments, across all segments and asset categories. Refer toItem 8. Note 39for moreadditional information on the above impairment charges.related to our goodwill and intangible assets.
There can be no assurance that our strategic initiatives, including restructurings, will achieve their intended effects.
We are in the process of implementing certain initiatives, including our Supply Chain Reinvention Program, designed to increase operational efficiency and improve our return on invested capital by, globalizingamong other goals, reducing portfolio complexity, investing in advanced planning capabilities, diversifying sourcing, and optimizing our supply chain throughmanufacturing assets and distribution models. We also are launching Project Energize, a global shared service arrangements, streamlining ourinvestment and efficiency program to drive the next evolution of the Company's capabilities and organizational structure, making key executive employee changes, performing a strategic portfolio review, and disposing of certain assets.agility. We believe these initiatives will reduce operating costs and/or enhance our net sales, operating margins, and earnings; however, certain of these initiatives require substantial costs during implementation, and there can be no assurance thatany of these initiatives will produce the anticipated benefits. Any delay or failure to achieve the anticipated benefits could have a material adverse effect on our projected results.
However, if these programs are not implemented successfully, or if circumstances outside of our control affect our costs over their associated time periods, these programs may not produce the anticipated benefits and/or may cost more to achieve. In addition, implementing these changes will require a significant amount of management time and effort, which may disrupt our business or otherwise divert management’s attention from other aspects of our business, including our other strategic initiatives, possible organic or inorganic growth opportunities, and customer and vendor relationships. Any of the foregoing risks could materially adversely affect our business, results of operations, liquidity, and financial condition.
The synergies and benefits expected from acquiring HRA Pharma and Gateway may not be realized in the amounts anticipated or at all and integrating HRA Pharma and Gateway's business may be more difficult, time consuming or costly than expected.
We identifiedmay experience challenges integrating the HRA Pharma and Gateway businesses and managing our expanded operations. Our ability to realize the benefits expected from the HRA Pharma and Gateway acquisitions will depend, in part, on our ability to successfully integrate the business, control costs and maintain growth. Integrations can be complex and time consuming, and the integration may result in temporarily depressed sales while integration of supply chain and distribution channels take place. Any delays, additional unexpected costs, or other difficulties encountered in the integration process could have a material adverse effect on the Company’s revenues, expenses, operating results and/or financial condition.
Even if integration occurs successfully, we may not achieve projected synergies or level of anticipated sales growth in new products, brands, or geographic markets within the anticipated timeframe, or at all. There are inherent uncertainties involved in identifying and assessing the profit potential, value, strengths, weaknesses, risks, and contingent and other liabilities of acquisitions, such as HRA Pharma and Gateway, some of which can be affected
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Risk Factors
by risks and uncertainties relating to government regulations and oversight as well as changes in the business, the industry, competition, consumer trends or general economic conditions. For instance, in response to the FDA's evolving regulatory expectations on infant formula, we have shortened our internal controlsproduction campaigns to perform more frequent major cleanings and implemented enhanced product testing and quality procedures, resulting in additional costs and lower production volumes of infant formula.
Failure to effectively monitor and respond to ESG matters, including our ability to set and meet reasonable goals related to climate change and sustainability efforts, may negatively affect our business and operations.
Regulatory developments and stakeholder expectations relating to ESG matters are rapidly changing. Concern over financial reporting;climate change has increased focus on the sustainability of practices and products in the markets we serve, and changes to laws and regulations regarding climate change mitigation may result in increased costs and disruption to operations. Moreover, the standards by which ESG matters are measured are developing and evolving, and certain areas are subject to assumptions that could change over time. If we are unable to recognize and respond to such developments, or if our existing practices and procedures are not adequate to meet new regulatory requirements, we may miss corporate opportunities, become subject to regulatory scrutiny or third-party claims, or incur costs to revise operations to meet new standards.
As a global organization, we have set goals to address the impact of our operations on climate change and related environmental issues. These targets include reducing carbon emissions and water usage as well as becoming fully reliant on renewable energy sources. Refer to Item 1. Business - Corporate Social Responsibility. We believe these goals are obtainable, however, any failure or perceived failure to remediate the material weakness couldachieve our sustainability goals or to act responsibly with respect to such matters may negatively impact our business and the priceoperations and/or financial condition. While we monitor a broad range of our ordinary shares.
In connection with our review of certain material misstatements related to the characterization of the Tysabri® royalty stream, income taxes and the evaluation of long-lived assets in our animal health reporting unit for impairment testing, in each case contained in certain of our historical financial statements and identified as part of our December 31, 2016 year end, we concluded that there were material weaknesses in our internal control over financial reporting that contributed to those misstatements. The material weaknesses over the income tax process that was identified during our fiscal year ended December 31, 2016 was not remediated during our fiscal year ended December 31, 2017, and we determined that we did not design or maintain effective controls over our income tax accounting process. As a result of the material weaknesses, we concluded that we did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2016, April 1, 2017, July 1, 2017, September 30, 2017 or December 31, 2017 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The failure to maintain effective control over financial reporting in turn resulted in material deficiencies in our disclosure controls and procedures.
We continue to identify and implement, actions to improve the effectiveness of our internal control over financial reporting and disclosure controls and procedures, butESG issues, there can be no assurance that we will manage such remediation effortsissues successfully, or that we will be successful. We have also incurred and may continue to incur substantial accounting, legal, consulting, and other costs in connection with remediatingsuccessfully meet the material weaknesses. Failure to remediate the material weaknesses could have a negative impact on our business and the market for our ordinary shares. For more information on our material weaknesses and the statusexpectations of our remediation efforts, see Item 9A - Controlsstakeholders, consumers and Procedures, which includes Management's Report on Internal Control over Financial Reporting.employees.
Perrigo Company plc- Item 1A
Risk Factors
Global Risks
Our business, financial condition, and results of operations are subject to risks arising from the international scope of our operations.
We manufacture, source raw materials, and sell our products in a number of countries. The percentage of our business outside the U.S. has been increasing. We are subject to risks associated with international manufacturing and sales, including:
Unexpectedincluding changes in regulatory requirements;
Problems relatedrequirements. Refer to markets with different cultural biases or political systems;
Possible difficulties in enforcing agreements;
Difficulties obtaining Pricing, for changes to tax and import/export or import licenses;
Changes to U.S.laws and foreign trade and customs policies including(including the enactment of tariffs on goods imported into the U.S., including but not limited to, goods imported from Mexico;China), problems related to markets with different cultural norms or political systems, possible difficulties in enforcing agreements, longer payment cycles and
Imposition shipping lead-times, difficulties obtaining export or import licenses, and imposition of withholding or other taxes.
Additionally, we are subject to periodic reviews and audits by governmental authorities responsible for administering import/import and export regulations. To the extent that we are unable to successfully defend against an audit or review, we may be required to pay assessments, penalties, and increased duties.
Certain of our facilities operate in a special purpose sub-zone established by the U.S. Department of Commerce Foreign Trade Zone Board, which allows us certain tax advantages on products and raw materials shipped through these facilities. If the Foreign Trade Zone Board were to revoke the sub-zone designation or limit our use, we could be subject to increased duties.
Although we believe that we conduct our business in compliance with applicable anti-corruption, anti-bribery and economic sanctions or other anti-corruption laws, if we are found to not be in compliance with such laws or other anti-corruption laws, we could be subject to governmental investigations, legal or regulatory proceedings, substantial fines, and/or other legal or equitable penalties. This risk increases in locations outside of the U.S., particularly in locations that have not previously had to comply with the FCPA, U.K. Bribery Act 2010, Irish Criminal Justice (Corruption Offenses) Act 2018, and similar laws.
Perrigo Company plc- Item 1A
Risk Factors
We operate in jurisdictions that could be affected by economic and politicalgeopolitical instability, which could have a material adverse effect on our business.
Our operations and supply partners could be affected by economic or political instability, embargoes, military hostilities, unstable governments and legal systems, inter-governmental disputes, travel restrictions, terrorist acts, and inter-governmental disputes. We have significant operations in Israel, which has experienced varying degreesother armed conflicts. The global nature of hostility in recent years. Doingour business in Israel and certain other regions involves the following risks:risks, among others:
Certain countries and international organizations have refused to do business with companies with Israeli operations. We are also precluded from marketing our products to certain countries due to U.S. and Israeli regulatory restrictions. International economic sanctions and boycotts of our products could negatively impact our sales and ability to export our products.
Our facilities in Israel are within a conflict zone. If terrorist acts or military actions were to result in substantial damage to our facilities, our business activities would be disrupted since, with respect to most products, we would need to obtain prior regulatory agency approval for a change in manufacturing site. In addition, our insurance may not adequately compensate us for losses that may occur, and any losses or damages incurred by us could have a material adverse effect on our business.
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Risk Factors
•The U.S. Department of State and other governments have at times issued advisories regarding travel to certain countries in which we do business. As a result,business, causing regulatory agencies have at various times curtailedto curtail or prohibitedprohibit their inspectors from traveling to inspect facilities. If these inspectors are unable to inspect our facilities, the regulatory agencies could withhold approval for new products intended to be produced at those facilities.
•On June 23, 2016, the UK electorate voted in a referendum to voluntarily depart from the EU, known as "Brexit". The UK Government subsequently approved a withdrawal agreement and left the EU on January 31, 2020.
Our international operations
The Trade and Cooperation Agreement ("TCA") was signed on December 30, 2020. The TCA provides for free trade in goods and limited mutual market access in services, as well as for cooperation mechanisms in a range of policy areas and UK participation in some EU programs. It is for indefinite duration but is subject to review every 5 years and may be subjectterminated on 12 months’ notice. Uncertainty relating to interruption duethe Ireland/Northern Ireland protocol remains.
Although the TCA is in place, the full extent of any disruption on imports and exports, for example relating to travel restrictions, war, terrorist acts, and other armed conflicts. Also, further threats of armed hostilities in certain countries could limit or disrupt markets and our operations, including disruptions resulting from the cancellation of contracts or the loss of assets. These events could have a material adverse effect on our international business operations.increased regulatory complexities, is unknown.
The UK held a referendum on June 23, 2016 on its membership innow has an ability to diverge from EU regulation (the UK Government’s stated aim), which could enable the EU. A majority of UK voters voted to exitseek competitive regulatory advantage. However, the EU (“Brexit”). The UK is scheduled to leavecould respond by withdrawing benefits under the EU on March 29, 2019, and negotiations are taking place to determine the future terms of the UK’s relationship with the EU, including the terms of withdrawal, the terms of future trading and relations and any potential transition periods. Brexit has created significant instability and volatility in the global financial markets, has led to significant weakening of the British pound compared to the U.S. dollar and other currencies, and could adversely affect European or worldwide economic or market conditions. Although it is unknown what the future trading terms with the EU will be, theyTCA. These complexities may impair the ability of our operations in the EU to transact business in the futureUK in the UK,future, and similarly the ability of our UK operations to transact business in the future in the EU. Specifically, it is possible that there will be greater restrictions on imports and exports between the UK and EU countries, increased restrictions on freedom of movement for employees, and increased regulatory complexities. In addition, Brexit could lead to legal uncertainty and potentially divergentdifferent national laws and regulations as the UK determines which EU laws to replace or replicate. Further, among other things, Brexit could reduce consumer spending in the UK and the EU, which could result in decreased demand for our products. Any of thesethe above-mentioned effects of Brexit, and others we cannot anticipate, could adversely affect our business, business opportunities, operations, and financial results.
WhileMoreover, financial volatility and geopolitical instability outside the challengingU.S. may impact our operations or affect global economic environmentmarkets. For example, the war in Ukraine and the resulting sanctions by U.S. and European governments, together with any additional future sanctions by them, could have a larger impact that expands into other markets where we do business, including our supply chain, business partners and customers in the broader region, which could result in lost sales, supply shortages, increase manufacturing costs and lost efficiencies. Further, the conflict may adversely impact macroeconomic conditions and increase volatility in and affect our ability to access capital markets and external financing sources on acceptable terms or at all. The Israel/Hamas conflict could impact our supply of API. Israel is a global technology research and development center that plays a critical role to the global API market, as a number of key suppliers are located within Israel. Perrigo sources some raw materials and finished goods from suppliers in Israel for certain self-care products, including Omeprazole. There is potential for some disruption as it relates to in-country logistics, including freight. As a precaution, Perrigo has engaged alternate suppliers to help minimize a potential supply disruption. Although there has not had abeen any material impact on operations and we believe we have a strong mitigation plan in place, the conflict between Israel and Hamas remains active and fluid. Should the conflict expand or escalate, we could experience disruptions to our liquidity or capital resources, there can be no assurance that possible future changes in global financial marketsAPI supply. Given the international scope of our operations, such effects of ongoing wars and global economic conditions will notarmed conflicts, and others we cannot anticipate, could adversely affect our liquidity or capital resources, impact our ability to obtain financing, or decrease the value of our assets.
The challenging economic conditions have also impacted the movements in exchange rates, which have experienced significant recent volatility. Uncertainty regarding the future growth rates between countries, the influence of central bank actions,business, business opportunities, operations, and the changing political environment globally may contribute to continued high levels of exchange rate volatility, which could have an adverse impact on ourfinancial results.
Our customers could be adversely impacted if economic conditions worsen. Our CHCA segment does not advertise its products like national brand companies and thus is largely dependent on retailer promotional activities to drive sales volume and increase market share.If our customers do not have the ability to invest in store brand promotional activities, our sales may suffer. Additionally, while we actively review the credit worthiness of our customers and suppliers, we cannot fully predict to what extent they may be negatively impacted by slowing economic growth.
The international scope of our business exposes us to risks associated with foreign exchange rates.
We report our financial results in U.S. dollars. However, a significant portion of our net sales,revenues, expenses, assets, indebtedness and other liabilities and costs are denominated in foreign currencies. These currencies include, among others, the euro, Indian rupee,Euro, British pound, Canadian dollar, Israeli shekel, Australian dollar,Swedish Krona, Chinese Yuan, Danish Krone, and Mexican peso. The additionPolish Zloty. Fluctuations in currency exchange rates, including as a result of Omega, a euro-denominated business, that represents a significant portioninflation, central bank monetary policies, currency controls or other currency exchange restrictions have had, and could continue to have, an adverse impact on our financial performance. We may seek to mitigate the risk of our net salessuch impacts through hedging, but such hedging activities may be costly and earnings, and a substantial portion of our net assets, has significantly increased our exposure to changes in the euro/U.S. dollar exchange rate. Approximately 34% of Omega’s sales are in other foreign currencies, with the majority of the product costs for these markets denominated in euros. may not be effective.
Perrigo Company plc- Item 1A
Risk Factors
In addition, several emerging market economies arein which we operate may be particularly vulnerable to the impact of rising interest rates, inflationary pressures, weaker oil and other commodity prices, and large external deficits. While some of
Perrigo Company plc- Item 1A
Risk Factors
these jurisdictions are showing signs of stabilization or recovery, others continue to experience levels of stress and volatility. Risks in one country can limit our opportunities for portfolio growth and negatively affect our operations in another country or countries. As a result, any such unfavorableSuch conditions or developments could have an adverse impact on our operations. Our results of operations and, in some cases, cash flows, have in the past been, and may in the future be, adversely affected by movements in exchange rates. In addition, we may also be exposed to credit risks in some of those markets.We may implement currency hedges or take other actions intended to reduce our exposure to changes in foreign currency exchange rates. If we are not successful in mitigating the effects of changes in exchange rates on our business, any such changes could materially impact our results.
Risks Related to
Litigation and Insurance Risks
We are or may become involved in lawsuits and may experience unfavorable outcomes of such proceedings.
We may become involved in lawsuits arising from a wide variety of commercial, manufacturing, development, marketing, sales and other business-related matters, including, but not limited to, competitive issues, pricing, contract issues, intellectual property matters, false advertising, antitrust or unfair competition, taxation matters, workers' compensation, product quality/recall, environmental remediation, securities law, disclosure, product liability and regulatory issues. Litigation is unpredictable and can be costly.could result in potentially significant monetary damages, and we could incur substantial legal expenses, even if a claim against us is unsuccessful. We intend to vigorously defend against any lawsuits, however, we cannot predict how the cases will be resolved. Adverse results in, theor settlements of, such cases could result in substantial monetary judgments. No assurance can be made that litigation will not have a material adverse effect on our reputation, financial position or results of operations in the future (referfuture. Refer to Item 8. Note 1619.
The actual or alleged presence of certain hazardous substances or petroleum products on, under or in our currently or formerly owned property, or from a third-party disposal facility that we may have used, or the failure to remediate them, could have adverse effects, including, for example, substantial investigative or remedial obligations and limitations on our ability to sell or rent affected property or to borrow funds using affected property as collateral. There can be no assurance that environmental liabilities and costs will not have a material adverse effect on us. Refer to Item 1. Business - Environmental for more information on specific ongoing litigation).related to environmental remediation matters.
We may be subject to liability if our products violate applicable laws or regulations in the jurisdictions where our products are distributed. The successful assertion of product liability or other product-related claims against us could result in potentially significant monetary damages, and we could incur substantial legal expenses. Even if a product liability or consumer fraud claim is unsuccessful, not merited, or not fully pursued, we may still incur substantial legal expenses defending against such a claim, and our reputation may suffer.
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• | We may face environmental exposures including, for example, those relating to discharges from and materials handled as part of our operations, the remediation of soil and groundwater contaminated by hazardous substances or wastes, and the health and safety of our employees. While we do not have any material remediation liabilities currently outstanding, we may in the future face liability for the costs of investigation, removal or remediation of certain hazardous substances or petroleum products on, under or in our currently or formerly owned property, or from a third-party disposal facility that we may have used, without regard to whether we knew of, or caused, the presence of the contaminants. The actual or alleged presence of these substances, or the failure to remediate them, could have adverse effects, including, for example, substantial investigative or remedial obligations and limitations on our ability to sell or rent affected property or to borrow funds using affected property as collateral. There can be no assurance that environmental liabilities and costs will not have a material adverse effect on us. See Item 1. Business - Information Applicable to All Reportable Segments - Environmental for more information. |
Our CHCI segment regularly makes advertising claims regarding the effectiveness of its products, which we are responsible for defending. An unsuccessful defense of product-related claims could result in potentially significant monetary damages and substantial legal expenses. Even if a claim is unsuccessful, not merited, or not fully pursued, we may still incur substantial legal expenses defending against such a claim, and our reputation could suffer.
Additionally, we may be the target of claims asserting violations of securities fraud and derivative actions, or other litigation proceedings in the future.
Perrigo Company plc- Item 1A
Risk Factors
Increased scrutiny on pricing practices and competition in the pharmaceutical industry, including antitrust enforcement activity by government agencies and class action litigation, may have an adverse impact on our business and operating results, of operations.which could be material.
There has been increased scrutiny regarding sales, marketing, and pricing practices in the pharmaceutical industry, from both government agencies and the media, including allegations of “price gouging” and/or collusion. This includes recent U.S. Congressional inquiries and hearings in connection with the investigation of specific price increases by several pharmaceutical companies, proposed and enacted legislation seeking greater transparency incriminal antitrust investigations regarding drug pricing, civil False Claims Act investigations relating to drug pricing and criminal investigations regarding drug pricing. U.S. federalmarketing, multiple civil antitrust litigation initiated by governmental and state prosecutors have issued subpoenas to a number ofprivate plaintiffs against pharmaceutical companies seeking information about their drug pricing practices,manufacturers and several class action lawsuits have been filed that allege price-fixing with respect to various pharmaceutical products. In December 2016, the Antitrust Division of the U.S. Department of Justice (the “Antitrust Division”) filed criminal charges against two former executives from a competitor of the Company for their roles in conspiracies to fix prices, rig bidsindividuals, and allocate customers for certain generic drugs.related media reports.
On May 2, 2017, we disclosed that search warrants were executed at a number ofseveral Perrigo facilities and other locations in connection with the Antitrust Division’s ongoing investigation related to drug pricing in the pharmaceutical industry. Perrigo has also been served with and responded to a civil investigative demand in connection with a related civil False Claims Act investigation by the Civil Division of the Department of Justice. Although no charges or other related civil claims have been brought to date against Perrigo or any of our current employees (or, to the best of our knowledge, former employees), by the Department of Justice, we take the investigation very seriously.
If criminal antitrust charges are filed involving Perrigo, we would incur substantial litigation and other costs, and could face substantial monetary penalties, injunctive relief, negative publicity and damage to our reputation. Regardless of the ultimate outcome, responding to those charges would divert management’s time and attention and could impair our operations. Further,While we cannot predict whether legislative or regulatory changes may result from the ongoing public scrutiny of our industry, what the nature ofintend to defend Perrigo's conduct at issue in these investigations vigorously, any such changes might be, or what impact they may have on Perrigo. Any of these developmentsadverse decision could have a material adverse impact on our business, results of operations and reputation.
We are cooperatingIn addition, we have been named as a co-defendant with the government’s investigation and are committed to operating our businesscertain other generic pharmaceutical manufacturers in compliance with all applicable laws and regulations and the highest standards of ethical conduct. We do not condone, and will not countenance, any violation of these standards by our employees, agents, and business partners.
Publishing earnings guidance subjects us to risks, including increased stock volatility that could lead to potential lawsuits by investors.
Because we publish earnings guidance, we are subject to a number of
risks. Actual results may vary fromclass action, individual plaintiff direct action, State Attorney General, and county lawsuits alleging that we engaged in anti-competitive behavior to fix or raise the
guidanceprices of certain drugs starting, in some instances, as early as calendar year 2010. Refer to Item 8. Note 19. While we provide investors from timeintend to time, such that our stock price may decline following, among other things,defend these lawsuits vigorously, any earnings release or guidance that does not meet market expectations.
It has become increasingly commonplace for investors to file lawsuits against companies following a rapid decrease in market capitalization. We have been in the past, and may be in the future, named in these types of lawsuits. These types of lawsuits can be costly and divert management attention and other resources away from our business, regardless of their merits, and could result in adverse settlements or judgments, whichdecision could have a material adverse impact on the Company.our business, results of operations and reputation.
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Risk Factors
Third-party patents and other intellectual property rights may limit our ability to bring new products to market and may subject us to potential legal liability, causing us to incur significant costs.which could have a material adverse effect on our business and operating results.
The manufacture, use and sale of new products that are the subject of conflicting patent rights have been the subject of substantial litigation in the pharmaceutical industry.
Perrigo Company plc- Item 1A
Risk Factors
•As a manufacturer of generic pharmaceutical products, the ability of our CHCACSCA and RXCSCI segments to bring new products to market is often limited by third-party patents or proprietary rights and regulatory exclusivity periods awarded on products. Launching new products prior to resolution of intellectual property issues may result in us incurring legal liability if the related litigation is later resolved against us. The cost and time for us to develop prescription and Rx-to-OTC switch products is significantly greater than the rest of the new products that we introduce. Any failure to bring new products to market in a timely manner could cause us to lose market share, and our operating results could suffer.
•We couldmay have to defend against charges that we violatedinfringed patents or violated proprietary rights of third parties. This could require us to incur substantial expense and could divert significant effort of our technical and management personnel. If we are found to have infringed on the rights of others, we could lose our right to develop or manufacture some products or could be required to pay monetary damages or royalties to license proprietary rights from third parties. Additionally, if we choose to settle a dispute through licensing or similar arrangements, the costs associated with these arrangements may be substantial and could include ongoing royalties. An adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling a number of our products.
•At times, our CHCA or RX segmentsCSCA segment may seek approval to market drug products before the expiration of a third party's patents for thosetherapeutically equivalent products, based upon our belief that such patents are invalid, unenforceable or would not be infringed by our products. In these cases, we may face significant patent litigation. Depending upon a complex analysis of a variety of legal and commercial factors, we may, in certain circumstances, elect to market a store brand or generic pharmaceutical product while litigation is pending, before any court decision, or while an appeal of a lower court decision is pending, known as an "at risk" launch. The risk involved in an "at risk" launch can be substantial because, if a patent holder ultimately prevails, the remedies available to the patent holder may include, among other things, damages measured by the profits lost by the holder, which are often significantly higher than the profits we make from selling the generic version of the product. By electing to proceed in this manner, we could face substantial damages if we receive an adverse final court decision. In the case where a patent holder is able to prove that our infringement was "willful" or "exceptional," under applicable law, the patent holder may be awarded up to three times the amount of its actual damages or we may be required to pay attorneys’ fees.
The success of certain of our products depends on the effectiveness of measures we take to protect our intellectual property rights and patents.
If we fail to adequately protect our intellectual property, competitors may manufacture and market similar products.
•We have been issued patents covering certain of our products, and we have filed, and expect to continue to file, patent applications seeking to protect newly developed technologies and products in various countries. Any existing or future patents issued to or licensed by us may not provide us with any significant competitive advantages for our products or may even be challenged, invalidated, or circumvented by competitors. In addition, patent rights may not prevent our competitors from developing, using, or commercializing non-infringing products that are similar or functionally equivalent to our products.
•We also rely on trade secrets, unpatented proprietary know-how, and continuing technological innovation that we seek to protect, in part by confidentiality agreements with licensees, suppliers, employees, and consultants. If these agreements are breached, we may not have adequate remedies for any such breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Furthermore, trade secrets and proprietary technology may otherwise become known or be independently developed by competitors or, if patents are not issued with respect to products arising from research, we may not be able to maintain the value of such intellectual property rights.
Perrigo Company plc- Item 1A
Risk Factors
Our ability to achieve operating results in line with published guidance is inherently subject to numerous risks and other factors beyond our control. Publishing earnings guidance subjects us to risks, including increased stock volatility, that could lead to potential lawsuits by investors.
Because we publish earnings guidance, we are subject to several risks. Earnings guidance is inherently uncertain and subject to factors beyond our control. Actual results may vary from the guidance we provide investors from time to time, such that our stock price may decline following, among other things, any earnings release or guidance that does not meet market expectations.
It has become increasingly commonplace for investors to file lawsuits against companies following a rapid decrease in market capitalization. We have been in the past, are currently, and may be in the future, named in these types of lawsuits. These types of lawsuits can be costly and divert management attention and other resources away from our business, regardless of their merits, and could result in adverse settlements or judgments. The inherent uncertainty of earnings guidance and related lawsuits could have a material impact on us.
Significant increases in the cost or decreases in the availability of the insurance we maintain could adversely impact our operating results and financial condition. Disputes with insurers on the scope of existing policies may limit the coverage available under such policies.
To protect the Company against various potential liabilities, we maintain a variety of insurance programs, including property, general, and product, and directors' and officers' liability. We may reevaluate and change the types and levels of insurance coverage that we purchase. WeInsurance costs, including deductible or retention amounts, may increase, or our coverage could be reduced, which could lead to an adverse effect on our financial results depending on the nature of a loss and the level of insurance coverage we maintained. Moreover, we are self-insured when insurance is not available, not offered at economically reasonable premiums or does not available at reasonable premiums. Risks associated with insurance plans include:
Insurance costs could increase significantly, or the availability of insurance may decrease, either of which could adversely impact our financial condition;
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• | Deductible or retention amounts could increase or our coverage could be reduced in the future and to the extent losses occur, there could be an adverse effect on our financial results depending on the nature of the loss and the level of insurance coverage we maintained (refer to Item 8. Note 16 for further information related to legal proceedings); |
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• | Product liability insurance may not be available to us at an economically reasonable cost (or at all for certain specific products) or our insurance may not adequately cover our liability in connection with product liability claims (refer to Item 8. Note 16 for further information related to legal proceedings); and |
As ouradequately cover claims brought against us. Our business inherently exposes us to claims, for injuries allegedly resulting from the use of our products, we may become subject to claims for which we are not adequately insured. Unanticipatedand an unanticipated payment of a large claim may have a material adverse effect on our business.
Disputes with insurers on the scope of existing policies may reduce the coverage available under such policies. In May 2021, insurers on multiple policies of D&O insurance filed an action in the High Court in Dublin against us and our current and former directors and officers seeking declaratory judgments on certain coverage issues. If successful, such claims would limit the policies available to Perrigo for certain pending securities claims, as well as claims for legal expenses relating to certain matters that were previously resolved, and could reduce substantially Perrigo’s total insurance coverage for such claims.
Tax Related Risks
The resolution of uncertain tax positions, including any ongoing disputes with U.S. Internal Revenue Service ("IRS")and foreign tax authorities, could be unfavorable, which could have a material adverse effect on our business.
Although we believe our tax estimates are reasonable and our tax filings are prepared in accordance with applicable tax laws, the final determination with respect to any tax audit or 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 or cash flows in the periods for which that determination is made and in future periods after the determination. In addition, future period earnings may not agree withbe adversely impacted by litigation costs, settlements, penalties or interest assessments. See Item 8. Note 18 for a description of current audits and adjustment-related disputes and related litigation.
Changes to tax laws and regulations or the conclusion that we are treated asinterpretation thereof could have a foreign corporation for U.S. federalmaterial adverse effect on our results of operations and the ability to utilize cash in a tax purposes.efficient manner.
Although we are incorporated in Ireland, the IRS may assert that we should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal tax purposes pursuant to section 7874 of the U.S. Internal Revenue Code of 1986, as amended ("Code"). For U.S. federal tax purposes, a corporation generally is considered a tax resident in the jurisdiction of its organization or incorporation. Because we are an Irish incorporated entity, we would generally be classified as a foreign corporation (and, therefore, a non-U.S. tax resident) under these rules. Section 7874 of the Code provides an exception under which a foreign incorporated entity may, in certain circumstances, be treated as a U.S. corporation for U.S. federal tax purposes. Refer to Item 1. Business - Government Regulation and Pricing.
Perrigo Company plc to be treated as a foreign corporation for U.S. federal tax purposes under section 7874 of the Code, either (i) the former stockholders of Perrigo Company must own (within the meaning of section 7874 of the Code) less than 80% (by both vote and value) of our stock by reason of holding shares in Perrigo Company (the "ownership test") as of the closing of the Elan acquisition or (ii) we must have substantial business activities in Ireland after the Elan acquisition (taking into account the activities of our expanded affiliated group).
Upon our acquisition of Elan, Perrigo Company stockholders held 71% (by both vote and value) of our shares. As a result, we believe that under current law, we should be treated as a foreign corporation for U.S. federal tax purposes. However, we cannot assure that the IRS will agree with our position that the ownership test is satisfied. There is limited guidance regarding the section 7874 provisions, including the application of the ownership test. An unfavorable determination on Perrigo Company plc’s treatment as a foreign corporation under section 7874 of the Code could have a material impact on our consolidated financial statements in future periods.
Based on the limited guidance available, we currently expect that Section 7874 of the Code likely will limit our and our U.S. affiliates’ ability to use their U.S. tax attributes, such as net operating losses, to offset certain U.S. taxable income, if any, generated by the Elan acquisition or certain specified transactions for a period of time following the Elan acquisition (refer to Item 8, Note 14).
Perrigo Company plc- Item 1A
Risk Factors
Changes to tax laws could have a material adverse effect on our results of operations and the ability to utilize cash in a tax efficient manner.
We believe that under current law, we should be treated as a foreign corporation for U.S. federal tax purposes. However, any ofthere is limited guidance regarding the following could adversely affect our statussection 7874 provisions. An unfavorable determination on Perrigo Company plc’s treatment as a foreign corporation for U.S. federal tax purposes:
Changesunder section 7874 of the Code or changes to the inversion rules in section 7874 of the Code, the IRS Treasury regulations promulgated thereunder, or other IRS guidance;guidance and
Legislative legislative proposals aimed at expanding the scope of U.S. corporate tax residence.
On April 4, 2016, the United States Treasury ("Treasury") and the IRS issued a package of temporary regulations that incorporate the guidance promised in the 2014 and 2015 notices and provide other rules. These temporary regulations are generally effective for certain inversion transactions completed on or after November 19, 2015 or, in certain cases, to certain specified post-inversion transactions occurring after that date provided that an inversion transaction had occurred on or after September 22, 2014. We do not believe that those regulations would apply to our transaction, which occurred prior to those effective dates. Treasury and the IRS also issued final regulations on June 3, 2015, which address the “substantial business activities” test of Section 7874 of the Code. We believe that those regulations, which have an effective date of June 4, 2015, also do not impact the treatment ofresidence could adversely affect our status as a foreign corporation under Section 7874, as our transaction also occurred prior to the effective date of those final regulations.
On October 16, 2016, Treasury released final regulations regarding corporatefor U.S. federal tax inversions and related earnings stripping. These final regulations include provisions that may be interpreted to impact otherwise common tax structures including intercompany financing and obligations. We believe that these regulations do not materially impact our intercompany financing and obligations. Treasury has indicated that they will continue to study certain portions of the proposed regulations that were not finalized, and we will evaluate the impacts of any additional guidance or regulations to our cross-border treasury management practices and intercompany financing structures at that time. We have no assurance that such guidance, if any, will not impact our ability to utilize existing or similar structures in the future.
The Organization for Economic Co-operation and Development, which represents a coalition of member countries, has recommended changes to numerous long-standing tax principles relating to Base Erosion and Profit Shifting ("BEPS"). These changes are being adopted and implemented by many of the countries in which we do business and may increase our taxes in these countries. In addition, the European Commission has launched several initiatives to implement BEPS actions including an anti-tax avoidance directive ("ATADI & II") and having a common (consolidated) corporate tax base. It is unclear at present if and how these initiatives will be implemented by the EU countries. Specifically, Ireland is embarking on a consultation process to implement the ATAD & II directives and BEPS related measures. The shape of this reform may adversely impact our consolidated effective tax rate.
On December 25, 2017, Belgium enacted a tax reform bill (“Belgium Tax Act”) providing for a simplified tax system including, among other items, a corporate income tax rate reduction from 33% to 29% in 2018 (and to 25% from 2020) and an increase in the participation exemption on qualifying dividends from 95% to 100% (refer to Item 8, Note 14 for further information related to the Belgium Tax Act).On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“U.S. Tax Act”). The U.S. Tax Act includes a number of significant changes to existing U.S. tax laws that impact us. These changes include a corporate income tax rate reduction from 35% to 21% and the elimination or reduction of certain U.S. deductions and credits, including limitations on the deductibility of interest expense and executive compensation. The U.S. Tax Act also transitions international taxation from a worldwide system to a modified territorial system. This modified territorial system includes, among other items, base erosion prevention measures which have the effect of subjecting certain earnings of our U.S. owned foreign corporations to U.S. taxation as global intangible low-taxed income (“GILTI”) and the establishment of a minimum tax on certain payments from our U.S. subsidiaries to related foreign persons as base erosion and anti-abuse tax (“BEAT”). These changes are effective beginning in 2018. The U.S. Tax Act also includes a one-time mandatory deemed repatriation tax on accumulated U.S. owned foreign
Perrigo Company plc- Item 1A
Risk Factors
corporations’ previously untaxed foreign earnings (“Transition Toll Tax”). The Transition Toll Tax will be paid over an eight-year period starting in 2018 and will not accrue interest.
Our preliminary estimate of the impact of the U.S. Tax Act (including the Transition Toll Tax) is subject to the finalization of management's analysis related to certain matters, such as developing interpretations of the provisions of the U.S. Tax Act, changes to certain estimates and amounts related to the earnings and profits of certain U.S. owned foreign subsidiaries and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the U.S. Tax Act may require further adjustments and changes in our estimates,purposes, which could have a material adverse effectimpact on our business, resultsConsolidated Financial Statements in future periods.
Additionally, we are subject to tax laws in various jurisdictions globally. Refer to Item 1. Business - Government Regulation and Pricing for a discussion of operations or financial conditions. The final determination of the impact of therecent changes to U.S. Tax Act (including the Transition Toll Tax) will be completed as additional information becomes available, but no later than one year from the enactment of the U.S. Tax Act (refer to Item 8, Note 14 for further information related to the U.S. Tax Act).
and EU tax laws. Any of these changes could have a prospective or retroactive application to us, our shareholders, and affiliates, and could adversely affect us by changing our effective tax rate and limiting our ability to utilize cash in a tax efficient manner.
Our effective tax rate or cash tax payment requirements may change in the future, which could adversely impact our future results fromof operations.
A number of factors may adversely impact our future effective tax ratesrate or cash tax payment requirements, which may impact our future results and cash flows from operations (referoperations. Refer toItem 8. Note 1418for further information related to Income Taxes). These factors include, but are not limited to:
Changes changes to income tax rates, to tax laws or the interpretation of such tax laws (including additional proposals for fundamental international tax reform)reform globally);
Income tax rate changes by governments;
The the jurisdictions in which our profits are determined to be earned and taxed;
Changes changes in the valuation of our deferred tax assets and liabilities;
Adjustments adjustments to estimated taxes upon finalization of various tax returns;
Adjustments adjustments to our interpretation of transfer pricing standards, treatment or characterization of intercompany transactions, changes in available tax credits, grants and other incentives;
Changes changes in stock-based compensation expense;
Changes changes in U.S. generally accepted accounting principles;
Expiration expiration or the inability to renew tax rulings or tax holiday incentives;
Divestitures and divestitures of current operations; andoperations.
Repatriation of non-U.S. earnings with respect to which we have not previously provided for U.S. taxes.
The resolution of uncertain tax positions could be unfavorable, which could have an adverse effect on our business.
Although we believe that our tax estimates are reasonable and that our tax filings are prepared in accordance with all applicable tax laws, the final determination with respect to any tax audit or 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 or cash flows in the periods for which that determination is made and in future periods after the determination. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties or interest assessments.
We are currently involved in several audit and adjustment related disputes, including litigation, with the Internal Revenue Service (“IRS”). These include litigation regarding our 2009, 2010, 2011, and 2012 tax years, as well as proposed audit adjustments related to litigation costs and transfer pricing positions related to Athena Neurosciences, Inc. (“Athena”), a subsidiary of Elan acquired in 1996, for the 2011, 2012 and 2013 tax years.
Perrigo Company plc- Item 1A
Risk Factors
At this time, we cannot predict the outcome of any audit or related litigation. Unfavorable resolutions of the audit matters discussed above could have a material impact on our consolidated financial statements in future periods. (refer to Item 8. Note 14 for further information related to uncertain tax positions and ongoing tax audits and Item 8. Note 16 for further information related to legal proceedings).
Risks Related to Capital and Liquidity Risks
Our historical failure to timely file our periodic reports with the SEC may limit our options in accessing the public markets to raise debt or equity capital, which in turn may limit our ability to pursue future transactions or strategies.
We did not timely file our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 or our Quarterly Report on Form 10-Q for the quarter ended April 1, 2017. As a result, there currently are limits on our ability to access the public markets. For example, we are not eligible to use Form S-3 until we establish the required history of making timely filings for twelve full calendar months. The ability to use Form S-3 to register public offerings in the United States offers certain benefits, such as relatively lower costs and shorter time-frames to prepare a registration statement and cause it to become effective, which may enhance our ability to take advantage of positive market conditions as they develop. The limited availability of access to the public markets could increase the time and costs related to raising capital or prevent us from pursuing transactions or implementing future business strategies. We expect we will again become eligible to use Form S-3 as of June 1, 2018; however, any failure by us to timely file one or more of our periodic reports or otherwise remain current in our SEC reporting requirements may further inhibit our ability to access the public markets.
Our indebtedness could adversely affect our ability to invest in our business and implement our strategic initiatives.
We anticipate that cash, cash equivalents, cash flows from operations, and borrowings available under our credit facilities will substantially fund working capital and capital expenditures. Our business requires continuous capital investments, and there can be no assurance that financial capital will always be available on favorable terms or at all. Additionally, our leverage and debt service obligations could adversely affect the business. At December 31, 2017,2023, our total indebtedness outstanding was $3.3$4.1 billion.
Our senior credit facilities, theThe agreements governing our senior notes,Senior Secured Credit Facilities (as defined in Item 8. Note 12) impose material operating and financial restrictions that limit our operating flexibility, including the following:
•The Credit Agreement (as defined below) governing our Senior Secured Credit Facilities contain, and agreements governing our other indebtedness may contain, a number of restrictions and covenants that, among other things, limit our ability to makeand/or our restricted subsidiaries’ ability to:
•incur or assume liens or additional debt or provide guarantees in respect of obligations of other persons;
•pay dividends or distributions or other paymentsredeem or repurchase capital stock;
•prepay, redeem or repurchase certain debt;
•make loans, investments, acquisitions (including certain acquisitions of exclusive licenses) and capital expenditures;
•enter into agreements that restrict distributions from our subsidiaries;
•enter into transactions with affiliates;
•enter into sale and lease-back transactions;
•sell, transfer or exclusively license certain assets, including material intellectual property, and capital stock of our subsidiaries; and
•consolidate or merge with or into, or sell substantially all of our assets to, another person.
•The Credit Agreement governing our investors and creditors unlessSenior Secured Credit Facilities also includes certain financial testscovenants that require us to maintain a maximum first lien secured leverage ratio and a minimum interest coverage ratio.
Perrigo Company plc- Item 1A
Risk Factors
•As a result of these restrictions, we may be limited in how we conduct our business; unable to raise additional debt or other criteria are satisfied.
We also must comply with certain specified financial ratios and tests. These restrictions could affect our abilityequity financing to operate ourduring general economic or business and may limit our abilitydownturns; or unable to compete effectively, take advantage of potentialnew business opportunities such as acquisitions.or grow in accordance with our plans.
•Our failure to comply with any of the covenants could result in a default under the Credit Agreement and certain other indebtedness, which, if not cured or waived, could result in us having to repay our borrowings before their due dates. Such default may allow the lenders or other note holders to accelerate the related debt and may result in the acceleration of any other debt to which cross-acceleration or cross-default provision applies. If we do not comply withare forced to refinance these borrowings on less favorable terms or if we were to experience difficulty in refinancing the covenants and restrictions contained indebt prior to maturity, our senior credit facilities, agreements governing our senior notes, and agreements governing our other indebtedness, weresults of operations or financial condition could be inmaterially affected. In addition, an event of default under those agreements, and the debt, together with accrued interest, could then be declared immediatelyCredit Agreement may permit the lenders to refuse to permit additional borrowings under the Revolver (as defined below) or to terminate all commitments to extend further credit under the Revolver. Furthermore, if we are unable to repay the amounts due and payable.
Any defaultpayable under our senior credit facilitiesthe Credit Agreement or agreements governing our senior notes or other indebtedness could lead to an acceleration of debt under other debt instruments, the lenders and note holders may be able to proceed against the collateral granted to them to secure that contain cross-acceleration or cross-default provisions.indebtedness. If our indebtedness is accelerated, there can be no assurance that we would be able to repay or refinance our debt or obtain sufficient new financing.
Downgrades•Future downgrades to our credit ratings may limit our access to capital and materially increase borrowing costs on current or future financing, including via trade payables with vendors. Customers' inclination to purchase goods from us may also be affected by the publicity associated with deterioration of our credit ratings.
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• | There are various maturity dates associated with our credit facilities, senior notes, and other debt facilities. There is no assurance that cash, future borrowings or equity financing will be available for the payment or refinancing of our indebtedness. Further, there is no assurance that future refinancing or renegotiation of our senior credit facilities, senior notes or other debt facilities, or additional agreements will not have materially different or more stringent terms (refer to•There are various maturity dates associated with our Senior Secured Credit Facilities, senior notes, and other debt facilities. There is no assurance that cash, future borrowings or equity financing will be available for the payment or refinancing of our indebtedness. Further, there is no assurance that any future refinancing or renegotiation of our Senior Secured Credit Facilities, senior notes or other debt facilities, or additional agreements will not have materially different or more stringent terms. Refer toItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations). |
Perrigo Company plc- Item 1ACapital Resources.
Risk Factors
We cannot guarantee that we will buy back our ordinary shares pursuant to our announced share repurchase plan or that our share repurchase plan will enhance long-term shareholder value.
In October 2015,2018, our Board of Directors authorized a $2.0up to $1.0 billion three-yearof 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 plan.program. During the three monthsyear ended December 31, 2015, we repurchased shares through the plan totaling $500.0 million. During 2016,2023 and December 31, 2022, we did not purchaserepurchase any shares under such authorization, and there can be no assurances that we will do so in the open market. During 2017, we repurchased $191.5 million worth of shares.future. The specific timing and amount of additional buybacks under the authorization, if any, will depend upon several factors, including market and business conditions, the trading price of our ordinary shares, and the nature of other investment opportunities. opportunities, the availability of our distributable reserves and the tax consequences of any buybacks. In addition, our ability to repurchase shares may be limited in the future under Irish law, if at any time we do not have sufficient distributable reserves. No share repurchases are currently anticipated in the near term.
Buybacks of our ordinary shares pursuant to our share repurchase plan could affect the market price of our ordinary shares, or increase their volatility. Additionally, our share repurchase plan couldvolatility or diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. Although our share repurchase plan is intended to enhance long-term shareholder value, there is no assurance that it will do so, and short-term share price fluctuations could reduce the plan’s effectiveness.
Any additional shares we may issue could dilute your ownership in the Company.
Under Irish law, our authorized share capital can be increased by an ordinary resolution of our shareholders, and the directors may issue new ordinary or preferred shares up to a maximum amount equal to the authorized but unissued share capital, without shareholder approval, once authorized to do so by the articles of association or by an ordinary resolution of our shareholders.
Subject to specified exceptions, Irish law grants statutory preemption rights to existing shareholders to subscribe for new issuances of shares for cash, but allows shareholders to authorize the waiver of the statutory preemption rights either in our articles of association or by way of a special resolution withresolution. Such disapplication of these preemption rights can either be generally applicable or be in respect to anyof a particular allotment of shares.
Our articles of association contain, as permitted by Irish company law, a provision authorizing our Board of Directors to issue new shares for cash without offering preemption rights. The authorization of the directors to issue shares and the authorization of the waiver of the statutory preemption rights must both be renewed by the shareholders at least every five years, and we cannot provide any assurance that these authorizations will always be approved, which could limit our ability to issue equity and thereby adversely affect the holders of our securities.
Perrigo Company plc- Item 1A
Risk Factors
We are incorporated in Ireland; Irish law differs from the laws in effect in the United States and may afford less protection to, or otherwise adversely affect, our shareholders.
As an Irish company, we are governed by the Irish Companies Act 2014 (the "Act"). The Act differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, mergers, amalgamations and acquisitions, takeovers, shareholder lawsuits, and indemnification of directors.
•Under Irish law, the duties of directors and officers of a company are generally owed to the company only. As a result, shareholders of Irish companies do not have the right to bring an action against the directors or officers of a company for the breach of such duties, except in limited circumstances.
Depending on the circumstances, shareholders•Shareholders may be subject to different or additional tax consequences under Irish law as a result of the acquisition, ownership and/or disposition of ordinary shares, including, but not limited to, Irish stamp duty, dividend withholding tax, Irish income tax, and capital acquisitions tax.
•There is no treaty between Ireland and the U.S. providing for the reciprocal enforcement of foreign judgments. Before a foreign judgment would be deemed enforceable in Ireland, the judgment must be (i) for a definite sum, (ii) provided by a court of competent jurisdiction and be for a(iii) final and conclusive sum.conclusive. An Irish courtHigh Court may exercise its right to refuse to recognize and enforce a foreign judgment if the foreign judgment was obtained by fraud, if it violated Irish public policy, if it is in breach of natural justice, or if it is irreconcilable with an earlier judgment.
Perrigo Company plc- Item 1A
Risk Factors
•An Irish courtHigh Court may stay proceedings if concurrent proceedings are being brought elsewhere. Judgments of U.S. courts of liabilities predicated upon U.S. federal securities laws may not be enforced by Irish courtsHigh Courts if deemed to be contrary to public policy in Ireland.
We are subject to Irish takeover rules under which our Board of Directors is not permitted to take any action without shareholder or Irish Takeover Panelapproval that might frustrate an offer for our ordinary shares once we have received an approach that may lead to an offer, or have reason to believe an offer is or may be imminent. Further, it•It could be more difficult for us to obtain shareholder approval for a merger or negotiated transaction than if we were a U.S. company because the shareholder approval requirements for certain types of transactions differ, and in some cases are greater, under Irish law.
•Additionally, under the Irish Takeover Panel Act issued in 1997 and Takeover Rules issued in 2022, the Board of Directors is not permitted to take any action that might frustrate an offer for our ordinary shares, including issuing additional ordinary shares or convertible equity, making material acquisitions or dispositions, or entering into contracts outside the ordinary course of business, once the Board of Directors has received an approach that may lead to an offer or has reason to believe that such an offer is or may be imminent, subject to certain exceptions. These provisions may give the Board of Directors less ability to control negotiations with hostile offerors and protect the interests of holders of ordinary shares than would be the case for a corporation incorporated in a jurisdiction of the United States.
We may be limited in our ability to pay dividends in the future.
A number of factors may limit our ability to pay dividends, in the future, including:including, among other things:
The availability of distributable reserves, as approved by our shareholders and the Irish High Court;
•Our ability to receive cash dividends and distributions from our subsidiaries;
•Compliance with applicable laws and debt covenants; and
•Our financial condition, results of operations, capital requirements, general business conditions, and other factors that our Board of Directors may deem relevant.relevant; and
•The availability of our distributable reserves.
Under Irish law, distributable reserves are the accumulated realized profits so far as not previously utilized by distribution or capitalization, less accumulated realized losses so far as not previously written off in a reduction or a reorganization of capital duly made, subject to adjustments for any increases to, or reductions of, share premium. In addition, no distribution or dividend may be made if, at the time of the distribution or dividend, our net assets are not, or would not be, after giving effect to such distribution or dividend, be equal to, or in excess of, the aggregate of our called-up share capital plus undistributable reserves.
While we currently expect to continue paying dividends, significant changes in our business or financial condition such as asset impairments, sustained operating losses and the selling of assets, could impact the amount of distributable reserves available to us. On July 18, 2023, the Irish High Court approved the creation of $4,900 million of distributable reserves of the Company through the reduction of the Share Premium account. The court order authorizing the creation of distributable reserves was filed with the Registrar of Companies in Ireland and became effective on July 20, 2023.
Perrigo Company plc- Item 1A
Risk Factors
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 1C. CYBERSECURITY
RISK MANAGEMENT AND STRATEGY
Cybersecurity is an important part of our risk management program and an area of increasing focus for our Board and management. While management is responsible for day-to-day risk management, the Board, is responsible for the Company’s overall risk oversight function, including cybersecurity risks, and includes oversight by several committees. The Audit Committee supports the Board in overseeing the overall framework for the risk assessment and enterprise risk management (“ERM”) process for the Company. The Nominating & Governance Committee (“NGC”) supports the Board by overseeing cybersecurity risks, policies and objectives. As part of its duties, the NGC regularly provides reports to the full Board of Directors (which includes Audit Committee members) related to matters within its responsibility. As a result of this process, the Audit Committee receives updates on, among other things, cybersecurity, which can be used to assist the Board and Audit Committee in its oversight of the Company's ERM processes.
We use a risk-based approach to identify, assess, protect, detect, respond to and recover from cybersecurity threats. Recognizing that no single technology, process or business control can effectively prevent or mitigate all risks, we employ multiple technologies, processes and controls, all working independently but as part of a cohesive strategy to minimize risk, including the following:
•Management invests in organization capability and technology to manage and identify cybersecurity and information security risks. Our Company has information security employees across the globe, enabling us to monitor and promptly respond to threats and incidents, identify and maintain oversight of cybersecurity risks associated with third parties, evaluate and deploy cybersecurity technologies, and ensure associates are educated and prepared to address shared cybersecurity risks.
•We emphasize security and resiliency through business assurance capabilities and incident response plans designed to identify, evaluate, and remediate incidents when they occur. We regularly review and update our plans, policies and technologies and conduct regular training exercises and crisis management preparedness activities to test their effectiveness.
•We have implemented an information and cybersecurity awareness program designed to educate and test employee maturity at least annually, and regularly throughout the year employees receive training regarding phishing and other threat actor schemes, the inherent risks involved in human interaction with information and operational technology, and new and emerging technologies.
•Our global cybersecurity program increasingly leverages intelligence-sharing capabilities about emerging threats within the Consumer Packaged Goods sector, across other industries, with specialized vendors, industry groups, and through public-private partnerships with government intelligence agencies. Such intelligence allows us to better detect and work to prevent emerging cybersecurity threats before they materialize.
•The Company’s cybersecurity policies, standards and processes are designed and implemented in light of the requirements of the National Institute of Standards and Technology (NIST) frameworks for cybersecurity and privacy.
•Our strategy to identify, assess, protect, detect, respond to and recover from cybersecurity threats is regularly tested by external parties through auditing, penetration testing, and other exercises designed to assess and test our cybersecurity health, resiliency and the effectiveness of our program.
We have experienced and may continue to experience cybersecurity incidents; however, we do not believe any cybersecurity incidents incurred to date have materially affected our Company, including our business strategy, results of operations, or financial condition. While we continue to employ resources to monitor our systems and protect our infrastructure, these measures may prove insufficient, and that could subject us to significant risks. For
further discussion of how these and other potential cybersecurity risks may impact our business, refer to the risk factor under heading “A cybersecurity breach, disruption or misuse of our information systems, or our external business partners’ information systems could have a material adverse effect on our business” in Item 1A. Risk Factors – Operational Risks.
GOVERNANCE
The NGC, comprised solely of independent directors, is charged with oversight of risks related to global cybersecurity and operational resiliency. The NGC routinely engages with relevant management on a range of cybersecurity-related topics, including the threat of environment and vulnerability assessments, policies and practices, technology trends and regulatory developments from the Chief Financial Officer (“CFO”) and Senior Vice President, Information Technology and Services (“IT&S”) Strategy and Business Partnering. The NGC meets separately in advance of each regular Board meeting and when needed in the event of a specific cybersecurity threat, and its Chair regularly reports out to the Board on key matters considered by the NGC. The Board is periodically briefed on related cybersecurity matters from other executives from Legal, Privacy, and IT&S, as well as external experts related to breach management, external attestation of the company’s cybersecurity practices and processes, and evolving cybersecurity matters that may inform the company’s cybersecurity strategy and approach. The Board has received and will continue to receive cybersecurity training.
Our overall information security efforts are led by the CFO and Senior Information Technology Executives. These leaders have substantial experience in cybersecurity including knowledge, skills, certifications, and background in cybersecurity.
We have a formalized breach management protocol that utilizes a cross-functional team to address global cybersecurity efforts that includes partnership with Legal, Risk, our CFO, IT&S Strategy and Business Partnering and Enterprise HR which lead matters when they occur. This collaborative approach, working with a wide range of key stakeholders to manage risk, allows us to effectively share and respond to threat intelligence. In the event of a specific cybersecurity threat or incident, management is notified in accordance with established escalation procedures. If appropriate, management then notifies the NGC, which may meet to describe the cybersecurity threat or incident before reporting out to the Board regarding the matter. We use forensic and other key third party service providers to assist the Company with its response in the event of a cybersecurity incident.
ITEM 2. PROPERTIES
Our world headquarters is located in Dublin, Ireland, and our North American base of operations is located in Allegan,Grand Rapids, Michigan. We manufacture products at 2817 worldwide locations and have R&D, logistics, and office support facilities in many of the regions in which we operate. We own approximately 72%80% of our facilities and lease the remainder. Our primary facilities by geographic area were as follows at December 31, 2017:
| | | | | | | | | | | | | | |
| Country | | | | |
Country | | Number of Facilities | | Segment(s) Supported |
| Ireland | | 1 | | CSCA, CSCI |
IrelandUnited States | | 41 | | 1 | CHCA, CHCI, RXCSCA, CSCI |
United StatesFrance | | 8 | | 44 | CHCA, RX, OtherCSCI |
MexicoBelgium | | 5 | | 9 | CHCACSCI |
United KingdomChina | | 5 | | 7 | CHCICSCA, CSCI |
FranceUnited Kingdom | | 5 | | 6 | CHCICSCI |
BelgiumGermany | | 4 | | 4 | CHCICSCI |
AustriaSwitzerland | | 4 | | 4 | CHCICSCI |
AustraliaAustria | | 3 | | 3 | CHCICSCI |
IsraelHong Kong | | 2 | | 3 | CHCA, CHCI, RXCSCI |
IndiaFinland | | 2 | | 2 | CHCACSCI |
GermanyPortugal | | 2 | | 2 | CHCICSCI |
SwitzerlandAustralia | | 2 | | 2 | CHCICSCI |
ItalyGreece | | 2 | | 1 | CHCICSCI |
PortugalSpain | | 2 | | 1 | CHCICSCI |
Perrigo Company plc - Item 2
We believe that our production facilities are adequate to support the business, and our property and equipment are well maintained. Our manufacturing plants are suitable for their intended purposes and have capacities for current and near term projected needs of our existing products.
| |
ITEM 3. | ITEM 3. LEGAL PROCEEDINGS |
Information regarding our current legal proceedings is presented in Item 8. Note 1619.
| |
ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Perrigo Company plc - Additional Item
Executive Officers
ADDITIONAL ITEM. INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and their ages and positions as of February 23, 20182024 were:
| | | | | | | | | | | | | | |
| | | | |
| | Title and Business Experience | | Age |
| Svend Andersen | | Mr. Andersen was named Executive Vice President and President, Consumer HealthcareSelf-Care International in February 2017. Prior to joining Perrigo in May 2016, Mr. Andersen served as Executive Vice President - Europe for LEO-Pharma from December 2015 to May 2016. Prior to that, he was Regional President and Corporate officer at Hospira, Inc.’s Europe, Middle East and Africa (“EMEA”) business for five years, was | | 62 |
| Eduardo Bezerra | | Eduardo Bezerra joined Perrigo in May 2022 as Executive Vice President responsibleand Chief Financial Officer. Mr. Bezerra previously served as Senior Vice President and Chief Financial Officer for the Western European division’s pharmaceuticals, generics, OTCDel Monte Fresh Produce, Inc., from 2019 to 2022. Before that, Mr. Bezerra held a number of positions of increasing responsibility at Monsanto company from 1998 to 2019. | | 49 |
| Catherine T. Schmelter | | Ms. Schmelter was named Executive Vice President and hospital products businessesPresident Consumer Self-care Americas in September 2023. Prior to joining Perrigo, Ms. Schmelter was most recently at Actavis from 2008Treehouse Foods, where she served as Chief Transformation Officer. Prior to 2015 including leading Alpharma’s EMEA businesses prior to its acquisition by Actavis, and prior to that,Treehouse Foods, Ms. Schmelter spent 10 years with Ferrosan (A Novo Nordisk Subsidiary) specializedat Kraft Foods in OTC and consumer health products asvarious leadership roles, including Vice President for Global Commercial Operations.of Meals, after beginning her CPG career at General Mills. | | 5655 |
| Thomas M. Farrington | | Mr. Farrington was named Executive Vice President and Chief Information Officer in November 2015. He formerly served as Senior Vice President and Chief Information Officer from October 2006 to November 2015. | | 6066 |
| Kyle L. Hanson | | Kyle L. Hanson joined Perrigo in June 2022 as Executive Vice President, General Counsel and Corporate Secretary. Ms. Hanson previously served as Senior Vice President, General Counsel and Secretary for Wolverine Worldwide, Inc., from 2018 to 2022. | | 59 |
| Alison Ives | | Alison Ives was appointed Executive Vice President and Chief Scientific Officer in June 2022. Ms. Ives previously served as Vice President Regulatory Affairs, Consumer Self-Care International from December 2017 to September 2020 and Vice President, Consumer Self-Care Americas, from September 2020 until May 2022. | | 43 |
| Ronald C. Janish | | Mr. Janish was named Chief Transformation Officer in January 2019 and Executive Vice President of Global Operations and Supply Chain in October 2015. He served as Senior Vice President of International and Rx Operations from 2012 until 2015 and as Managing Director of Perrigo’s Australian operations from 2010 to 2012. Previously, he held Senior Vice President roles for Perrigo in International Market Development, China Business Development and Global Procurement.2015. | | 5258 |
Todd W. KingmaPatrick Lockwood-Taylor | | Mr. KingmaPatrick Lockwood-Taylor was named Executive Vice President, General Counsel and Secretary in May 2006. He served as Vice President, General Counsel and Secretary from August 2003 to May 2006. | | 58 |
Sharon Kochan | | Mr. Kochan was named Executive Vice President and President, Branded Consumer Healthcare and International in February 2017. He served as Executive Vice President and General Manager, Consumer Healthcare International from August 2012 to February 2017. He served as Executive Vice President, General Manager of Prescription Pharmaceuticals from March 2007 to July 2012 and as Senior Vice President of Business Development and Strategy from March 2005 to March 2007. Mr. Kochan was Vice President, Business Development of Agis Industries (1983) Ltd. from July 2001 until the acquisition of Agis by the Company in March 2005. | | 49 |
James R. Michaud | | Mr. Michaud was named Executive Viceappointed President, Chief Human ResourcesExecutive Officer in August 2016. In 2014, Mr. Michaud was Presidentand Board Member of Human Resources Strategies, a consulting company focused on providing business based human resource strategies to a wide variety of companies in multiple industries. His corporate career spanned senior human resource roles in Alcoa, Arcelor Mittal Steel, and most recently, Cliffs Natural Resources,Perrigo Company plc, effective June 30, 2023. He joined Perrigo from Bayer AG, where he served as Executive Vice President, Chief Human Resources Officer from 2010 to 2014. | | 62 |
Jeffrey R. Needham | | Mr. Needham was named Executive Vice President andRegional President of Consumer Healthcare Americas in October 2009. HeHealth North America, while also serving a dual role as President of Bayer U.S. Before Bayer, Mr. Lockwood-Taylor served as Senior Vice President and CEO of Commercial Business Development for Consumer Healthcare from March 2005 through October 2009. Previously,The Oneida Group Inc., a private company. Prior to this position, he served as Senior Vice President of International from November 2004 to March 2005. He served as Managing Director of Perrigo’s U.K. operations from May 2002 to November 2004spent more than 20 years with Procter & Gamble in various roles, including brand franchise and as Vice President of Marketing from 1993 to 2002.general management leadership positions. | | 6155 |
| Grainne Quinn | | Ms.Dr. Quinn was named Executive Vice President in July 2016 and has served as Chief Medical Officer since November 2015. Prior to that she served as Vice President and Head of Global Patient Safety from January 2014 until November 2015. Dr. Quinn | | 54 |
| Robert Willis | | Mr. Willis was named Executive Vice President and HeadChief Human Resources Officer in March 2019 after serving as Vice President of Human Resources Global Pharmacovigilance and Risk ManagementBusinesses for Elan from April 2009 until December 2013 when the Company acquired Elan. | | 48 |
Uwe F. Roehrhoff | | Mr. Roehrhoff was appointed President, Chief Executive Officer and Board Member effective January 15, 2018.nearly six years. Prior to joining Perrigo, Mr. Roehrhoff served as Chief Executive OfficerWillis gained more than 20 years of Gerresheimer AG, a leading global manufacturer of pharmaceutical packaging productsexperience in Human Resources leadership through roles with Fawaz Alhokair Group, GE Capital, DoubleClick, and medical devices for storage, dosage and safe administration of drugs. He began his career with Gerresheimer AG in 1991 and steadily advanced to serve in a number of key leadership roles in Europe and North America, including leading the American subsidiary Gerresheimer Glass Inc. from 2001 to 2010. He served as an executive board member from 2003 to 2017, responsible for two of the company’s three business units, and CEO of Gerresheimer AG from 2010 until his retirement in August 2017. Mr. Roehrhoff served as Audit Committee Chairman on the Board of Directors of Catalent, Inc. from February 2017 to February 2018 and as deputy chairman of Klöckner&Co SE since May 2017.Norkom Technologies. | | 55 |
Paul Weninger | | Mr. Weninger was named Executive Vice President of Global Quality Operations in December 2015. He served as Senior Vice President, U.S. Quality Operations from 2013 to 2015; Vice President, Consumer Healthcare and Rx Quality Operations, U.S. and Asia Pacific from 2010 to 2013; Vice President, Global CHC Quality Operations from 2007 to 2010. | | 54 |
John Wesolowski | | Mr. Wesolowski was named Executive Vice President, President RX in November 2016. He previously was named as Acting General Manager, RX, in July 2016 and served in that capacity until November 2016. Previously, he served as Senior Vice President of RX Commercial Operations, from 2013 until July 2016. Mr. Wesolowski joined Perrigo in February 2004 as the Vice President, RX Sales and Marketing and was subsequently promoted to the Senior Vice President of RX Sales and Marketing in 2012. | | 50 |
Ronald L. Winowiecki | | Mr. Winowiecki was appointed CFO in February 2018. He served as Acting CFO from February 2017 to February 2018; Senior Vice President of Business Finance from January 2014 to February 2017; Vice President for Treasury and Accounting Shared Services from September 2011 to December 2013; and the Company’s Corporate Vice President Treasurer from October 2008 to August 2011. | | 51 |
Perrigo Company plc - Item 5
PART II.
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ITEM 5. | ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common equity has traded on the New York Stock Exchange under the symbol PRGO since June 6, 2013. Prior to June 6, 2013,that, our common equity traded on the Nasdaq Global Select Market under the symbol PRGO. Since June 6, 2013, our common equity has traded on the New York Stock Exchange ("NYSE") under the symbol PRGO. In association with the acquisition of Agis Industries (1983) Ltd., our common equity has been trading on the Tel Aviv Stock Exchange ("TASE") since March 16, 2005. same symbol.
As of February 23, 2018,2024, there were 1,4984,117 record holders of our ordinary shares.
Set forth below are the high and low sale prices for our ordinary shares on the NYSE for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | Six Months Ended |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| | High | | Low | | High | | Low | | High | | Low |
| First quarter | $ | 87.48 |
| | $ | 66.29 |
| | $ | 152.36 |
| | $ | 122.62 |
| | $ | 198.42 |
| | $ | 158.35 |
|
| Second quarter | $ | 77.74 |
| | $ | 65.47 |
| | $ | 133.53 |
| | $ | 84.85 |
| | $ | 167.92 |
| | $ | 140.40 |
|
| Third quarter | $ | 89.87 |
| | $ | 63.68 |
| | $ | 99.14 |
| | $ | 82.50 |
| | N/A |
| | N/A |
|
| Fourth quarter | $ | 91.73 |
| | $ | 79.70 |
| | $ | 97.17 |
| | $ | 79.72 |
| | N/A |
| | N/A |
|
The graph below shows a comparison of our cumulative total return with the cumulative total returns for the S&P 500 Index, and the S&P PharmaceuticalsConsumer Staples Index. The graph assumes an investment of $100 at the beginning of the period and the reinvestment of any dividends. Information in the graph is presented for the years ended December 31, 20122018 through December 31, 2017.2023.
Perrigo Company plc 
* $100 invested on December 31, 2018 - Item 5in stock or index - including reinvestment of dividends. Indexes calculated on month-end basis.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG PERRIGO COMPANY PLC**, THE S&P 500 INDEX, AND THE S&P PHARMACEUTICALS INDEX
|
| | | | | | |
| | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 |
| Perrigo Company plc | $100.00 | $147.94 | $161.60 | $140.30 | $81.18 | $85.72 |
| S&P 500 | $100.00 | $132.39 | $150.51 | $152.59 | $170.84 | $208.14 |
| S&P Pharmaceuticals | $100.00 | $135.23 | $165.27 | $174.84 | $172.10 | $193.74 |
| |
* | $100 invested on December 31, 2012 in stock or index - including reinvestment of dividends. Indexes calculated on month-end basis. |
| |
** | Perrigo Company priorOur Board of Directors authorized up to $1.0 billion of share repurchases with no expiration date in October 2018, subject to December 18, 2013. Perrigo Company plc beginning December 18, 2013. |
In January 2003, the Board of Directors adopted a policy of paying quarterly dividends. The declaration and payment of dividends and the amount paid, if any, are subject to the discretionDirectors’ approval of the Board of Directorspricing parameters and depend on our earnings, financial condition, capital and surplus requirements and other factors the Board of Directorsamount that may consider relevant (refer to Item 8. Note 11 for additional information on dividends paid).
In October 2015, the Board of Directors approved a three-yearbe repurchased under each specific share repurchase plan of up to $2.0 billion.program (the "2018 Authorization"). We did not repurchase any shares under the share repurchase plan during the three monthsyear ended December 31, 20172023 or December 31, 2022. During the year ended December 31, 20172020, we repurchased 2.73.4 million ordinary shares at an average repurchasepurchase price of $71.72$48.28 per share for a total of $191.5 million. We did not repurchase any shares$164.2 million under the share repurchase plan during the year ended 2018 Authorization. As of December 31, 2016. During2023, the six months ended December 31, 2015, we repurchased 3.3approximate value of shares available for purchase under the 2018 Authorization was $835.8 million ordinary shares at an average repurchase price of $151.59 per share, for a total of $500.0 million..
ITEM 6. [RESERVED]
Perrigo Company plc - Item 67
Executive Overview
| |
ITEM 6. | SELECTED FINANCIAL DATA |
The Consolidated Statements of Operations data set forth below with respect to the years ended December 31, 2017 and December 31, 2016, the six months ended December 31, 2015 and December 27, 2014, and the year ended June 27, 2015, and the Consolidated Balance Sheet data at December 31, 2017, December 31, 2016, and December 31, 2015 are derived from and are qualified by reference to the audited consolidated financial statements included in Item 8 of this report and should be read in conjunction with those financial statements and notes. The Consolidated Statements of Operations data set forth below with respect to the year ended June 28, 2014 and the Consolidated Balance Sheet data at June 27, 2015 and June 28, 2014 are derived from audited consolidated financial statements not included in this report. |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | Six Months Ended | | Year Ended |
| (in millions, except per share amounts) | December 31, 2017 | | December 31, 2016(1) | | December 31, 2015(2) | | December 27, 2014(3) | | June 27, 2015(4) | | June 28, 2014(5) |
| Statements of Operations Data | | | | | | | | | | | |
| Net sales | $ | 4,946.2 |
| | $ | 5,280.6 |
| | $ | 2,632.2 |
| | $ | 1,844.7 |
| | $ | 4,227.1 |
| | $ | 3,914.1 |
|
| Cost of sales | 2,966.7 |
| | 3,228.8 |
| | 1,553.3 |
| | 1,170.9 |
| | 2,582.9 |
| | 2,462.0 |
|
| Gross profit | 1,979.5 |
| | 2,051.8 |
| | 1,078.9 |
| | 673.8 |
| | 1,644.2 |
| | 1,452.1 |
|
| Operating expenses | 1,381.3 |
| | 4,051.5 |
| | 1,011.3 |
| | 384.1 |
| | 971.7 |
| | 880.7 |
|
| Operating income (loss) | $ | 598.2 |
| | $ | (1,999.7 | ) | | $ | 67.6 |
| | $ | 289.7 |
| | $ | 672.5 |
| | $ | 571.4 |
|
| | | | | | | | | | | | |
| Net income (loss) | $ | 119.6 |
| | $ | (4,012.8 | ) | | $ | 42.5 |
| | $ | 180.6 |
| | $ | 136.1 |
| | $ | 232.8 |
|
| | | | | | | | | | | | |
| Diluted earnings from continuing operations per share | $ | 0.84 |
| | $ | (28.01 | ) | | $ | 0.29 |
| | $ | 1.34 |
| | $ | 0.97 |
| | $ | 2.01 |
|
| | | | | | | | | | | | |
| Dividends declared per share | $ | 0.64 |
| | $ | 0.58 |
| | $ | 0.25 |
| | $ | 0.21 |
| | $ | 0.46 |
| | $ | 0.39 |
|
| |
(1)
| Includes the results of operations for assets acquired from Barr Laboratories, Inc. and assets acquired from Matawan Pharmaceuticals, LLC for the five months and eleven months and one week ended December 31, 2016, respectively. |
| |
(2)
| Includes the results of operations of Naturwohl and the GSK, ScarAway®, and Entocort® asset acquisitions for the two and a half months, three months, three months, and two weeks ended December 31, 2015, respectively.
|
| |
(3)
| Includes the results of operations for assets acquired from Lumara Health, Inc. for the two months ended December 27, 2014. |
| |
(4)
| Includes the results of operations for assets acquired from Lumara Health, Inc. and the results of operations of Omega Pharma Invest N.V. and Gelcaps Exportadora de Mexico, S.A. de C.V. for the eight, three, and two months ended June 27, 2015, respectively. |
| |
(5)
| Includes the results of operations for Elan Corporation, plc and results of operations for assets acquired from Fera Pharmaceuticals, LLC (Methazolomide) and Aspen Global Inc. for the six, five and four months ended June 28, 2014, respectively. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | December 27, 2014 | | June 27,
2015 | | June 28,
2014 |
| Balance Sheet Data | | | | | | | | | | | |
| Cash and cash equivalents | $ | 678.7 |
| | $ | 622.3 |
| | $ | 417.8 |
| | $ | 3,596.1 |
| | $ | 785.6 |
| | $ | 799.5 |
|
| Total assets | 11,628.8 |
| | 13,870.1 |
| | $ | 19,349.6 |
| | 16,508.4 |
| | $ | 19,591.9 |
| | $ | 13,879.1 |
|
| Long-term debt, less current portion | 3,270.8 |
| | 5,224.5 |
| | 4,971.6 |
| | 4,439.4 |
| | 5,246.9 |
| | 5,246.9 |
|
| |
ITEM 7. | ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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."
Perrigo Company plc - Item 7
Executive Overview
EXECUTIVE OVERVIEW
Perrigo Company plc was incorporated under the laws of Ireland on June 28, 2013 and became the successor registrant of Perrigo Company, a Michigan corporation, on December 18, 2013 in connection with the acquisition of Elan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo," the "Company," "we," "our," "us," and similar pronouns used herein refer to Perrigo Company plc, its subsidiaries, and all predecessors of Perrigo Company plc and its subsidiaries.
We areThe 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." This discussion and analysis compares 2023 results to 2022. For discussion and analysis that compares 2022 results to 2021, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of our Annual Report on Form 10-K for the year ended December 31, 2022.
EXECUTIVE OVERVIEW
Perrigo is a leading global healthcarepure-play self-care company delivering value to our customerswith more than a century of innovation and consumers by providing Quality Affordable Healthcare Products®. Founded in 1887 as a packagerexperience serving the health and wellness needs of home remedies, we have built a unique business model that is best described as the convergence of a fast-moving consumer goods company, a high-quality pharmaceutical manufacturing organization and a world-class supply chain network. We believe we areconsumers. As one of the world's largest manufacturersoriginators of the over-the-counter (“OTC”("OTC") healthcareself-care market, Perrigo has a powerful legacy and vast scale in producing high-quality self-care products through a proven ability to proactively shape its portfolio to meet the evolving needs of consumers and supplierscustomers.
Perrigo provides access to trusted self-care products that can be procured without needing to visit a doctor for a prescription. Guided by our vision and purpose, our strategic goal is to create a sustainable and value accretive growth engine by 1) delivering consumer preferred brands and innovation, 2) driving category growth with our customers, 3) powering our business with our world-class quality and supply chain, including a focus on sustainability with meaningful goals to reduce greenhouse gas emissions, water, and waste, in addition to improving the recyclability of infant formulas for theour packaging, and 4) evolving our ways of working to one operating model. Our unique competency is to deliver a blended-branded business model of branded, value and store brand market. Weproduct offerings that provide consumers access to self-care products across the value spectrum.
Perrigo's broad offerings are a leading provider of branded OTC products throughout Europe, and also a leading producer of generic pharmaceutical topical products such as creams, lotions, and gels,well diversified across several major product categories as well as nasal sprays and injection ("extended topical") prescription drugs. We are headquartered in Ireland, and sell our productsacross geographies, primarily in North America and Europe as well aswith no one product representing more than 3% of total revenue. In North America, Perrigo is the leading store brand private label provider of self-care products in many categories, including upper respiratory, nutrition and women's health. In Europe, our portfolio consists primarily of brands, including Compeed®, EllaOne®, Solpadeine®, and ACO®.
Several initiatives are anticipated to advance our self-care strategy, including the implementation of our Supply Chain Reinvention Program and Project Energize, a global investment and efficiency program. In addition, we continue to invest in other markets,initiatives, including Australia, Israelinnovation, information systems and China.tools, and our people to drive consistent and sustainable results.
Our fiscal year previously consisted of a 52- or 53-week year ending on or around June 30 of each year with each quarter ending on the Saturday closest to each calendar quarter end. Beginning on January 1, 2016, we changed our fiscal year to beginbegins on January 1 and endends on December 31 of each year. As a result of our change in year31. We end this report on Form 10-K discloses the results of our operations for:
The twelve-month period from January 1, 2017 through December 31, 2017;
The twelve-month period from January 1, 2016 through December 31, 2016;
The twelve-month period from January 1, 2015 through December 31, 2015;
The six-month period from June 28, 2015 through December 31, 2015; and
The six-month period from June 29, 2014 through December 27, 2014.
Calendar-year data for 2015 was derived from our audited results for the six-month period ended December 31, 2015 and unaudited results for the fiscal quarters ended March 28, 2015 and June 27, 2015. We cut off our quarterly accounting periods on the Saturday closest to the end of the calendar quarter, with the fourth quarter ending on December 31 of each year.
Our Segments
Our reporting segments are as follows:
Consumer Healthcare Americas ("CHCA"), comprises our U.S., Mexico and Canada consumer healthcare business (OTC, contract, infant formula and animal health categories).
Consumer Healthcare International("CHCI"),comprises our branded consumer healthcare business primarily in Europe and our consumer focused businesses in the U.K., Australia, and Israel. This segment also includes our U.K. liquid licensed products business.
Prescription Pharmaceuticals("RX"),comprises our U.S. Prescription Pharmaceuticals business.
We also had two legacy operating segments, Specialty Sciences and Other, which contained our Tysabri® financial asset and Active Pharmaceuticals business ("API") businesses, respectively, which we divested (refer to Item 8. Note 2 and Note 6). Following these divestitures, there were no substantial assets or operations left in either of these segments. Effective January 1, 2017, all expenses associated with our former Specialty Sciences segment were moved to unallocated expenses. Our segments reflect the way in which our managementchief operating decision maker, who is our CEO, makes operating decisions, allocates resources and manages the growth and profitability of the Company. Our reporting and operating segments are:
•Consumer Self-Care Americas ("CSCA") comprises our consumer self-care business in the U.S. and Canada. CSCA previously included our Latin American businesses until they were disposed on March 9, 2022.
•Consumer Self-Care International ("CSCI") comprises our consumer self-care business outside of the U.S. and Canada, primarily in Europe and Australia.
Perrigo Company plc - Item 7
Executive Overview
Recent Highlights
Market Factors and Trends
Economic Uncertainty
Current macroeconomic conditions remain very dynamic, including impacts from rising inflation and interest rates, volatile changes in foreign currency exchange rates, political unrest, COVID-19 and legislative and regulatory changes. Any causes of market size contraction could reduce our sales or erode our operating margin and consequently reduce our net earnings and cash flows.
Our interest expense is impacted by the overall global economic and interest rate environment. We manage interest rate risk through our capital structure and the use of interest rate swaps to fix the interest rate on greater than 90% of our outstanding debt.
Inflationary Costs and Supply Chain
Over the course of 2022 and 2023, supply chain disruptions, including volatility in both cost and availability of agricultural, oil and paper based commodities driven by the war in Ukraine, have led to higher input costs. Additionally, we experienced employment vacancies and attrition as the labor market negatively impacted productivity and drove the need for wage rate increases and other retention benefits. We implemented a series of actions to substantially mitigate these and other inflationary cost pressures such as strategic pricing and our Supply Chain Reinvention Program. Benefits from our actions have begun to substantially offset inflationary pressures, and the global freight constraints in availability of freight containers and truck drivers have normalized. However, future supply chain disruptions and inflationary pressures from the continuation of the war in Ukraine and the more recent events from the war in Israel are uncertain.
Infant Formula
As part of its efforts to prevent supply interruptions and future Cronobacter spp. illnesses associated with powdered infant formula, in March 2023, the FDA released an “Immediate National Strategy to Increase the Resiliency of the U.S. Infant Formula Market” and issued a letter to the powdered infant formula industry to share information to assist the industry in improving the microbiologic safety of powdered infant formula. In response to those changes, we made considerable investments in all our infant formula manufacturing sites, including enhanced cleaning and sanitation protocols, enhancements to our environmental monitoring programs and added additional quality personnel. These changes resulted in lower manufacturing output and production yields across our infant formula network.
As previously disclosed, the Company received a warning letter from the FDA on August 30, 2023 relating to the Perrigo Wisconsin infant formula facility, which was acquired from a third party in November 2022. While the Company worked to resolve the issues raised in the August 30 letter, on November 29, 2023, the Company received notice from the FDA of additional inspection observations relating to Perrigo Wisconsin. Consistent with the Company’s commitment to quality, the Company temporarily paused all production at that facility and conducted an extended site-wide assessment and cleaning.
The Company also bolstered its internal resources and brought in additional outside expertise to help revise, enhance and strengthen comprehensive standards and processes across our infant formula network. As part of this plan, each of our infant formula manufacturing facilities are undergoing a site-specific evaluation and a plant wide reset, which may entail a pausing of production for comprehensive cleaning, infrastructure improvements and further enhancements to quality protocols and manufacturing processes. Perrigo Wisconsin has recently completed its plant-wide reset, and is now back in production. Our other two infant formula facilities are under evaluation or set to begin a reset in the first quarter of 2024.
We have incurred and expect to incur certain extraordinary non-recurring costs associated with the evolving U.S. infant formula regulatory landscape, including consulting and legal fees relating to the Company’s responses to the FDA and the development and institution of new protocols across our infant formula manufacturing sites, as well as other costs relating to the extended cleaning and sanitization and the pausing and restarting of production. We also expect higher ongoing operating costs at our infant formula manufacturing sites moving forward as we implement
Perrigo Company plc - Item 1. Business for information7
Executive Overview
our enhanced program with additional internal capabilities. Cash costs in 2024 to achieve this remediation plan are estimated at $35 to $45 million. Due to these costs and the unabsorbed overhead and depressed sales volumes resulting from these actions, infant formula results in 2024 is now expected below 2023 levels.
War in Ukraine
The invasion of Ukraine by Russia and resulting economic and political sanctions imposed by the United States, United Kingdom, European Union, and other countries on Russia, Belarus, and occupied regions in Ukraine have negatively impacted our results from operations in the region. We currently have 68 employees working in our Ukraine subsidiary. We do not have a subsidiary or employees in Russia. We have no manufacturing facilities in either Russia or Ukraine and we previously sold products into Russia entirely through distributors. In March 2022, we halted all sales to distributors in Russia and sales in Ukraine were severely depressed. Future impacts are difficult to predict due to the high level of uncertainty related to the war’s duration, evolution and resolution. If the conflict spreads or materially escalates, or economic conditions deteriorate, the impact on our business and results of operations could be material.
Israel-Hamas War
We continue to closely monitor the ongoing Israel/Hamas conflict and the social, political and economic environment in Israel and competitive landscape.in the surrounding region to evaluate the impacts on our operations and supply chain. Israel is a global technology research and development center that plays a critical role to the global API market, as a number of key suppliers are located within Israel. The Company sources some raw materials and finished goods from suppliers in Israel for certain self-care products, including Omeprazole. Despite this situation, to date, Perrigo has confirmed that our suppliers in the region have active operations and continue to manufacture materials for us, and we have not received any reports of restrictions on imports or exports in Israel. However, there is potential for some disruption as it relates to in-country logistics, including freight. As a precaution, Perrigo has engaged alternate suppliers to help minimize a potential supply disruption. If the conflict spreads or materially escalates, or if the conflict leads to further volatility and uncertainty in financial markets or economic conditions, the impact on our business and results of operations could be material.
Foreign Exchange
We have both translation and transaction exposure to the fluctuation of exchange rates. Translation exposures relate to exchange rate impacts of measuring income statements of foreign subsidiaries that do not use the U.S. dollar as their functional currency. Transaction exposures relate to 1) the impact from input costs that are denominated in a currency other than the local reporting currency and 2) the revaluation of transaction-related working capital balances denominated in currencies other than the functional currency. Significant exchange rate fluctuations, especially in the Euro or the British Pound Sterling, have had, and could continue to have, a significant impact on our net sales, net earnings and cash flows, and have significantly impacted our historical net sales, costs and net earnings and could do so in the future.
Restructuring
Supply Chain Reinvention Program
In 2022, we initiated a Supply Chain Reinvention Program to reduce structural costs, improve profitability and our service levels to our retail partners, and strengthen our resiliency by streamlining and simplifying our global supply chain. Through this initiative, we plan to reduce portfolio complexity, invest in advanced planning capabilities, diversify sourcing, and optimize our manufacturing assets and distribution models. We have identified a total annual run-rate potential savings opportunity by the end of fiscal year 2028 of between an estimated $200 million to $300 million (not including related depreciation expense on capital investments) if all facets of the Program are successfully implemented and executed. To obtain these potential benefits, we anticipate incurring costs of between $350 million to $570 million by the end of fiscal year 2028 to complete the program implementation, including capital investments, restructuring expenses, and implementation costs. A significant portion of the annual run-rate potential savings of the Program, between $150 million to $200 million (not including related depreciation expense on capital investments), are anticipated by the end of fiscal year 2025, along with associated potential spend of between $300
Perrigo Company plc - Item 7
Executive Overview
million and $450 million. During 2023, we achieved approximately $40 million of net savings, partially offset by approximately $28 million of restructuring expense. Refer to Item 8. Note 17. Strategy
Project Energize
Our
Perrigo has successfully transformed into a pure-play consumer self-care company and is now embarking on the next stage of its self-care journey - evolving to One Perrigo. This evolution will create sustainable, value accretive growth through a blended-branded business model that better positions the Company to win in self-care.
As part of the Company's sustainable, value accretive growth strategy, the Company is launching Project Energize - a global investment and efficiency program to drive the next evolution of capabilities and organizational agility. This three-year program is expected to produce significant benefits in the Company’s long-term business performance by enabling our One Perrigo growth strategy, increasing organizational agility and mitigating impacts from stabilizing and strengthening the infant formula business.
Project Energize will be initiated in the first quarter of 2024, subject to local law and consultation requirements, and is expected to deliver Quality Affordable Healthcare Products® an annualized pre-tax savings in the range of $140 million to $170 million by leveraging2026. The Company expects to reinvest approximately $40 million to $60 million of these savings to drive its blended-branded business model. Restructuring and related charges associated with these actions are estimated to be in the range of $140 million to $160 million, including $20 million to $40 million in investments to enhance capabilities and are expected to be substantially incurred by the end of 2026. Restructuring activities as part of Project Energize are expected to result in the net reduction of approximately 6% of total Perrigo roles.
Impairments
During the three months ended December 31, 2023, we identified impairment indicators within our global infrastructureRare Diseases reporting unit within the CSCI Segment as a result of performance and market factors that led to expandincreased discount rates and lower comparable company multiples. We determined the reporting unit was impaired and recorded an impairment charge totaling $90.0 million related to goodwill. Refer to Item 8. Note 9.
Indebtedness and Capital
In December 2023, we entered into Amendment No. 1, an Incremental Assumption Agreement to our product offerings, thereby providing new innovative productsTerm Loan and product line extensionsRevolving Credit Agreement that provides for a fungible add on to existing consumersthe Term B Loans in an aggregate principal amount of $300 million. The funds were used to settle the cash tender offer by Perrigo Finance Unlimited Company ("Perrigo Finance") for $300.0 million in aggregate principal amount of 3.900% Senior Notes due 2024 ("2024 Notes"). The tender offer was settled on December 15, 2023, and servicing new healthcare consumers through entry into adjacent or new markets. We accomplish this strategy by investingPerrigo Finance accepted for purchase $300.0 million of the 2024 Notes and paid approximately $295.1 million in aggregate cash consideration (excluding accrued interest). Refer to Item 8. Note 12.
Tax Updates
On January 13, 2021, the IRS issued a 30-day letter and continually improving all aspectsRevenue Agent's Report with respect to its audit of our five strategic pillars:
High quality;
Superior customer service;
Leading innovation;
Best cost; and
Empowered people.
We utilize shared services and Research and Development ("R&D") centers2013 to 2015 fiscal tax years. The 30-day letter proposed, among other modifications, to reduce Perrigo U.S.'s deductible interest expense for certain intercompany debts owed in connection with the 2013 Elan merger transaction. On May 5, 2023, we finalized an agreement with IRS Appeals providing for settlement of excellence in order to help ensure consistency in our processes around the world, and to maintain focusMay 7, 2020 NOPA. In addition, based on our five strategic pillars.
We have grown rapidly in recentthe agreement with IRS Appeals, we will apply similar adjustments for all remaining tax years through
a combination2018. In the second quarter of
organic growthfiscal year 2023 we adjusted previously established reserves related to this and
targeted acquisitions. 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 and will continue to be driven by successful new product launchesother matters in the
CHCA, CHCI, and RX segments. Over time, we expectsame audit period. Refer to
continueItem 1. Note 18 for additional information. On December 20, 2023 the IRS Examination Team confirmed its application of interest rates agreed with IRS Appeals 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 a return on invested capital ("ROIC") metric.all remaining tax years with deductible interest expense relating to such intercompany debt.
Competitive Advantage
We believe our consumer facing business model is best-in-class in that it combines the unique competencies of a fast-moving consumer goods company and a pharmaceutical manufacturing company, with the supply chain breadth necessary to support customers in the markets we serve. These durable business model competencies align with our five strategic pillars and provide us a competitive advantage in the marketplace. We fully integrate quality in our operational systems across all products. Our ability to manage our supply chain complexity across multiple dosage forms, formulations, and stock-keeping units, as well as acquisitions, integration, and hundreds of global partners provides value to our customers. Product development and life cycle management are at the core of our operational investments. Globally we have 28manufacturing 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; and
Expansive pan-European commercial infrastructure, brand-building capabilities, and a diverse product portfolio.
Perrigo Company plc - Item 7
Executive Overview
Highlights
Year Ended December 31, 2017
| |
• | On March 27, 2017, we completed the sale of our Tysabri® financial asset, effective January 1, 2017, to Royalty Pharma for up to $2.85 billion, consisting of $2.2 billion in cash and up to $250.0 million and $400.0 million in milestone payments if the royalties on global net sales of Tysabri® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we derecognized the Tysabri® financial asset and recorded a $17.1 million gain (refer to Item 8. Note 6). |
| |
• | On April 6, 2017, we completed the sale of our India API business to Strides Shasun Limited for $22.2 million, inclusive of an estimated working capital adjustment. The sale did not have a material impact on our operations (refer to Item 8. Note 2). |
| |
• | On August 25, 2017, we completed the sale of our Russian business to Alvogen Pharma LLC. for €12.7 million ($15.1 million), inclusive of an estimated working capital adjustment. The sale did not have a material impact on our operations (refer to Item 8. Note 2). |
| |
• | On November 21, 2017, we completed the sale of our Israel API business to SK Capital, for a sale price of $110.0 million, which resulted in an immaterial gain recorded in our Other segment in Other expense (Income), net on the Consolidated Statements of Operations (refer to Item 8. Note 2 and Note 6). |
| |
• | We repurchased $191.5 million worth of shares as part of our authorized share repurchase plan (refer to Item 8. Note 11). |
| |
• | We executed initiatives related to our cost optimization strategy that was announced on February 21, 2017. Restructuring charges totaled $61.0 million (refer to Item 8. Note 18). |
Year Ended December 31, 2016
Consistent with previously announced actions, we added a number of positions and processes to our Dublin headquarters across a range of corporate functions, including supply chain/global operations, procurement, enterprise risk management, and corporate finance, leveraging the strength of our global platform.
| |
• | We repaid $500.0 million outstanding under our 1.300% Senior Notes due 2016 ("1.300% 2016 Notes") on September 29, 2016 (refer to Item 8. Note 10). |
| |
• | On August 5, 2016, we completed the sale of our U.S. Vitamins, Minerals, and Supplements ("VMS") business to International Vitamins Corporation (refer to Item 8. Note 2). |
Six Months Ended December 31, 2015
On November 13, 2015, our shareholders rejected an unsolicited tender offer from Mylan N.V. ("Mylan"). During the six months ended December 31, 2015, the total cost to effectively defend against Mylan was $86.9 million, which was recorded in Administration expense.
| |
• | We expanded our product offerings through targeted acquisitions including (refer to Item 8. Note 2): |
| |
• | The announced acquisition of a portfolio of generic dosage forms and strengths of Retin-A® (tretinoin), a topical prescription acne treatment, from Matawan Pharmaceuticals, LLC, which closed in January 2016 and expanded our "prescription only" ("Rx") portfolio.
|
| |
• | The acquisition of Crohn's disease treatment Entocort® (budesonide) capsules and its authorized generic (for sale within the U.S.), from AstraZeneca plc, which expanded our Rx portfolio.
|
Perrigo Company plc - Item 7
Executive Overview
| |
• | The acquisition of Naturwohl Pharma GmbH ("Naturwohl"), a nutritional business known for its leading German dietary supplement brand, Yokebe®, and the acquisition of a portfolio of well-established OTC brands, such as Niquitin® and Coldrex®,from GlaxoSmithKline Consumer Healthcare (“GSK”). Both of these acquisitions built upon the global platform we established through the Omega Pharma Invest N.V. ("Omega") acquisition, leveraging our European market share and expanding our product offerings.
|
| |
• | The ScarAway® brand portfolio acquisition, which served as our entry into the branded OTC business in the U.S.
|
| |
• | We repurchased $500.0 million worth of shares as part of our authorized share repurchase plan (refer to Item 8. Note 11). |
| |
• | We executed initiatives designed to increase operational efficiency and improve our return on invested capital by globalizing our supply chain through global shared service arrangements, streamlining our organizational structure, and disposing of certain assets. During the six months ended December 31, 2015, restructuring charges totaled $26.9 million (refer to Item 8. Note 18). |
RESULTS OF OPERATIONS
CONSOLIDATED
Consolidated Results
|
| | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | Year Ended |
| ($ in millions) | December 27,
2014 | | December 31,
2015 | | December 31,
2015 | | December 31,
2016 | | December 31,
2017 |
| Net sales | $ | 1,844.7 |
| | $ | 2,632.2 |
| | $ | 5,014.7 |
| | $ | 5,280.6 |
| | $ | 4,946.2 |
|
| Gross profit | $ | 673.8 |
| | $ | 1,078.9 |
| | $ | 2,049.4 |
| | $ | 2,051.8 |
| | $ | 1,979.5 |
|
| Gross profit % | 36.5 | % | | 41.0 | % | | 40.9 | % | | 38.9 | % | | 40.0 | % |
| Operating expenses | $ | 384.1 |
| | $ | 1,011.3 |
| | $ | 1,599.0 |
| | $ | 4,051.5 |
| | $ | 1,381.3 |
|
| Operating expenses % | 20.8 | % | | 38.4 | % | | 31.9 | % | | 76.7 | % | | 27.9 | % |
| Operating income (loss) | $ | 289.7 |
| | $ | 67.6 |
| | $ | 450.4 |
| | $ | (1,999.7 | ) | | $ | 598.2 |
|
| Operating income (loss) % | 15.7 | % | | 2.6 | % | | 9.0 | % | | (37.9 | )% | | 12.1 | % |
| Change in financial assets | $ | (46.9 | ) | | $ | (57.3 | ) | | $ | (88.8 | ) | | $ | 2,608.2 |
| | $ | 24.9 |
|
| Interest and other, net | $ | 117.0 |
| | $ | 115.1 |
| | $ | 478.2 |
| | $ | 239.3 |
| | $ | 158.0 |
|
| Loss on extinguishment of debt | $ | 9.6 |
| | $ | 0.9 |
| | $ | 1.8 |
| | $ | 1.1 |
| | $ | 135.2 |
|
| Income tax expense (benefit) | $ | 29.4 |
| | $ | (33.6 | ) | | $ | 61.1 |
| | $ | (835.5 | ) | | $ | 160.5 |
|
| Net income (loss) | $ | 180.6 |
| | $ | 42.5 |
| | $ | (1.9 | ) | | $ | (4,012.8 | ) | | $ | 119.6 |
|
Perrigo Company plc - Item 7
Consolidated
| |
* | Total net sales by geography is derived from the location of the entity that sells to a third party. For geographic information for the year ended December 31, 2016, six months ended December 31, 2015, and the year ended June 27, 2015, refer to Item 8. Note 19. |
Details and analysis of our financial results for the years ended December 31, 2017, December 31, 2016, and December 31, 2015, the six months ended December 31, 2015 and December 27, 2014, and the years ended June 27, 2015 and June 28, 2014 areCurrency translation effects described below by reporting segment and line item. Refer torepresent estimates of the "Unallocated Expenses," "Interest, Other and Change in financial assets (Consolidated)," and "Income Taxes (Consolidated)" sections belownet differences between translation of foreign currency transactions into U.S. dollars for discussions related to our expenses.
Restructuring
On February 21, 2017, we approved a workforce reduction plan as part of a larger cost optimization strategy across the Company, which was completed during the year. Our plan was to reduce our global workforce by approximately 750 employees, which included some actions already taken and 235 employees who had elected to participate in a voluntary early retirement program. This represented a reduction of approximately 14% of our global non-production workforce. The changes to our workforce varied by country, based on legal requirements and required consultations with works councils and other employee representatives, as appropriate. During the year ended December 31, 2017, we recognized $61.0 million of restructuring expenses (refer to Item 8. Note 18). In addition, during2023 at the average exchange rates for the reporting period and average exchange rates for the year ended December 31, 2017, we executed a supply chain reorganization which continues to generate savings for both our North American and International segments.
Impairments
Throughout the years ended December 31, 2017 and December 31, 2016, 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 by segment (in millions):2022.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | December 31, 2017 |
| | | Definite-Lived Intangible Assets | | Assets
Held-For-Sale | | IPR&D | | Fixed Assets | | Total |
CHCA(1) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4.5 |
| | $ | 4.5 |
|
CHCI(2) | | — |
| | 3.7 |
| | 1.1 |
| | — |
| | 4.8 |
|
RX(3) | | 19.7 |
| | — |
| | 11.6 |
| | 3.6 |
| | 34.9 |
|
Other(4) | | — |
| | 3.3 |
| | — |
| | — |
| | 3.3 |
|
| | | $ | 19.7 |
| | $ | 7.0 |
| | $ | 12.7 |
| | $ | 8.1 |
| | $ | 47.5 |
|
(1) Relates to certain idle property, plant and equipment.
(2) Relates primarily to our Russian business assets held-for-sale, which were sold August 25, 2017 (refer to Item 8. Note 2).
Perrigo Company plc - Item 7
Consolidated
(3) Relates
CONSOLIDATED
Consolidated Financial Results
| | | | | | | | | | | |
| Year Ended |
| (in millions, except percentages) | December 31, 2023 | | December 31, 2022 |
| Net sales | $ | 4,655.6 | | | $ | 4,451.6 | |
| Gross profit | $ | 1,680.4 | | | $ | 1,455.4 | |
| Gross profit % | 36.1 | % | | 32.7 | % |
| Operating income | $ | 151.9 | | | $ | 78.9 | |
| Operating income % | 3.3 | % | | 1.8 | % |
Net sales increased $204.0 million, or 4.6%, primarily due to:
•$195.9 million increase from our acquisitions, comprised of ten additional months of Gateway (acquired on November 1, 2022) inclusive of an unfavorable impact of $9.2 million from a voluntary product recall and four additional months of HRA Pharma (acquired on April 29, 2022) inclusive of an unfavorable impact of $19.8 million due to intangible assets acquired throughdistributor transitions as part of the Lumara Health, Inc. acquisition and In-Process Research and Development ("IPR&D") assets acquired in conjunction with certain Development-Stage Rx Products(referintegration strategy to Item 8. Note 3). (4) Relates to our Israel API assets held-for-sale, which were sold November 21, 2017 (refer to Item 8. Note 2). |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | December 31, 2016 |
| | | Goodwill | | Indefinite-Lived Intangible Assets | | Definite-Lived Intangible Assets | | Assets
Held-For-Sale | | IPR&D | | Fixed Assets | | Total |
CHCA(1) | | $ | 24.5 |
| | $ | 0.4 |
| | $ | — |
| | $ | 9.9 |
| | $ | — |
| | $ | 3.5 |
| | $ | 38.3 |
|
CHCI(2) | | 868.4 |
| | 849.1 |
| | 321.4 |
| | — |
| | 3.5 |
| | — |
| | 2,042.4 |
|
RX(3) | | — |
| | — |
| | 342.2 |
| | — |
| | — |
| | 0.2 |
| | 342.4 |
|
Specialty Sciences(4) | | 199.6 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 199.6 |
|
Other(5) | | — |
| | — |
| | 2.0 |
| | 6.3 |
| | — |
| | — |
| | 8.3 |
|
| | | $ | 1,092.5 |
| | $ | 849.5 |
| | $ | 665.6 |
| | $ | 16.2 |
| | $ | 3.5 |
| | $ | 3.7 |
| | $ | 2,631.0 |
|
(1) Relates primarily to goodwill acquired throughcapture synergies from the acquisition of Sergeant’s Pet Care Products, Inc.HRA Pharma; and Velcera Inc. (refer to Item 8. Note 3),as well as U.S. VMS assets held for sale, which were subsequently sold on August 5, 2016 (refer to Item 8. Note 2).(2) Relates to certain intangible assets and goodwill acquired in conjunction with the Omega acquisition as well as trademarks originally acquired through the acquisition of Aspen Global Inc. (refer to Item 8. Note 3).(3) Relates•$73.8 million increase, or 1.7%, due primarily to our intangible assets acquiredapproximately $209 million in conjunction withstrategic pricing actions and higher sales volume in the Entocort® acquisition (referSkin Care, Healthy Lifestyle and Upper Respiratory product categories. E-commerce and new products also contributed to Item 8. Note 3).(4) Relates to goodwillcategory growth. The increase was partially offset by lower net sales stemming from our Elan acquisition (refer to Item 8. Note 3).(5)Relatesthe evolving FDA regulatory expectations for infant formula manufacturing, declines in legacy nutrition in the CSCA segment due primarily to our India API assets held-for-sale, which were sold April 6, 2017 (referpurposeful SKU prioritization actions to Item 8. Note 2focus capacity on higher margin products and 9).
CONSUMER HEALTHCARE AMERICAS
Recent Trends and Developments
We continue to experience a reduction in pricing expectations within our CHCA segment, primarily in the cough/cold, animal health, and analgesics categories due to various factors, including focus from customers to capture supply chain productivity savings and competition in specific product categories. We expect this pricing environment to continue to impact our CHCA segment for the foreseeable future.
| |
• | We completed the sale of the animal health pet treats plant fixed assets on February 1, 2017 and received $7.7 million in proceeds (refer to Item 8. Note 2). |
Segment Results
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
|
| | | | | | | |
| | Year Ended |
| ($ in millions) | December 31,
2016 | | December 31,
2017 |
| Net sales | $ | 2,507.1 |
| | $ | 2,429.9 |
|
| Gross profit | $ | 825.2 |
| | $ | 817.8 |
|
| Gross profit % | 32.9 | % | | 33.7 | % |
| Operating income | $ | 399.8 |
| | $ | 445.0 |
|
| Operating income % | 15.9 | % | | 18.3 | % |
Perrigo Company plc - Item 7
CHCA
Net sales decreased $77.2 million, or 3%, over the prior year due to:
| |
• | The absence of $110.2 million in sales attributable to the U.S. VMS business (refer to Item 8. Note 2); |
A net decrease in sales of existing products of $21.5 $9.4 million due to pricing pressures and lower volumesdistributor transition in certain categories; and
Discontinued products of $14.0 million;addition to the impacts noted above; partially offset by
| |
• | New product sales of $68.7 million related primarily to the launches of fluticasone nasal spray (store brand equivalent to Flonase®), smoking cessation products and esomeprazole magnesium (store brand equivalent to Nexium® 24HR capsules).
|
•$49.9 million decrease from exited product lines and $19.3 million decrease from the divestitures of the Latin American businesses and ScarAway® brand asset in the prior year.
Operating income increased $45.2$73.0 million, or 11%92.5%, as a result of:due to:
A decrease of $7.4•$225.0 million increase in gross profit due to:
Favorable product mix in certain categories;driven by higher net sales flow through and
Positive contributions the benefits from our supply chain efficiencies; more thanreinvention program primarily within CSCA. These were partially offset by
| |
• | The absence of $17.6 million in gross profit as a result of the sale of the U.S. VMS business (refer to Item 8. Note 2); and |
Pricing pressures in certain categories as discussed above.
A decrease of $52.6 million in operating expenses due to:
| |
• | The absence of a $36.7 million intangible asset and goodwill impairment charges related to the sale of the U.S. VMS business, held-for-sale assets associated with our animal health pet treats plant and our animal health business (refer to Item 8. Note 2, Note 3, and Note 9); |
Decreased selling and administrative expenses of $31.0 million due primarily to timing of promotions related to our animal health category and savings related to our cost reduction initiatives taken in the prior year;
Decreased R&D expenses of $8.2 million due to timing of clinical trials, reduced spending on lower infant formula clinical trialsproductivity within U.S. nutrition stemming from the evolving FDA regulatory expectations for infant formula manufacturing and lower costs related to ourunfavorable cost reduction initiatives; and
| |
• | A $4.1 million gain related to contingent consideration (refer to Item 8. Note 6); offset partially by |
| |
• | Increased restructuring expenses of $21.8 million related primarily to strategic organizational enhancements (refer to Item 8. Note 18); and |
A $4.5 million impairment charge recorded on idle property, plant and equipment.
of goods sold inflation primarily in Europe.Gross profit as a percentage of net sales was 0.8% higher due primarilyincreased 340 basis points compared to favorable product mix and supply chain efficiencies as discussed above.
Operating income as a percentage of net sales was 2.4% higher due primarily to favorable product mix as discussed above and decreased operating expenses.
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
|
| | | | | | | |
| | Year Ended |
| ($ in millions) | December 31,
2015 | | December 31,
2016 |
| Net sales | $ | 2,554.2 |
| | $ | 2,507.1 |
|
| Gross profit | $ | 846.7 |
| | $ | 825.2 |
|
| Gross profit % | 33.2 | % | | 32.9 | % |
| Operating income | $ | 439.9 |
| | $ | 399.8 |
|
| Operating income % | 17.2 | % | | 15.9 | % |
Perrigo Company plc - Item 7
CHCA
Net sales decreased $47.1 million, or 2%, over the prior year due to:
Discontinued products of $61.3 million related primarily to a label refresh within the infant formula category;driven by strategic pricing actions, benefits from purposeful SKU prioritization actions and
A net $56.5 million decrease in existing product sales as a result of:
Strong sales in our infant nutrition, and smoking cessation categories; more than higher margin new products. These positive initiatives were partially offset by
A milder cold and flu season higher cost of goods sold inflation in the firstE.U. and second quarters of 2016, which led to weaker saleslower manufacturing productivity in the cough/cold and analgesics categories;U.S. nutrition.
Pricing pressure, which impacted sales in the cough/cold, analgesics, and animal health categories in particular;
Lower sales in the antacids category; and
Timing of promotions in the second and third quarters of 2015 and a milder allergy season in the third quarter of 2016, which had a negative impact on year-over-year sales in the cough/cold category;
Lower year-over-year sales of $52.1 million attributable to the U.S. VMS business, which was sold in August 2016; and
Unfavorable foreign currency translation movement of $15.0 million; offset partially by
| |
• | New product sales of $117.4 million related primarily to the launches of fluticasone nasal spray (store brand equivalent to Flonase®), certain guaifenesin products (store brand equivalent to Mucinex®), several new infant formula and food products, and new animal health products; and
|
| |
• | Incremental net sales of $20.3 million related primarily to the Gelcaps and ScarAway® acquisitions.
|
Operating income decreased $40.1 million, or 9%, as a result of:
A decrease of $21.5 million in gross profit due to:
Pricing pressure as noted above; and
| |
• | Increased intangible asset amortization expense associated primarily with the Gelcaps and ScarAway® acquisitions; offset partially by
|
Margin contributions from new products and strong performance in the infant nutrition and smoking cessation categories; and
Continued manufacturing and supply chain efficiencies.
An increase of $18.6 million in operating expenses due to:
| |
• | A $24.5 million goodwill impairment charge related to our animal health business, (refer to Item 8. Note 3); |
Increased research and development investments of $6.5 million due to timing of clinical trials;
| |
• | A $6.2 million impairment charge related to the sale of the U.S. VMS business, (refer to Item 8. Note 2); |
| |
• | A $3.7 million impairment charge recorded on the held-for-sale assets associated with our animal health pet treats plant, (refer to Item 8. Note 9); partially offset by |
| |
• | Decreased restructuring expense of $9.9 million (refer to Item 8. Note 18); and |
Decreased selling and administrative expenses due to cost containment.
Perrigo Company plc - Item 7
CHCA
Six Months Ended December 31, 2015 vs. Six Months Ended December 27, 2014
|
| | | | | | | |
| | Six Months Ended |
| ($ in millions) | December 27,
2014 | | December 31,
2015 |
| Net sales | $ | 1,176.1 |
| | $ | 1,251.5 |
|
| Gross profit | $ | 361.2 |
| | $ | 417.9 |
|
| Gross profit % | 30.7 | % | | 33.4 | % |
| Operating income | $ | 151.1 |
| | $ | 209.2 |
|
| Operating income % | 12.9 | % | | 16.7 | % |
Net sales increased $75.4 million, or 6%, due primarily to:
New product sales of $122.9 million related primarily to certain new infant formula products;
| |
• | Incremental net sales due primarily to the Gelcaps and ScarAway® acquisitions of $20.2 million; and
|
A•$66.0152.0 million increase in existing sales primarily attributable to increased sales volumes of smoking cessation, cough/cold, and gastrointestinal products; offset partially by
A decline of $22.9 million in sales of existing products, primarily in animal health and diabetic care;
Discontinued products of $99.6 million related primarily to reformulated infant formula, analgesic, and animal health products; and
Unfavorable foreign currency translation movement of $11.2 million.
Operating income increased $58.1 million, or 38%, as a result of:
An increase of $56.7 million in gross profit due to:
Improved purchase prices and efficiencies in manufacturing facilities; and
| |
• | Incrementally higher gross profit attributable primarily to the Gelcaps and ScarAway® acquisitions; and
|
A decrease of $1.4 million in operating expenses due to:
Decreased R&D spend of $13.6 million due to relative timing of clinical trials; offset partially by
An increase in restructuring expense of $10.9 million related to strategic organizational enhancements; and
| |
• | Increased administrative expenses of $1.9 million primarily related to the Gelcaps and ScarAway® acquisitions.
|
CONSUMER HEALTHCARE INTERNATIONAL
Recent Trends and Developments
Management has developed a strategy to: (1) implement a brand prioritization to address certain market dynamics, with an objective to balance the cost of advertising and promotional investments with expected contributions from category sales, (2) restructure the sales force in certain markets to more effectively serve customers, and (3) in-source certain product manufacturing and development. The combination of these actions is expected to improve the segment's focus on higher value OTC products, reduce selling costs and improve operating margins in the segment.
As part of our previously announced strategic initiatives, management implemented improvements and evaluated the overall cost structures within our CHCI segment in the following ways:
On December 8, 2016, we announced the cancellation of the unprofitable EuroGenerics NV distribution agreement in Belgium. The year-over-year effect of the cancellation, combined with the
Perrigo Company plc - Item 7
CHCI
exit of certain OTC distribution agreements, reduced our net sales by $200.3 million in 2017, with an immaterial impact to operating income.
| |
• | We made progress on our previously announced restructuring plans to right-size the Omega business due to the impact of market dynamics on sales volumes. During the year ended December 31, 2017, we recognized $17.1 million of restructuring expense in the CHCI segment (refer to Item 8. Note 18). |
Management continues to evaluate the most effective business model for each country, aligning our sales infrastructure and actively integrating sales strategies with promotional programs.
| |
• | On August 25, 2017, we completed the sale of our Russian business, which was previously classified as held-for-sale, to Alvogen Pharma LLC. The total sale price was €12.7 million ($15.1 million), inclusive of an estimated working capital adjustment, which resulted in an immaterial gain in the segment (refer to Item 8. Note 2). |
The combination of these actions improved the segment's focus on higher value OTC products, reduced selling costs and improved operating margins in the segment.
The CHCI segment has been positively impacted by market dynamics in countries such as the Nordics, Italy, and Portugal offset by softness in certain brand categories in France and Germany, as well as by unfavorable foreign currency impacts primarily in the U.K. related to Brexit.
Segment Results
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
|
| | | | | | | |
| | Year Ended |
| ($ in millions) | December 31,
2016 | | December 31,
2017 |
| Net sales | $ | 1,652.2 |
| | $ | 1,491.0 |
|
| Gross profit | $ | 693.4 |
| | $ | 682.0 |
|
| Gross profit % | 42.0 | % | | 45.7 | % |
| Operating income (loss) | $ | (2,087.4 | ) | | $ | 12.5 |
|
| Operating income (loss) % | (126.3 | )% | | 0.8 | % |
Net sales decreased $161.2 million, or 10%, over the prior year due to:
The absence of $200.3 million in sales attributable to the cancellation of unprofitable distribution contracts;
Discontinued products of $14.7 million; and
| |
• | A net decrease in sales of existing products of $11.3 million due primarily to the absence of sales from our exited Russian business (refer to Item 8. Note 2); partially offset by |
New product sales of $64.1 million.
Operating income increased $2.1 billion, due to:
A $11.4 million decrease in gross profit due primarily to:
Operational efficiencies across the organization; more than offset by
Lower volumes in sales; and
Lower margins in our U.K. store brand business.
A decrease of $2.1 billion in operating expenses due primarily to:to $90.0 million in goodwill impairment charges related to the Rare Diseases reporting unit in the CSCI segment, the acquisition of HRA Pharma and Gateway, and higher employee expenses,partially offset by decreased acquisition and integration expenses compared to the prior year period.
Perrigo Company plc- Item 7
CHCICSCA
CONSUMER SELF-CARE AMERICAS
| |
• | The absence of $2.0 billion of impairment charges on certain indefinite-lived and definite-lived intangible brand category assets and goodwill impairments in the Branded Consumer Healthcare-Rest of World ("BCH-ROW") and BCH-Belgium reporting units recorded in the prior year period (refer to Item 8. Note 3); and |
A
Segment Financial Results
| | | | | | | | | | | |
| Year Ended |
| (in millions, except percentages) | December 31, 2023 | | December 31, 2022 |
| Net sales | $ | 2,962.3 | | | $ | 2,925.9 | |
| Gross profit | $ | 908.4 | | | $ | 787.2 | |
| Gross profit % | 30.7 | % | | 26.9 | % |
| Operating income | $ | 389.6 | | | $ | 366.1 | |
| Operating income % | 13.2 | % | | 12.5 | % |
Net sales increased $36.4 million, or 1.2% primarily due to:
•$127.6 million increase from our acquisitions, comprised of ten additional months of Gateway (acquired on November 1, 2022) inclusive of an unfavorable impact of $9.2 million from a voluntary product recall and four additional months of HRA Pharma (acquired on April 29, 2022); partially offset by
•$38.1 million decrease, or 1.3%, due primarily to lower net sales stemming from the evolving FDA regulatory expectations for infant formula manufacturing and declines in sellinglegacy nutrition due primarily to purposeful SKU prioritization actions to focus capacity on higher margin products, partially offset by approximately $100 million of strategic pricing actions in addition to new products; and administrative expenses
•$32.5 million decrease from exited product lines and $19.3 milliondecreasefrom the divestitures of $66.6 million due to previously announced strategic initiatives to better align promotional investments with salesthe Latin American businesses and cost reduction initiatives takenthe ScarAway® brand asset in the current year;prior year.
CSCA net sales by product category were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Sales | Year Ended | | | | |
| (in millions, except percentages) | December 31, 2023 | | December 31, 2022 | | $ Change | | % Change |
| Nutrition | $ | 563.2 | | | $ | 564.6 | | | $ | (5.4) | | | (1.0) | % |
| Upper Respiratory | 559.2 | | | 520.4 | | | 42.8 | | | 8.2 | % |
| Digestive Health | 505.3 | | | 495.5 | | | 9.8 | | | 2.0 | % |
| Pain and Sleep-Aids | 396.4 | | | 412.2 | | | (15.8) | | | (3.8) | % |
| Oral Care | 313.9 | | | 312.9 | | | 1.0 | | | 0.3 | % |
| Healthy Lifestyle | 311.7 | | | 288.9 | | | 22.8 | | | 7.9 | % |
| Skin Care | 196.2 | | | 187.8 | | | 8.4 | | | 4.5 | % |
| Women's Health | 46.9 | | | 45.2 | | | 1.7 | | | 3.8 | % |
| Vitamins, Minerals, and Supplements ("VMS") | 17.5 | | | 27.9 | | | (10.4) | | | (37.3) | % |
| Other CSCA | 52.0 | | | 70.5 | | | (18.5) | | | (26.2) | % |
| Total CSCA | $ | 2,962.3 | | | $ | 2,925.9 | | | $ | 36.4 | | | 1.2% |
Sales in each category were driven primarily by:
•Nutrition: Net sales of $563.2 million increased 8.2% driven by the Gateway acquisition and strong growth in contract infant formula, partially offset by lower net sales in legacy infant formula and lower manufacturing productivity stemming from the FDA's evolving industry guidelines on infant formula manufacturing;
•Upper Respiratory: Net sales of $559.2 million decreased 1.0% due primarily to lower net sales of allergy products driven by a weaker and later start to the allergy season compared to the prior year, a voluntary OTC product recall, the divested Latin American businesses and exited product lines. These factors were partially offset by
| |
• | A $4.8 million impairment charge recorded related to the Russian business (refer to Item 8. Note 2); and |
| |
• | Increased restructuring expense of $3.8 million related to strategic organizational enhancements (refer to Item 1. Note 18). |
higher net sales of cough cold products, led by store brand Guaifenesin-based offerings, and the new product launch of store brand Cough Relief Liquid Honey;
Perrigo Company plc - Item 7
CSCA
•Digestive Health: Net sales of $505.3 million increased 2.0% due primarily to increased manufacturing capacity and demand for Polyethylene Glycol 3350 as well as new products, including Omeprazole Mini Capsules and Polyethylene Glycol 3350 Orange; partially offset by the divested Latin American businesses;
•Pain and Sleep-Aids: Net sales of $396.4 million decreased 3.8% due primarily to purposeful SKU prioritization actions in adult analgesic offerings to focus capacity on higher margin products as well as the divested Latin American businesses, partially offset by new products, including store brand Dual Action Acetaminophen 250mg and Ibuprofen 125mg Tablets, and higher demand for children's analgesics products;
•Oral Care: Net sales of $313.9 million increased 0.3% due primarily to the normalization of supply chain disruptions that impacted net sales in the prior year and strong consumer demand for oral care products, partially offset by purposeful SKU prioritization actions;
•Healthy Lifestyle: Net sales of $311.7 million increased 7.9% due primarily to higher volumes and market share gains in smoking cessation products;
•Skin Care: Net sales of $196.2 million increased 4.5% due primarily to the addition of HRA Pharma brands, including Mederma® and Compeed®, partially offset by the divested Latin American businesses and ScarAway® brand, and exited product lines;
•Women's Health: Net sales of $46.9 million increased 3.8% due primarily to the addition of HRA Pharma brands, including ella®, partially offset by purposeful SKU prioritization actions in feminine hygiene;
•VMS and Other: Net sales of $69.5 million decreased 29.4% due primarily to the divested Latin American businesses and purposeful SKU prioritization actions.
Operating income increased $23.5 million, or 6.4%, due primarily to:
•$121.2 million increase in gross profit driven by higher net sales flow through and the benefits from our supply chain reinvention program; partially offset by lower infant formula manufacturing productivity inU.S. nutrition stemming from the evolving FDA regulatory expectations for infant formula manufacturing. Gross profit as a percentage of net sales was 3.7% higher due primarilyincreased 380 basis points compared to improved product mix primarily driven by the cancellation of certain unprofitable distribution contracts, as described above.
| |
• | Operating income as a percentage of net sales was 127.1% higher due primarily to the absence of $2.0 billion of intangible asset and goodwill impairment charges as discussed above (refer to Item 8. Note 3). |
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
|
| | | | | | | |
| | Year Ended |
| ($ in millions) | December 31, 2015(1) | | December 31,
2016 |
| Net sales | $ | 1,360.6 |
| | $ | 1,652.2 |
|
| Gross profit | $ | 614.7 |
| | $ | 693.4 |
|
| Gross profit % | 45.2 | % | | 42.0 | % |
| Operating loss | $ | (124.3 | ) | | $ | (2,087.4 | ) |
| Operating loss % | (9.1 | )% | | (126.3 | )% |
(1) Includes Omega results from March 30, 2015 to December 31, 2015.
Net sales increased $291.6 million, or 21%, over the prior year due to:
An additional three months of resultsdriven by strategic pricing actions and benefits from operations attributablepurposeful SKU prioritization actions to Omega;
Newfocus capacity on higher margin products, totaling $119.0 million; and
Incremental nets sales due to the Naturwohl and GSK Product acquisitions totaling $84.2 million; offset partially by
A net $143.6 million decrease in sales volumes of existing products due primarily to:
Lower sales in the lifestyle category due in part to a product launch in the prior year;
Lower sales in the natural health and VMS category due primarily to timing of promotional activities;
Divestment of a European sports brand; and
The expiration of a distribution contract in the prior year;
Unfavorable foreign currency translation movement of $44.1 million; and
Discontinued products of $8.4 million.
Perrigo Company plc - Item 7
CHCI
Operating loss increased $2.0 billion, due to:
A $78.7 million increase in gross profit due to an additional three months of operations attributable to Omega; offset partially by
Decreased sales of existing products in the higher-margin lifestyle and natural health and VMS categories noted above;
Weaker performance in Belgium and Germany; and
Unfavorable foreign currency translation effect; more than offset by lower manufacturing productivity in U.S. nutrition.
An increase of $2.0 billion in operating expenses due primarily to:
| |
• | Intangible asset and goodwill impairment charges totaling $2.0 billion, (refer to Item 8. Note 3); and |
| |
• | Restructuring charges totaling $20.9 million related to strategic organizational enhancements (refer to Item 8. Note 18); |
An additional three months of operations from the Omega acquisition; offset partially by
Cost control measures.
Six Months Ended December 31, 2015 vs. Six Months Ended December 27, 2014
|
| | | | | | | |
| | Six Months Ended |
| ($ in millions) | December 27,
2014 | | December 31,
2015 |
| Net sales | $ | 177.1 |
| | $ | 833.0 |
|
| Gross profit | $ | 55.9 |
| | $ | 386.0 |
|
| Gross profit % | 31.6 | % | | 46.3 | % |
| Operating income (loss) | $ | 14.1 |
| | $ | (148.5 | ) |
| Operating income (loss) % | 8.0 | % | | (17.8 | )% |
Net sales increased $655.9 million, over the prior year due to:
Incremental net sales attributable to the Omega, Naturwohl and GSK acquisitions totaling $569.1 million; and
New products totaling $66.8 million; offset partially by
Unfavorable foreign currency translation movement of $14.8 million; and
Discontinued products of $3.8 million.
Operating income decreased $162.6 million, due to:
A $330.1 million increase in gross profit and a $492.7•$97.7 million increase in operating expenses due primarily to an additional six monthsthe addition of operations attributableHRA Pharma and Gateway as well as higher advertising and promotion costs on branded business, and higher administration costs, partially offset by reduced distribution costs compared to Omega.the prior year.
PRESCRIPTION PHARMACEUTICALS
Recent Trends and Developments
We continue to experience a significant reduction in pricing expectations from historical levels in our RX segment due to competitive pressures. This softness in pricing is attributable to various factors, including increased focus from customers to capture supply chain productivity savings, competition in specific products, and consolidation of certain customers. We expect this softness to continue to impact the segment for the foreseeable future, and we are forecasting a high single digit pricing decline in this segment for the year ending December 31, 2018.
Perrigo Company plc- Item 7
RX
| |
• | During the three months ended December 31, 2016, the U.S. market for Entocort® (Budesonide) capsules, including both brand and authorized generic capsules, experienced significant and unexpected increased competition, which reduced our future revenue stream. As a result, our net sales in the RX segment for the year ended December 31, 2017 were negatively impacted by $67.2 million.
|
We are continuing our previously announced portfolio review process, which includes the ongoing comprehensive internal evaluation of the RX segment's market position, growth opportunities, and interdependencies with our manufacturing and shared service operations to determine if strategic alternatives should be explored.
During the year ended December 31, 2017, we sold various Abbreviated New Drug Applications ("ANDAs") for a total gain of $23.0 million.
Segment Financial Results
Year Ended December 31, 2017 vs. Year Ended December 31, 2016 | | | | | | | | | | | |
| Year Ended |
| (in millions, except percentages) | December 31, 2023 | | December 31, 2022 |
| Net sales | $ | 1,693.3 | | | $ | 1,525.7 | |
| Gross profit | $ | 772.0 | | | $ | 668.2 | |
| Gross profit % | 45.6 | % | | 43.8 | % |
| Operating income (loss) | $ | (35.2) | | | $ | (30.0) | |
| Operating income % | (2.1) | % | | (2.0) | % |
|
| | | | | | | |
| | Year Ended |
| ($ in millions) | December 31,
2016 | | December 31,
2017 |
| Net sales | $ | 1,042.8 |
| | $ | 969.7 |
|
| Gross profit | $ | 501.1 |
| | $ | 449.7 |
|
| Gross profit % | 48.1 | % | | 46.4 | % |
| Operating income (loss) | $ | (0.2 | ) | | $ | 307.6 |
|
| Operating income (loss) % | — | % | | 31.7 | % |
Net sales decreased $73.1increased $167.6 million, or 7%,11.0% primarily due to:
| |
• | New product sales of $75.9 million due primarily to sales of Scopolamine and Testosterone 2% topical (generic equivalent to Axiron®); more than offset by
|
Decreased sales of existing products of $78.5•$111.9 million, or 7.4%, net increase due primarily to approximately $108 million of strategic pricing pressures acrossactions, and higher sales volume in certain product categories driven by new products, partially offset by an unfavorable impact of $9.4 million due to distributor transitions as part of the portfolio;
| |
• | Lower Entocort® sales of $67.2 million; and
|
Discontinued productsintegration strategy to capture synergies after the twelve month anniversary of $3.3 million.the HRA Pharma acquisition; and
Perrigo Company plc - Item 7
Operating income increased $307.8CSCI
•$68.3 million increase from twelve months HRA Pharma in the current year versus eight months in the prior year, inclusive of an unfavorable impact of $19.8 million due to distributor transitions as part of the integration strategy to capture synergies from the acquisition of HRA Pharma in addition to the impacts noted above; partially offset by
•$17.5 million decrease from exited product lines.
CSCI net sales by product category were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Sales | Year Ended | | | | |
| (in millions, except percentages) | December 31, 2023 | | December 31, 2022 (1) | | $ Change | | % Change |
| Skin Care | $ | 372.5 | | | $ | 334.6 | | | $ | 37.9 | | | 11.3 | % |
| Upper Respiratory | 299.1 | | | 268.7 | | | 30.4 | | | 11.3 | % |
| Healthy Lifestyle | 225.7 | | | 209.7 | | | 16.0 | | | 7.6 | % |
| Pain and Sleep-Aids | 222.9 | | | 200.2 | | | 22.7 | | | 11.3 | % |
| VMS | 185.5 | | | 183.9 | | | 1.6 | | | 0.9 | % |
| Women's Health | 119.7 | | | 96.1 | | | 23.6 | | | 24.6 | % |
| Oral Care | 101.5 | | | 94.8 | | | 6.7 | | | 7.1 | % |
| Digestive Health | 41.0 | | | 35.5 | | | 5.5 | | | 15.5 | % |
| Other CSCI | 125.4 | | | 102.2 | | | 23.2 | | | 22.7 | % |
| Total CSCI | $ | 1,693.3 | | | $ | 1,525.7 | | | $ | 167.6 | | | 11.0% |
(1) We updated our global reporting product categories as a result of:of our product portfolio reconfiguration. These product category updates have been adjusted retroactively to reflect the changes and have no impact on historical financial position, results of operations, or cash flows. Refer to Item 8. Note 2.
A decreaseSales in each category were driven primarily by:
•Skin Care: Net sales of $51.4$372.5 million in gross profitincreased 11.3%, inclusive of a 3.0% unfavorable effect of currency translation, driven primarily by the addition of HRA brands, including Compeed®, and strong sales within the Sebamed and ACO brand lines;
•Upper Respiratory: Net sales of $299.1 million increased 11.3%, inclusive of a 1.5% favorable effect of currency translation, due primarily to:
| |
• | Lower Entocort® sales as noted above; and
|
Pricing pressures as discussed above.
A decrease of $359.2 million in operating expenses due to:
| |
• | The absence of a $342.2 million impairment charge related to the Entocort® intangible asset (refer to Item 8. Note 3); |
A $23.0 million gain onto increased demand for cough/cold products, including Bronchostop and Coldrex stemming from a 2022/2023 strong cough/cold and flu season, and higher net sales of certain ANDAs;allergy products, including Beconase;
| |
• | A $15.4 million net gain related to contingent consideration (refer to Item 8. Note 6); |
Decreased selling expenses•Healthy Lifestyle: Net sales of $17.4$225.7 million increased 7.6%, inclusive of a 1.1% favorable effect of currency translation, due primarily to higher net sales of anti-parasite offerings, including Paranix and Jungle Formula, and higher demand for smoking cessation products, partially offset by lower category consumption in weight loss, impacting XLS Medical;
•Pain & Sleep-Aids: Net sales of $222.9 million increased 11.3%, inclusive of a 1.8% favorable effect of currency translation, due primarily to higher demand for Solpadeine, U.K. store brand products and higher net sales for Nytol;
•VMS: Net sales of $185.5 million increased 0.9%, inclusive of a 2.2% favorable effect of currency translation, due primarily to increased net sales of Davitamon and Abtei, partially offset by lower category consumption;
•Women's Health: Net sales of $119.7 million increased 24.6%, inclusive of a 2.0% favorable effect of currency translation, due primarily to the prior year specialty pharmaceuticals sales force restructuring initiative;addition of HRA brands, including ellaOne® andNorLevo®;
Decreased R&D expenses of $8.3 million due to timing of clinical trials, lower legal spend, and lower ongoing costs on certain projects; offset partially by
| |
• | Impairment charges related to certain definite-lived intangible assets, certain fixed assets and IPR&D of $34.9 million (refer to Item 8. Note 3); |
Perrigo Company plc- Item 7
RX
| |
• | Increased administrative expenses of $6.2 million due primarily to the settlement of our antitrust violation lawsuit (refer to Item 8. Note 16); and |
| |
• | Increased restructuring expenses of $3.8 million related to strategic organizational enhancements (refer to Item 8. Note 18). |
| |
• | Gross profit as a percentage of net sales was 1.7% lower due primarily to lower sales of Entocort® as discussed above.
|
| |
• | Operating income as a percentage of net sales was 31.7% higher due primarily to the absence of a $342.2 million impairment charge related to the Entocort® intangible asset (refer to Item 8. Note 3). |
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
|
| | | | | | | |
| | Year Ended |
| ($ in millions) | December 31,
2015 | | December 31,
2016 |
| Net sales | $ | 1,001.9 |
| | $ | 1,042.8 |
|
| Gross profit | $ | 543.3 |
| | $ | 501.1 |
|
| Gross profit % | 54.2 | % | | 48.1 | % |
| Operating income (loss) | $ | 377.8 |
| | $ | (0.2 | ) |
| Operating income % | 37.7 | % | | — | % |
•Oral Care: Net sales of $101.5 million increased $40.9 million, or 4%, due to:
| |
• | Net sales attributable to the Entocort® and Tretinoin Products acquisitions totaling $150.9 million; and
|
New product sales7.1% inclusive of $68.0 milliona 1.4% favorable effect of currency translation, due primarily to strong growth of store brand oral care products;
•Digestive Health and Other: Net sales of Benzoyl Peroxide 5%-Clindamycin 1% gel (a generic version$166.4 million increased 20.8%, inclusive of Benzaclin™); offset partially by
Decreaseda 1.9% unfavorable effect of currency translation, due primarily to the addition of the HRA Pharma Rare Diseases portfolio in the Other category and higher net sales of existingstore brand digestive health products of $174.1 million due to declined sales volume of certain products, pricing pressure across the portfolio, and the lack of exclusive market position for two key products versus the prior year; anddistribution brands.
Discontinued products of $3.9 million.
Perrigo Company plc - Item 7
CSCI
Operating income decreased $378.0$5.2 million, or 100%17.3%, due to:
•$103.8 million increase in gross profit driven by higher net sales flow through and the addition of HRA Pharma, partially offset by cost of goods sold inflation. Gross profit as a result of:percentage of net sales increased 180 basis points due primarily to strategic pricing actions and the acquisition of higher margin HRA products partially offset by less favorable product mix and higher cost of goods sold inflation; and
| |
• | A decrease of $42.2 million in gross profit due primarily to the pricing pressure noted above, as well as higher amortization expense from the Entocort® and Tretinoin Products acquisitions; and
|
An•$109.0 million increase of $335.8 million in operating expenses due primarily to:
| |
• | A $342.2 million impairment charge related to the Entocort® intangible assets, (refer to Item 8. Note 3); |
Increasedto $90.0 million in goodwill impairment charges related to the Rare Diseases reporting unit in the CSCI segment and higher selling and administrationadministrative expenses of $9.3 million, and
Increased R&D investments of $3.0 million due to timing of clinical trials; offset partially by
| |
• | The absence of an $18.0 million R&D payment made in connection with a R&D contractual arrangement in the prior year (refer to Item 8. Note 17). |
Perrigo Company plc- Item 7
RX
Six Months Ended December 31, 2015 vs. Six Months Ended December 27, 2014
|
| | | | | | | |
| | Six Months Ended |
| ($ in millions) | December 27,
2014 | | December 31,
2015 |
| Net sales | $ | 436.7 |
| | $ | 502.6 |
|
| Gross profit | $ | 230.5 |
| | $ | 253.4 |
|
| Gross profit % | 52.8 | % | | 50.4 | % |
| Operating income | $ | 168.8 |
| | $ | 181.9 |
|
| Operating income % | 38.6 | % | | 36.2 | % |
Net sales increased $65.9 million, or 15%, due primarily to:
New product sales of $41.2 million related primarily to the launches of Clobetasol Propionate 0.05% spray, Tacrolimus 0.1% ointment, and Testosterone gel 1%; and
Net sales attributable to the Lumara product acquisition of $7.0 million; offset partially by
A decrease in volumes of certain existing products.
Operating income increased $13.1 million, or 8%, as a result of:
An increase of $22.9 million in gross profit due primarily to:
Higher net sales and favorable product mix; and
Certain pricing initiatives.
Partially offset by a $9.8 millionincrease in operatingtwelve months of HRA Pharma expenses due to:
Increased selling and administration expense related to the specialty pharmaceuticals sales force; and
| |
• | An increase in restructuring expense of $2.6 million related to our strategic organizational enhancements (refer to Item 8. Note 18). |
SPECIALTY SCIENCES
Recent Trends and Developments
| |
• | On March 27, 2017, we announced the completed divestment of our Tysabri® financial asset to Royalty Pharma for up to $2.85 billion, consisting of $2.2 billion in cash and up to $250.0 million and $400.0 million in milestone payments if the royalties on global net sales of Tysabri® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we transferred the entire financial asset to Royalty Pharma and recorded a $17.1 million gain during the three months ended April 1, 2017. We elected to account for the contingent milestone payments using the fair value option method, and these were recorded at an estimated fair value of $134.5 million as of December 31, 2017 (refer to Item 8. Note 6 and Critical Accounting Estimates for additional information on the contingent milestones). |
Segment Results
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
Operating expenses were $201.2 million for the year ended December 31, 2015, compared to $15.0 million for the prior year period. The decreases of $186.2 million primarily relates to a $199.6 million impairment charge related to the Tysabri® goodwill (refer to Item 8. Note 3).
Perrigo Company plc- Item 7
Specialty Sciences
Six Months Ended December 31, 2015 vs. Six Months Ended December 27, 2014
Operating expenses were $6.5 million for the six months ended December 31, 2015, compared to $9.0 million for the prior year period. The decreases of $2.5 million was due to a reduction in legal expenses.
OTHER
Recent Trends and Developments
On April 6, 2017, we completed the sale of our India API business to Strides Shasun Limited. We received $22.2 million of proceeds, inclusive of an estimated working capital adjustment, which resulted in an immaterial gain. Prior to closing the sale, we determined that the carrying value of the India API business exceeded its fair value less the cost to sell, resulting in an impairment charge of $35.3 million, which was recorded in Impairment charges on the Consolidated Statements of Operations for the year ended December 31, 2016 (refer to Item 8. Note 2).
On November 21, 2017, we completed the sale of our Israel API business, which was previously classified as held-for-sale, to SK Capital for a sale price of $110.0 million, which resulted in an immaterial gain recorded in our Other segment in Other expense (Income), net on the Consolidated Statements of Operations (refer to Item 8. Note 2 and Note 6).
Segment Results
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
|
| | | | | | | |
| | Year Ended |
| ($ in millions) | December 31,
2016 | | December 31,
2017 |
| Net sales | $ | 78.5 |
| | $ | 55.6 |
|
| Gross profit | $ | 32.3 |
| | $ | 30.9 |
|
| Gross profit % | 41.2 | % | | 55.6 | % |
| Operating income | $ | 6.1 |
| | $ | 8.7 |
|
| Operating income % | 7.8 | % | | 15.6 | % |
Net sales decreased $22.9 million due primarily to competition on certain products and the sale of our Israel API business (refer to Item 8. Note 2). Operating income increased $2.6 million due to a $1.4 million decrease in gross profit due primarily to a decrease in sales of existing products offset by a $4.0 million decrease in operating expenses. The decrease in operating expenses related primarily to the absence of a $8.3 million impairment charge recorded on the India API business and certain definite-lived intangible assets in the prior year; offset partially by a $3.3 million impairment charge recorded on the Israel API business in the current period.
Perrigo Company plc - Item 7
Other
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
|
| | | | | | | |
| | Year Ended |
| ($ in millions) | December 31,
2015 | | December 31,
2016 |
| Net sales | $ | 98.0 |
| | $ | 78.5 |
|
| Gross profit | $ | 44.7 |
| | $ | 32.3 |
|
| Gross profit % | 45.5 | % | | 41.2 | % |
| Operating income (loss) | $ | (7.1 | ) | | $ | 6.1 |
|
| Operating income (loss) % | (7.3 | )% | | 7.8 | % |
Net sales decreased $19.5 million due primarily to competition on certain products, in particular, U.S. sales of Temozolomide. Operating income increased $13.2 million due primarily to the absence of a $29.0 million impairment on our India API held-for-sale assets recordedyear versus eight months in the prior year, period (referpartially offset by lower operating expenses driven by HRA cost synergies realized as part of the integration actions and lower restructuring expenses compared to Item 8. Note 9). Gross profit decreased $12.4 million as a result of increased competition, a $6.3 million impairment charge recorded on the India API held-for-sale business (refer to Item 8. Note 9), and a $2.0 million impairment charge related to a definite-lived intangible asset (refer to Item 8. Note 3).prior year.
Six Months Ended December 31, 2015 vs. Six Months Ended December 27, 2014
|
| | | | | | | |
| | Six Months Ended |
| ($ in millions) | December 27,
2014 | | December 31,
2015 |
| Net sales | $ | 54.8 |
| | $ | 45.1 |
|
| Gross profit | $ | 26.2 |
| | $ | 21.6 |
|
| Gross profit % | 47.7 | % | | 47.8 | % |
| Operating income (loss) | $ | 14.5 |
| | $ | (19.5 | ) |
| Operating income (loss) % | 26.4 | % | | (43.3 | )% |
Net sales decreased $9.7 million, or 18%, due primarily to competition on certain products and unfavorable changes in foreign currency translation. Operating income decreased $34.0 million as a result of a decrease of $4.6 million in gross profit due primarily to a decrease in sales of existing products and an impairment charge of $29.0 million on our India API held-for-sale assets (refer to Item 8. Note 9).
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, 2023 | | December 31, 2022 |
| $ | 202.4 | | | $ | 257.2 | |
|
| | | | | | | | | | | | | | | | | | |
| Six Months Ended | | Year Ended |
December 27,
2014 | | December 31,
2015 | | December 31,
2015 | | December 31,
2016 | | December 31,
2017 |
| $ | 49.6 |
| | $ | 149.0 |
| | $ | 220.9 |
| | $ | 116.6 |
| | $ | 174.7 |
|
Perrigo Company plc - Item 7
Other
The $58.1decrease of $54.8 million increase forin unallocated expenses during the year ended December 31, 20172023 compared to the prior year period was due primarily to a decrease in acquisition and integration expenses associated with the HRA Pharma and Gateway acquisitions.
Interest expense, net, Other (income) expense, net and (Gain) Loss on extinguishment of debt (Consolidated)
| | | | | | | | | | | |
| Year Ended |
| (in millions) | December 31, 2023 | | December 31, 2022 |
| | | |
| Interest expense, net | $ | 173.8 | | | $ | 156.0 | |
| Other (income) expense, net | $ | (10.4) | | | $ | 53.1 | |
| (Gain) loss on extinguishment of debt | $ | (3.2) | | | $ | 8.9 | |
Interest Expense, net
The $17.8 million increase during the year ended December 31, 2023 compared to the prior year was due primarily to an increase in
share-based compensationinterest expense
of $12.6 million driven primarily by the resignation of certain executives, an increase of $41.1 million of administrative expenses driven by legal fees, consulting fees and employee-related expenses, andassociated with an increase in
restructuring of $6.0 million related to strategic organizational enhancements (refer to Item 8. Note 15).outstanding borrowings under our Senior Secured Credit Facilities.
Other (Income) Expense, Net
The $104.3$63.5 million decrease forin expense during the year ended December 31, 20162023 compared to the prior year was due primarily to unfavorable changes in revaluation of foreign currency expense associated with the absenceacquisition of legalHRA Pharma and professional feestermination expense of the forward currency options related to our defense against the unsolicited takeover bid by Mylanacquisition of $100.3 million and Omega acquisition-related fees of $18.1 million. We also experienced a $15.0 million reductionHRA Pharma in share-based compensation compared to the prior year due primarily to the resignationyear.
(Gain) Loss on extinguishment of our former Chief Executive Officer, Joseph C. Papa. These decreases were offset partially by a $36.2debt
The $3.2 million increase in legal and professional fees in the current year.
The $99.4 million increase for the six months ended December 31, 2015 compared to the prior year period was due primarily to $86.9 million in fees incurred in our defense against the unsolicited takeover bid by Mylan and $7.5 million in corporate restructuring charges.
Interest, Other and Change in Financial Assets (Consolidated)
|
| | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | Year Ended |
| ($ in millions) | December 27,
2014 | | December 31,
2015 | | December 31,
2015 | | December 31,
2016 | | December 31,
2017 |
| Change in financial assets | $ | (46.9 | ) | | $ | (57.3 | ) | | $ | (88.8 | ) | | $ | 2,608.2 |
| | $ | 24.9 |
|
| Interest expense, net | $ | 56.7 |
| | $ | 89.9 |
| | $ | 179.1 |
| | $ | 216.6 |
| | $ | 168.1 |
|
| Other expense (Income), net | $ | 60.3 |
| | $ | 25.2 |
| | $ | 299.1 |
| | $ | 22.7 |
| | $ | (10.1 | ) |
| Loss on extinguishment of debt | $ | 9.6 |
| | $ | 0.9 |
| | $ | 1.8 |
| | $ | 1.1 |
| | $ | 135.2 |
|
Change in Financial Assets
Prior to its divestituregain on March 27, 2017, we accounted for the Tysabri® royalty stream as a financial asset and had elected to use the fair value option model with changes in fair value presented in Net income (loss) under the caption Change in financial assets. Royalty rights were $24.9 millionextinguishment of expense, $2.6 billion of expense and $88.8 million of income for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, respectively. Royalty rights were $57.3 million of income and $46.9 million of income for the six months ended December 31, 2015 and December 27, 2014, respectively. Royalty rights were $78.5 million of income and $26.6 million of income for the years ended June 27, 2015 and June 28, 2014, respectively, resulting in a change in financial asset of $2.6 billion, $2.7 billion, $10.4 million, and $51.9 million fordebt during the year ended December 31, 2017, December 31, 2016, six months2023 is related to the debt refinancing and tender offer activity during the fourth quarter of 2023. The $8.9 million loss on extinguishment of debt during the year ended December 31, 2015, and the year ended June 27, 2015 compared2022 is related to the write-off of certain new and previously deferred financing fees and make whole payments due in connection with repaying outstanding borrowings prior year periods, respectivelyto maturity (refer to Item 8. Note 612 for additional information on the assumptions)).
In the first quarter of 2016, a competitor's pipeline product, Ocrevus®, received breakthrough therapy designation from the U.S. Food and Drug Administration ("FDA"). Breakthrough therapy designation is granted when a drug is intended alone or in combination with one or more other drugs to treat a serious or life threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. In June 2016, the FDA granted priority review with a target action date in December 2016. A priority review is a designation when the FDA will direct overall attention and resources to the evaluation of applications for drugs that, if approved, would be significant improvements in the safety or effectiveness of the treatment, diagnosis, or prevention of serious conditions when compared to standard applications. The product was approved late in the first quarter of 2017. The product is expected to compete with Tysabri®, and we expected it to have a significant negative impact on the Tysabri® royalty stream. Industry analysts believe that, based on released clinical study information, Ocrevus® will compete favorably against Tysabri® in the relapsing, remitting multiple sclerosis market segment due to its high efficacy and convenient dosage form.
Perrigo Company plc - Item 7
Unallocated, Interest, Other, and Taxes
Given the new market information for Ocrevus®, we used industry analyst estimates to reduce our first ten year growth forecasts from an average growth of approximately 3.4% in the fourth calendar quarter of 2015 to an average decline of approximately minus 2.0% in the third and fourth calendar quarters of 2016. In November 2016, we announced we were evaluating strategic alternatives for the Tysabri® financial asset. As of December 31, 2016, the financial asset was adjusted based on the strategic review and sale process. These effects, combined with the change in discount rate each quarter, led to a reduction in fair value of $204.4 million, $910.8 million, $377.4 million and $1.1 billion in the first, second, third and fourth quarters of 2016, respectively.
On March 27, 2017, we announced the completed divestment of our Tysabri® financial asset to Royalty Pharma for up to $2.85 billion, consisting of $2.2 billion in cash and up to $250.0 million and $400.0 million in milestone payments if the royalties on global net sales of Tysabri® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we transferred the entire financial asset to Royalty Pharma and recorded a $17.1 million gain during the three months ended April 1, 2017. We elected to account for the contingent milestone payments using the fair value option method, and these were recorded at an estimated fair value of $134.5 million as of December 31, 2017. We chose the fair value option as we believe it will help investors understand the potential future cash flows we may receive associated with the two contingent milestones.
We valued the contingent milestone payments using a modified Black-Scholes Option Pricing Model ("BSOPM"). Key inputs in the BSOPM are the estimated volatility and rate of return of royalties on global net sales of Tysabri® that are received by Royalty Pharma over time until payment of the contingent milestone payments is completed. Volatility and the estimated fair value of the milestones have a positive relationship such that higher volatility translates to a higher estimated fair value of the contingent milestone payments. In the valuation of contingent milestone payments performed, we assumed volatility of 30.0% and a rate of return of 8.07% as of December 31, 2017. We assess volatility and rate of return inputs quarterly by analyzing certain market volatility benchmarks and the risk associated with Royalty Pharma achieving the underlying projected royalties. During the year ended December 31, 2017, the fair value of the Royalty Pharma contingent milestone payments decreased $42.0 million, as a result of the decrease in the estimated projected Tysabri® revenues due to the launch of Ocrevus® late in the first quarter of 2017.
In addition, payment of the contingent milestone payments is dependent on global net sales of Tysabri®. Of the $134.5 million of estimated fair valued contingent milestone payments as of December 31, 2017, $79.7 million and $54.8 million relates to the 2018 and 2020 contingent milestone payments, respectively. If Tysabri® global net sales do not meet the prescribed threshold in 2018, we will write off the $79.7 million asset as an expense to Change in financial assets on the Consolidated Statement of Operations. If the prescribed threshold is exceeded, we will write up the asset to $250.0 million and recognize income of $170.3 million in Change in financial assets on the Consolidated Statement of Operations. If Tysabri® global net sales do not meet the prescribed threshold in 2020, we will write off the $54.8 million asset as an expense to Change in financial assets on the Consolidated Statement of Operations. If the prescribed threshold is exceeded, we will write up the asset to $400.0 million and recognize income of $345.2 million in Change in financial assets on the Consolidated Statement of Operations.
Global Tysabri® net sales need to exceed $1.9 billion and $2.0 billion in 2018 and 2020, respectively, in order for Royalty Pharma to receive the level of royalties needed to trigger the milestone payments owed to us. Tysabri® net sales are anticipated to decline on a global basis in 2018, compared to 2017, due to increased competition from Ocrevus®, offset by volume growth in Tysabri® international markets (refer to Item 8. Note 6).
Interest Expense, Net
Interest expense, net was $168.1 million for the year ended December 31, 2017, compared to $216.6 million in the prior year. The $48.5 million decrease for the year ended December 31, 2017 compared to the prior year was the result of the early debt repayments made during the year ended December 31, 2017.
Interest expense, net was $216.6 million for the year ended December 31, 2016, compared to $179.1 million in the prior year. The $37.5 million increase for the year ended December 31, 2016 compared to the prior year was due to interest incurred on the debt assumed in the Omega acquisition and borrowings on our revolving credit agreements during the year ended December 31, 2016.
Perrigo Company plc - Item 7
Unallocated, Interest, Other, and Taxes
Interest expense, net was $89.9 million for the six months ended December 31, 2015, compared to $56.7 million in the prior year period. The $33.2 million increase for the six months ended December 31, 2015 compared to the prior year period was due primarily to the incremental increase in borrowings resulting from the Omega acquisition, including the issuance of $1.6 billion of senior notes in November 2014 and assumed Omega debt, of which $798.3 million was outstanding at December 31, 2015, as well as amounts drawn under our revolving credit facilities, including $380.0 million and $300.0 million outstanding under the 2015 Revolver and 2014 Revolver, respectively, at December 31, 2015.
Other Expense (Income), Net
Other expense (Income), net, was $10.1 million for the year ended December 31, 2017, compared to $22.7 million in the prior year. The $32.8 million decrease was due primarily to the absence of a $22.3 million equity investment impairment, $8.2 million of favorable changes in revaluation of monetary assets and liabilities held in foreign currencies, and a $3.2 million reduction in equity method losses.
Other expense (Income), net, was $22.7 million for the year ended December 31, 2016, compared to $299.1 million in the prior year. The $276.4 million decrease was due primarily to the absence of the $259.8 million loss incurred in the prior year on the derivatives used to economically hedge fluctuations in the euro-denominated purchase price of the Omega and GSK Products acquisitions. The losses on the derivatives due to the changes in the EUR/USD exchange rate prior to their settlement economically offset the final settlement of the euro-denominated Omega purchase price paid on March 30, 2015.
Other expense (Income), net, was $25.2 million for the six months ended December 31, 2015, compared to $60.3 million in the prior year period. The $35.1 million decrease was due primarily to a $10.7 million other-than-temporary impairment of a marketable equity security, losses on equity method investments totaling $7.1 million, and a $4.8 million loss on a foreign currency derivative we entered into, to hedge against the change in the euro for the euro-denominated purchase price of the GSK Products acquisition, offset by the absence of a $64.7 million loss related to derivative activity to economically hedge fluctuations in the euro-denominated purchase price of the Omega acquisition and a gain of $12.5 million from the transfer of a rights agreement.
Loss on Extinguishment of Debt
During the year ended December 31, 2017, we recorded a $135.2 million loss on extinguishment of debt, which consisted of tender premium on debt repayments, transaction costs, write-off of deferred financing fees, and bond discounts related to the $500.0 million 3.500% senior notes due December 2021, $500.0 million 3.500% senior notes due March 2021, $400.0 million 4.900% senior notes due 2044, $800.0 million 4.000% senior notes due 2023, and $400.0 million 5.300% senior notes due 2043.
During the year ended December 31, 2016, we recorded a $1.1 million loss on extinguishment of debt, which consisted of deferred financing fees we wrote off primarily related to the prepayment of 1.300% 2016 Notes. During the six months and year ended December 31, 2015 we recorded a $0.9 million and $1.8 million loss on extinguishment of debt, respectively, which consisted of deferred financing fees we wrote off related to the undrawn tranche of certain credit facilities that we allowed to expire during the period. The $9.6 million and $10.5 million losses during the six months and year ended December 27, 2014 and June 27, 2015, respectively, consisted mainly of interest on the bridge agreement associated with financing the Omega acquisition. The $165.8 million loss recorded in the year ended June 28, 2014 consisted of make-whole payments, write-off of unamortized discounts, write-off of deferred financing fees, and interest on the bridge agreements associated with financing the Elan acquisition.
Perrigo Company plc - Item 7
Unallocated, Interest, Other, and Taxes
Income Taxes (Consolidated)
The effective tax rates were as follows:
| | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 |
| 47.2 | % | | 5.9 | % |
|
| | | | | | | | | | | | | |
| Six Months Ended | | Year Ended |
December 27,
2014 | | December 31,
2015 | | December 31,
2015 | | December 31,
2016 | | December 31,
2017 |
| 14.0 | % | | (376.2 | )% | | 103.3 | % | | 17.2 | % | | 57.3 | % |
The effective tax rate on the pre-tax loss for the year ended December 31, 2017 was higher2023, increased when compared to the year ended December 31, 2016 due to an increase in the valuation allowance position due to current year activity, tax law changes in the U.S., increases in unrecognized tax benefits, offset by tax law changes in Belgium.
The effective tax rate on the pre-tax loss for the year ended December 31, 2016 was lower compared to the year ended December 31, 20152022, primarily due to the impact of the asset impairments recorded during the year ended December 31, 2016. The effective tax rate for the year ended December 31, 2015 was impacted by the impairment of Omega's intangible assets, India API assets being classified as held for sale, the valuation allowance on deferred taxes and Omega transaction costs.
The effective tax rate for the six months ended December 31, 2015 was significantly higher than for the six months ended December 27, 2014 due mainly to the impairment of Omega’s intangible assets and the related impacts on the valuation allowance position, as well as our India API assets being classified as held for sale. The effective tax rate was favorably affected by a reductionaudit settlements in the reserves for uncertain tax liabilities in the amount of $6.1 million for the six months ended December 31, 2015 related to various audit resolutions.
For thecurrent year ended December 31, 2017, statutory income tax rateand changes in the U.S.jurisdictional mix of earnings, offset by the non-deductibility of certain charges and Belgium impacted the effective tax rate with a reduction to U.S. income tax expense of $2.4 million and increased Belgium income tax expense by $24.1 million. For the years ended December 31, 2016 and December 31, 2015, statutory income tax rate changes, primarilyexpenses in Europe, favorably impacted the effective tax rate by $27.9 million and $4.0 million, respectively (refer to Item 8. Note 14).2023.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Overview
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 wars in Ukraine and Israel, inflation and interest rates, the status of material contingent liabilities, recent financial market volatility, the COVID-19 pandemic and other uncertainties. Subject to relevant restrictions under our debt agreements, our cash requirements for other purposes and other factors management deems relevant, we may from time to time use available funds to redeem, repurchase or refinance our debt in privately negotiated or open market transactions, by tender offer or otherwise, in compliance with applicable laws, rules and regulations, at prices and on terms we deem appropriate (which may be below par).
Based on our current financial condition and credit relationships,the foregoing, management believes that our operations and borrowing resources are sufficient to provide for our currentshort-term and foreseeablelong-term capital requirements.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 commercial and capital market conditionsthe above factors on liquidity and may determine that modifications to our capital structure are appropriate if market conditions deteriorate, or if favorable capital market opportunities become available.available, or any change in conditions relating to the wars in Ukraine and Israel, inflation and interest rates, the status of material contingent liabilities, financial market volatility, the COVID-19 pandemic or other uncertainties have a material impact on our capital requirements.
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
Cash, and Cash Equivalents and Restricted Cash
| | | | | | | | | | | |
| Year Ended |
| (in millions) | December 31, 2023 | | December 31, 2022 |
| Cash, cash equivalents and restricted cash | $ | 751.3 | | | $ | 600.7 | |
Working capital(1) | $ | 935.9 | | | $ | 1,041.8 | |
*(1) Working capital represents current assets less current liabilities, excluding cash, and cash equivalents and restricted cash, assets and liabilities held for sale, and excluding current indebtedness.
Cash, cash equivalents, restricted cash, cash flows from operations, and borrowings available under our credit facilities are expected to be sufficient to finance the known and/or foreseeableour liquidity and capital expenditures.expenditures in both the short and long term. Although our lenders have made commitments to make funds available to us in a timely fashion under our revolving credit agreements and overdraft facilities, if economic conditions worsen or new information becomes publicly available impacting the institutions’ credit rating or capital ratios, these lenders may be unable or unwilling to lend money pursuant to our existing credit facilities.
Operating Activities
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
Should our outlook on liquidity requirements change substantially from current projections, we may seek additional sources of liquidity in the future.
|
| | | | | | | | | | | |
| | Year Ended |
| ($ in millions) | December 31,
2016 | | December 31,
2017 | | Increase/(Decrease) |
| Cash Flows From (For) Operating Activities | | | | | |
| Net income (loss) | $ | (4,012.8 | ) | | $ | 119.6 |
| | $ | 4,132.4 |
|
| Non-cash adjustments | 4,769.2 |
| | 683.2 |
| | (4,086.0 | ) |
| Subtotal | 756.4 |
| | 802.8 |
| | 46.4 |
|
| | | | | | |
| Increase (decrease) in cash due to: | | | | | |
| Accounts receivable | (0.6 | ) | | 3.2 |
| | 3.8 |
|
| Inventories | 100.7 |
| | (16.0 | ) | | (116.7 | ) |
| Accounts payable | (75.7 | ) | | (39.6 | ) | | 36.1 |
|
| Payroll and related taxes | (41.1 | ) | | (27.4 | ) | | 13.7 |
|
| Accrued customer programs | (13.9 | ) | | 34.6 |
| | 48.5 |
|
| Accrued liabilities | (79.5 | ) | | (47.8 | ) | | 31.7 |
|
| Accrued income taxes | 20.9 |
| | (6.1 | ) | | (27.0 | ) |
| Other, net | (12.3 | ) | | (4.8 | ) | | 7.5 |
|
| Subtotal | $ | (101.5 | ) | | $ | (103.9 | ) | | $ | (2.4 | ) |
| | | | | | |
| Net cash from operating activities | $ | 654.9 |
| | $ | 698.9 |
| | $ | 44.0 |
|
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
Cash Flows
We generated $698.9 million of
The following table includes summarized cash flow activities:
| | | | | | | | | | | | | | | | | |
| Year Ended | | |
| (in millions) | December 31, 2023 | | December 31, 2022 | | $ Change |
| Net cash from operating activities | $ | 405.5 | | | $ | 307.3 | | | $ | 98.2 | |
| Net cash (for) from investing activities | (77.5) | | | (1,958.6) | | | 1,881.1 | |
| Net cash (for) from financing activities | (187.2) | | | 421.6 | | | (608.8) | |
| Effect of exchange rate changes on cash and cash equivalents | 9.8 | | | (48.9) | | | 58.7 | |
| Net increase (decrease) in cash and cash equivalents | $ | 150.6 | | | $ | (1,278.6) | | | $ | 1,429.2 | |
Net cash from operating activities during the year ended December 31, 2017, a $44.0Operating Activities
The $98.2 million increase overin operating cash inflow was primarily driven by an increase in cash flow from the prior year period, due to the following:
Increasedchange in net earnings after adjustments, for items such as deferred income taxes, impairment charges, restructuring charges, changes in our financial assets, loss on extinguishment of debt, and depreciation and amortization;
Changes in accrued customer-related programs due primarily to new product launches, resulting in higher customer related-accruals, pricing dynamics in the RX segment, as well as timing of rebate and chargeback payments;
Changes in accounts payable due primarily to changes to the Omega accounts payable structure that occurred in the prior year period; and
| |
• | Changes in accrued liabilities due primarily to deferred revenue associated with BCH-Belgium distribution contracts and the absence of accruals related to the sale of our U.S. VMS business; partially offset by increased litigation accruals (refer to Item 8. Note 16), and fair market value adjustments related to contingent consideration (refer to Item 8. Note 6); offset partially by |
Changes in inventory due to the build up of inventory levels to support customer demands in the current period; offset by improved inventory management in the comparable prior year period; and
| |
• | Changes in accrued income taxes due primarily to Federal tax obligation payments made in the current year period, offset by expected tax refunds (refer to Item 8. Note 14). |
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
|
| | | | | | | | | | | |
| | Year Ended |
| ($ in millions) | December 31,
2015 | | December 31,
2016 | | Increase/ (Decrease) |
| Cash Flows From (For) Operating Activities | | | | | |
| Net loss | $ | (1.9 | ) | | $ | (4,012.8 | ) | | $ | (4,010.9 | ) |
| Non-cash adjustments | 745.4 |
| | 4,769.2 |
| | 4,023.8 |
|
| Subtotal | 743.5 |
| | 756.4 |
| | 12.9 |
|
| | | | | | |
| Increase (decrease) in cash due to: | | | | | |
| Accounts receivable | 4.8 |
| | (0.6 | ) | | (5.4 | ) |
| Inventories | (21.5 | ) | | 100.7 |
| | 122.2 |
|
| Accounts payable | (26.7 | ) | | (75.7 | ) | | (49.0 | ) |
| Payroll and related taxes | (42.0 | ) | | (41.1 | ) | | 0.9 |
|
| Accrued customer programs | 53.9 |
| | (13.9 | ) | | (67.8 | ) |
| Accrued liabilities | 98.9 |
| | (79.5 | ) | | (178.4 | ) |
| Accrued income taxes | (67.9 | ) | | 20.9 |
| | 88.8 |
|
| Other, net | 21.3 |
| | (12.3 | ) | | (33.6 | ) |
| Subtotal | $ | 20.8 |
| | $ | (101.5 | ) | | $ | (122.3 | ) |
| | | | | | |
| Net cash from operating activities | $ | 764.3 |
| | $ | 654.9 |
| | $ | (109.4 | ) |
We generated $654.9 million of cash from operating activities during the year ended December 31, 2016, a $109.4 million decrease over the prior year, duehigher working capital needs, primarily to the following:
Changes in accrued liabilities due primarily to payment of legal expenses associated with the Mylan defense which were accrued at December 31, 2015, deferred revenue associated with the BCH Belgium Distribution Contracts, and timing of payments;
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
Changes in accrued customer-related programs due to the pricing dynamics in the RX segment; and
Changes in accounts payable due to changes to the Omega accounts payable structure as discussed below; offset partially by
Changes in inventories due to improved inventory management in our CHCI and CHCA segments and increased sales of cough/cold products at the end of the year ended December 31, 2016; and
| |
• | Changes in accrued income taxes due primarily to the prior year including a $68.9 million incremental tax payment made in connection with the contested IRS audit (refer to Item 8. Note 14). |
In addition, increased net earnings after adjusting for non-cash items such as impairment charges, loss on extinguishment of debt, changes in our financial assets, and depreciation and amortization contributed to an increase in operating cash flow.
Six Months Ended December 31, 2015 vs. Six Months Ended December 27, 2014
|
| | | | | | | | | | | |
| | Six Months Ended |
| ($ in millions) | December 27,
2014 | | December 31,
2015 | | Increase / (Decrease) |
| Cash Flows From (For) Operating Activities | | | | | |
| Net income | $ | 180.6 |
| | $ | 42.5 |
| | $ | (138.1 | ) |
| Non-cash adjustments | 88.6 |
| | 279.2 |
| | 190.6 |
|
| Subtotal | 269.2 |
| | 321.7 |
| | 52.5 |
|
| | | | | | |
| Increase (decrease) in cash due to: | | | | | |
| Accounts receivable | (3.4 | ) | | 52.5 |
| | 55.9 |
|
| Inventories | (19.4 | ) | | (29.6 | ) | | (10.2 | ) |
| Accounts payable | (46.8 | ) | | (194.1 | ) | | (147.3 | ) |
| Payroll and related taxes | (26.3 | ) | | (38.2 | ) | | (11.9 | ) |
| Accrued customer programs | 51.8 |
| | 34.4 |
| | (17.4 | ) |
| Accrued liabilities | 52.1 |
| | 108.1 |
| | 56.0 |
|
| Accrued income taxes | 33.1 |
| | (56.8 | ) | | (89.9 | ) |
| Other, net | (18.3 | ) | | 2.9 |
| | 21.2 |
|
| Subtotal | $ | 22.8 |
| | $ | (120.8 | ) | | $ | (143.6 | ) |
| | | | | | |
| Net cash from operating activities | $ | 292.0 |
| | $ | 200.9 |
| | $ | (91.1 | ) |
We generated $200.9 million of cash from operating activities during the six months ended December 31, 2015, a $91.1 million decrease over the comparable prior year period, due primarily to the following:
Changes in accounts payable due primarily to the addition of Omega as well as changes to the Omega accounts payable structure as discussed below; and
| |
• | Changes in accrued income taxes due primarily to a $68.9 million incremental tax payment made in connection with the contested IRS audit (refer to Item 8. Note 14); offset partially by |
Changes in accrued liabilities due primarily to amounts not yet paid related to our defense against Mylan;
Changes in accounts receivable due to timing of receipt of payments;sales and payments received and made.
Increased net earnings after adjusting for non-cash items such as impairment charges, changes in our financial assets, and depreciation and amortization.
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
In addition, our operatingNet cash flow was negatively impacted by $57.7 million in legal and consulting fees related to our defense against Mylan.
Due to the acquisition of Omega on March 30, 2015, our CHCI segment experienced strong operating cash inflow in the second quarter of 2015 and cash outflow in the third quarter of 2015 primarily due to accounts payable payment structures with suppliers that increased the days outstanding in the second and fourth quarter compared to the first and third quarters. In order to establish a more sustainable cash flow pattern during the calendar year, in the fourth quarter of 2015 and continuing into the first quarter of 2016, we implemented a program to standardize these payment terms such that the days outstanding will largely be consistent each reporting period. This program had an unfavorable impact on accounts payable and operating cash flow in these quarters.
(for) from Investing Activities
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
|
| | | | | | | | | | | |
| | Year Ended |
| ($ in millions) | December 31,
2016 | | December 31,
2017 | | Increase/(Decrease) |
| Cash Flows From (For) Investing Activities |
| Proceeds from royalty rights | $ | 353.7 |
| | $ | 87.3 |
| | $ | (266.4 | ) |
| Acquisitions of businesses, net of cash acquired | (427.4 | ) | | (0.4 | ) | | $ | 427.0 |
|
| Asset acquisitions | (65.1 | ) | | — |
| | $ | 65.1 |
|
| Proceeds from sale of securities | 4.5 |
| | — |
| | $ | (4.5 | ) |
| Additions to property, plant and equipment | (106.2 | ) | | (88.6 | ) | | $ | 17.6 |
|
| Net proceeds from sale of business and other assets | 69.1 |
| | 154.6 |
| | $ | 85.5 |
|
Proceeds from sale of the Tysabri® financial asset | — |
| | 2,200.0 |
| | $ | 2,200.0 |
|
| Other investing, net | (3.6 | ) | | (14.8 | ) | | $ | (11.2 | ) |
| Net cash from (for) investing activities | $ | (175.0 | ) | | $ | 2,338.1 |
| | $ | 2,513.1 |
|
Cash generatedThe $1.9 billion increase in cash from investing activities totaled $2.3 billion for the year ended December 31, 2017, compared to cash used of $175.0 million in the prior year. The inflow in the current yearflow was due primarily to the completed divestmentabsence of our Tysabri® financial asset to Royalty Pharma, for which we received $2.2$1.9 billion in cash at closing (refer toItem 8. Note 6). In addition, we received $154.6 million in cash primarily related to the sale of our Israel API business (refer toItem 8. Note 2). The outflowpaid in the prior year was due primarily tofor the acquisitionacquisitions of HRA Pharma and a portfolio of generic dosage forms and strengths of Retin-A® ("Tretinoin"), a topical prescription acne treatment from Mattawan Pharmaceuticals, LLC, and the Generic Benzaclin™ product rights, which used $478.4$16.5 million increase in cash. The outflow was offset partially by proceeds from royalty rights of $353.7 million.
Cash used for capital expenditures totaled $88.6 million during the year ended December 31, 2017 comparedprimarily driven by higher milestone income related to $106.2 million in the prior year. The decrease in cash used for capital expenditures was due primarily to the decrease in the number of manufacturing projectslegacy royalty rights in the current year compared to the prior year.
Capital expenditures for the next twelve months are anticipatedtotaled approximately $101.7 million in 2023. We anticipate 2024 capital expenditures to be between $90.0$130 million and $115.0$180 million, depending on the progression of infant formula plant investments, our Supply Chain Reinvention Program, Project Energize, and project timelines related to manufacturing productivity capacity and quality/regulatory projects.efficiency upgrades, software and technology initiatives, and general plant maintenance. We expect to fund these estimated capital expenditures with funds from operating cash flows.
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
Net cash (for) from Financing Activities
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
|
| | | | | | | | | | | |
| | Year Ended |
| ($ in millions) | December 31,
2015 | | December 31,
2016 | | Increase/ (Decrease) |
| Cash Flows From (For) Investing Activities |
| Proceeds from royalty rights | $ | 335.1 |
| | $ | 353.7 |
| | $ | 18.6 |
|
| Acquisitions of businesses, net of cash acquired | (2,886.4 | ) | | (427.4 | ) | | 2,459.0 |
|
| Asset acquisitions | (4.0 | ) | | (65.1 | ) | | (61.1 | ) |
| Settlement of acquisition-related foreign currency derivatives | (304.8 | ) | | — |
| | 304.8 |
|
| Proceeds from sale of securities | — |
| | 4.5 |
| | 4.5 |
|
| Additions to property, plant and equipment | (166.8 | ) | | (106.2 | ) | | 60.6 |
|
| Proceeds from sale of business | — |
| | 69.1 |
| | 69.1 |
|
| Other investing, net | (2.7 | ) | | (3.6 | ) | | (0.9 | ) |
| Net cash from (for) investing activities | $ | (3,029.6 | ) | | $ | (175.0 | ) | | $ | 2,854.6 |
|
Cash used for investing activities totaled $175.0The $608.8 million for the year ended December 31, 2016, a $2.9 billion decrease over the prior year. The outflow in the year ended December 31, 2016financing cash flow was due primarily to the acquisitions of the Tretinoin Products and the Generic Benzaclin™ product rights, which used $478.4 milliona decrease in cash offset partially by $353.7 million of proceeds$1.6 billion from royalty rights. The outflow in the prior year was due primarily to $2.9 billion used for business acquisitions, most notably Omega, as well as $304.8 millionissuance of our Senior Secured Credit Facilities and related to the cash settlement of the non-designated foreign currency derivatives we used to hedge the euro-denominated Omega and GSK Products purchase prices. See Item 8. Note 2 and Item 8. Note 8 for more information on the above-mentioned acquisitions and derivatives, respectively.
Cash used for capital expenditures totaled $106.2 million during year ended December 31, 2016 compared to $166.8 millionfinancing fees in the prior year. The decreaseWe refinanced a portion of the 3.900% Notes due in capital expenditures over2024 with a $300 million fungible add on to the prior year was due primarily to several large infrastructure projects nearing completion.
Six Months Endedexisting 2022 Term B Loan in December 31, 2015 vs. Six Months Ended December 27, 2014
|
| | | | | | | | | | | |
| | Six Months Ended |
| ($ in millions) | December 27,
2014 | | December 31,
2015 | | Increase / (Decrease) |
| Cash Flows From (For) Investing Activities |
| Proceeds from royalty rights | $ | 175.8 |
| | $ | 166.3 |
| | $ | (9.5 | ) |
| Acquisitions of businesses, net of cash acquired | (83.0 | ) | | (791.6 | ) | | $ | (708.6 | ) |
| Settlement of acquisition-related foreign currency derivatives | (26.4 | ) | | (1.3 | ) | | $ | 25.1 |
|
| Additions to property, plant and equipment | (48.0 | ) | | (77.8 | ) | | $ | (29.8 | ) |
| Other investing, net | 0.8 |
| | (3.7 | ) | | $ | (4.5 | ) |
| Net cash from (for) investing activities | $ | 19.2 |
| | $ | (708.1 | ) | | $ | (727.3 | ) |
Cash used for investing activities totaled $708.1 million for the six months ended December 31, 2015, compared to cash from investing activities of $19.2 million in the prior year period. The cash outflow for the six months ended December 31, 2015 was to complete the Entocort®, GSK and Naturwohl acquisitions, offset partially by proceeds from royalty rights of $166.3 million. During the six months ended December 27, 2014, we used $83.0 million in cash to complete the Lumara products acquisition, and $26.4 million to hedge the euro-denominated Omega purchase price, and received $175.8 million in proceeds from royalty rights2023 (refer to Item 8. Note 212). Long term debt payments and Item 8. Note 8payments for more information on the above-mentioned acquisitions and derivatives, respectively). Capital expenditures for the six months ended December 31, 2015 totaled $77.8debt issuance costs decreased $666.2 million compared to $48.0 million in the comparable prior year period.Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
Financing Activities
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
|
| | | | | | | | | | | |
| | Year Ended |
| ($ in millions) | December 31,
2016 | | December 31,
2017 | | Increase/(Decrease) |
| Cash Flows From (For) Financing Activities |
| Issuances of long-term debt | $ | 1,190.3 |
| | $ | — |
| | $ | (1,190.3 | ) |
| Borrowings (repayments) of revolving credit agreements and other financing, net | (802.5 | ) | | 6.8 |
| | 809.3 |
|
| Payments on long-term debt | (559.2 | ) | | (2,611.0 | ) | | (2,051.8 | ) |
| Deferred financing fees | (2.8 | ) | | (4.8 | ) | | (2.0 | ) |
| Premium on early debt retirement | (0.6 | ) | | (116.1 | ) | | (115.5 | ) |
| Issuance of ordinary shares | 8.3 |
| | 0.7 |
| | (7.6 | ) |
| Equity issuance costs | (10.3 | ) | | — |
| | 10.3 |
|
| Repurchase of ordinary shares | — |
| | (191.5 | ) | | (191.5 | ) |
| Cash dividends | (83.2 | ) | | (91.1 | ) | | (7.9 | ) |
| Other financing, net | (8.7 | ) | | 2.3 |
| | 11.0 |
|
| Net cash for financing activities | $ | (268.7 | ) | | $ | (3,004.7 | ) | | $ | (2,736.0 | ) |
Cash used for financing activities totaled $3.0 billion for the year ended December 31, 2017, compared to $268.7 million of cash used for financing activities for the prior year. In the current year, cash used for financing included $2.6 billion of repayments on long-term debt, $116.1Additionally, we increased our dividend payment by $7.3 million of premium on early debt retirement relatedcompared to the current year debt extinguishment and $191.5 million in share repurchases, as discussed below. In the prior year, the cash used for financing activities was due primarily to borrowings of $1.2 billion of long-term debt, more than offset by net repayments on our revolving credit agreements and other short-term financing of $802.5 million and net repayments on our long-term debt of $559.2 million.
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
|
| | | | | | | | | | | |
| | Year Ended |
| ($ in millions) | December 31,
2015 | | December 31,
2016 | | Increase / (Decrease) |
| Cash Flows From (For) Financing Activities | | | | | |
| Borrowings (repayments) of revolving credit agreements and other financing, net | $ | 666.0 |
| | $ | (802.5 | ) | | $ | (1,468.5 | ) |
| Issuances of long-term debt | — |
| | 1,190.3 |
| | 1,190.3 |
|
| Payments on long-term debt | (917.3 | ) | | (559.2 | ) | | 358.1 |
|
| Premium on early debt retirement | — |
| | (0.6 | ) | | (0.6 | ) |
| Deferred financing fees | (3.6 | ) | | (2.8 | ) | | 0.8 |
|
| Issuance of ordinary shares | 8.9 |
| | 8.3 |
| | (0.6 | ) |
| Equity issuance costs | — |
| | (10.3 | ) | | (10.3 | ) |
| Repurchase of ordinary shares | (500.0 | ) | | — |
| | 500.0 |
|
| Cash dividends | (72.2 | ) | | (83.2 | ) | | (11.0 | ) |
| Other financing, net | (19.0 | ) | | (8.7 | ) | | 10.3 |
|
| Net cash from (for) financing activities | $ | (837.2 | ) | | $ | (268.7 | ) | | $ | 568.5 |
|
Cash used for financing activities totaled $268.7 million for the year ended December 31, 2016, compared to $837.2 million for the prior year. In the year ended December 31, 2016, cash used for financing included $802.5 million to repay balances outstanding under our revolving credit agreements and other short-term financing, $500.0 million used to prepay our 1.300% 2016 Notes, and $59.2 million in scheduled debt payments. These
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
payments were offset by the borrowing of $1.2 billion of long-term debt. In the year ended December 31, 2015, the cash used for financing activities was due primarily to payments of $917.3 million on long-term debt, which included the repayment of debt assumed from Omega and a $300.0 million legacy Perrigo term loan, and $500.0 million used to repurchase shares under our share purchase plan. This was offset by $666.0 million of net borrowings under our revolving credit facilities and other short term borrowings.
Six Months Ended December 31, 2015 vs. Six Months Ended December 27, 2014
|
| | | | | | | | | | | |
| | Six Months Ended |
| ($ in millions) | December 27,
2014 | | December 31,
2015 | | Increase / (Decrease) |
| Cash Flows From (For) Financing Activities |
| Issuances of long-term debt | $ | 2,504.3 |
| | $ | — |
| | $ | (2,504.3 | ) |
| Borrowings (repayments) of revolving credit agreements and other financing, net | (2.1 | ) | | 718.0 |
| | $ | 720.1 |
|
| Payments on long-term debt | (934.5 | ) | | (28.3 | ) | | $ | 906.2 |
|
| Deferred financing fees | (24.8 | ) | | (0.3 | ) | | $ | 24.5 |
|
| Issuance of ordinary shares | 1,039.5 |
| | 4.9 |
| | $ | (1,034.6 | ) |
| Equity issuance costs | (35.7 | ) | | — |
| | $ | 35.7 |
|
| Repurchase of ordinary shares | — |
| | (500.0 | ) | | $ | (500.0 | ) |
| Cash dividends | (29.0 | ) | | (36.3 | ) | | $ | (7.3 | ) |
| Other financing, net | (8.8 | ) | | (8.4 | ) | | $ | 0.4 |
|
| Net cash from financing activities | $ | 2,508.9 |
| | $ | 149.6 |
| | $ | (2,359.3 | ) |
Cash generated from financing activities totaled $149.6 million for the six months ended December 31,
2015, compared to $2.5 billion for the comparable prior year period. The net cash inflow during the six months
ended December 31, 2015 was due to net borrowings under our revolving credit facilities of $680.0 million and net
borrowings under our overdraft facilities and other short term borrowings of $38.0 million, offset partially by $500.0 million used to repurchase shares under our share repurchase plan, $36.3 million in dividend payments, and $28.3 million in scheduled principal payments on our euro-denominated term loan. The cash generated during the six months ended December 27, 2014 was due to financing activities to fund the Omega acquisition. The Omega financing included raising $1.6 billion of debt, net of discount and issuance costs, and issuing 6.8 million ordinary shares, which raised $999.3 million, net of issuance costs. In addition, we refinanced certain of our debt totaling $907.6 million.
Share Repurchases
In October 2015,2018, our Board of Directors authorized up to $1.0 billion of share repurchases with no expiration date, subject to the Board of Directors approved a three-yearDirectors’ approval of the pricing parameters and amount that may be repurchased under each specific share repurchase plan of up to $2.0 billion. During the year ended December 31, 2017, we repurchased 2.7 million ordinary shares at an average repurchase price of $71.72 per share, for a total of $191.5 million.program. We did not repurchase any shares under the share repurchase plan during the year ended December 31, 2016. During the six months ended 2023 or December 31, 2015, we repurchased 3.3 million ordinary2022. The future repurchase of shares, at an average repurchase priceif any, is subject to the discretion of $151.59 per share, for a totalour Board of $500.0 million.Directors.
Dividends
In January 2003, the Board of Directors adopted a policy of paying quarterly dividends. We paid dividends as follows:
| | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2023 | | December 31, 2022 | |
| Dividends paid (in millions) | $ | 149.7 | | | $ | 142.4 | | |
| Dividends paid per share | $ | 1.09 | | | $ | 1.04 | | |
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
|
| | | | | | | | | | | | | | | |
| | Six Months Ended | | Year Ended |
| | December 27,
2014 | | December 31,
2015 | | December 31,
2016 | | December 31,
2017 |
| Dividends paid (in millions) | $ | 29.0 |
| | $ | 36.3 |
| | $ | 83.2 |
| | $ | 91.1 |
|
| Dividends paid per share | $ | 0.21 |
| | $ | 0.25 |
| | $ | 0.58 |
| | $ | 0.64 |
|
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.
Dividends paid were as follows:
|
| | | | | | | | |
| Declaration Date | | Record Date | | Payable | | Dividend Declared |
| | | | | | | |
| Year Ended December 31, 2017 |
| November 2, 2017 | | December 1, 2017 | | December 19, 2017 | | $ | 0.160 |
|
| August 8, 2017 | | August 25, 2017 | | September 12, 2017 | | $ | 0.160 |
|
| May 3, 2017 | | May 26, 2017 | | June 13, 2017 | | $ | 0.160 |
|
| February 21, 2017 | | March 3, 2017 | | March 21, 2016 | | $ | 0.160 |
|
| | | | | | | |
| Year Ended December 31, 2016 |
| November 8, 2016 | | November 25, 2016 | | December 13, 2016 | | $ | 0.145 |
|
| August 2, 2016 | | August 26, 2016 | | September 13, 2016 | | $ | 0.145 |
|
| April 26, 2016 | | May 27, 2016 | | June 14, 2016 | | $ | 0.145 |
|
| February 16, 2016 | | February 26, 2016 | | March 15, 2016 | | $ | 0.145 |
|
| | | | | | | |
| Six Months Ended December 31, 2015 |
| November 4, 2015 | | November 27, 2015 | | December 15, 2015 | | $ | 0.125 |
|
| August 12, 2015 | | August 28, 2015 | | September 15, 2015 | | $ | 0.125 |
|
Borrowings and Capital Resources
On December 15, 2023, we and the Borrower entered into Amendment No. 1, an Incremental Assumption Agreement (the "Amendment") to the Credit Agreement. The Amendment provides for a fungible add on to the 2022 Term B Loans in an aggregate principal amount of $300.0 million (the "Incremental Term B Loans" and together with the 2022 Term B Loans, the “Term B Loans”). The terms of the Incremental Term B Loans, including pricing and maturity, are identical to the 2022 Term B Loans. The Term B Loans will mature on April 20, 2029. The net proceeds from the Incremental Term B Loans were used to settle the cash tender offer by Perrigo Finance for $300.0 million in aggregate principal amount of 3.900% Senior Notes due 2024 ("2024 Notes"). The tender offer was settled on December 15, 2023, and Perrigo Finance accepted for purchase $300.0 million of the 2024 Notes and paid approximately $295.1 million in aggregate cash consideration (excluding accrued interest). Refer to Item 8. Note 12.
Our short term debt as of December 31, 2023 of $440.6 million is comprised of (i) the remaining portion of the 3.900% Senior Notes due 2024, (ii) amortization payments for the Term A Loans and the Term B Loans and (iii) lease payments.
Term Loans and Notes
As of December 31, 2023 and December 31, 2022, we had $1,858.1 million and $1,588.3 million, respectively, outstanding under our Term Loan A Facility and Term Loan B Facility.
Loans under the Credit Agreement bear interest at a rate equal to, at the Borrower’s option and depending on the currency borrowed, either the adjusted Term SOFR Rate, EURIBOR Rate, the prime lending rate or the daily simple RFR rate (each as defined in the Credit Agreement), in each case, plus an applicable margin. Applicable margins and fees are outlined below;
| | | | | | | | | | | | | | | | | |
| Applicable Margins |
| Term SOFR and EURIBOR Rates | | Prime Lending and Daily Simple RFR Rates | | Per Annum Commitment Fee(2) |
Term A Loans(1) | 2.000% - 1.750% | | 1.000% - 0.750% | | — |
Term B Loans(1) | 2.500% - 2.250% | | 1.500% - 1.250% | | — |
Revolver(1) | 2.000% - 1.375% | | 1.000% - 0.375% | | 0.250% - 0.175% |
(1) Applicable margins are dependent upon our total net leverage ratio
(2) Payable on the undrawn amount
The Credit Agreement is guaranteed by us and certain of our wholly-owned subsidiaries organized in the U.S., Ireland, Belgium, England and Wales (subject to certain exceptions) (the “Guarantor Subsidiaries” and together with the Company, the “Guarantors” and together with the Borrower, the "Loan Parties"). 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 Term Loan B Facility, which are due quarterly, are equal to 1.0% per annum (adjusted, in the case of incremental loans, to enable fungibility), with any remaining balance payable on the maturity date. Principal repayments of the Term Loan A Facility, which are due quarterly, began in September 2022 and are equal to (i) for the first year anniversary of the Closing Date (as defined in the Credit Agreement), 2.5% per annum of the original principal amount of the Term Loan A Facility incurred and (ii) after the first year anniversary of the Closing Date, 5.0% per annum of the original principal amount of the Term Loan A Facility
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
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 Revolver and the Term Loan A Facility. 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.
Overdraft Facilities
Leases
We had $202.2 million and $238.6 million of lease liabilities and $197.3 million and $239.1 million of lease assets as of December 31, 2023 and December 31, 2022, respectively.
Available Resources
We have overdraft facilities available that we use to support our cash management operations. We report any balances outstanding in "Other Financing" in Item 8,8. Note 1012. The balance outstanding under the facilities was $6.9 million and $82.9 million at December 31, 2017 and December 31, 2015, respectively, and there were no balances outstanding under the facilities at December 31, 2016.
On March 30, 2015, we assumed and repaid certain overdraft facilities totaling €51.4 million ($56.0 million) with the Omega acquisition.
Accounts Receivable Factoring
We have accounts receivable factoring arrangements with non-related third-party financial institutions (the “Factors”). Pursuant to the terms of the arrangements, we sell to the Factors certain of our accounts receivable balances on a non-recourse basis for credit approved accounts. An administrative fee per invoice is charged on the gross amount of accounts receivables assigned to the Factors, and interest is calculated at the applicable EUR LIBOR rate plus a spread. The total amount factored on a non-recourse basis and excluded from accounts receivable was $27.5 million, $50.7 million, and $64.5 million at December 31, 2017, December 31, 2016 and December 31, 2015, respectively.
Revolving Credit Agreements
On December 9, 2015, our 100% owned finance subsidiary, Perrigo Finance Unlimited Company (formerly Perrigo Finance plc) ("Perrigo Finance"), entered into a $750.0 million revolving credit agreement (the "2015 Revolver"). On March 15, 2016, we used the proceeds of the long-term debt issuance described below under "2016 Notes" to repay the $750.0 million then outstanding under the 2015 Revolver and terminated the facility.
On March 30, 2015, we assumed a revolving credit facility with €500.0 million ($544.5 million) outstanding from Omega. On April 8, 2015, we repaid the €500.0 million ($539.1 million) outstanding under the assumed revolving credit facility and terminated the facility.
On December 5, 2014, Perrigo Finance entered into a $600.0 million revolving credit agreement, which increased to $1.0 billion on March 30, 2015 (the "2014 Revolver"). On March 15, 2016, we used the proceeds of the long-term debt issuance described below under "2016 Notes" to repay the $435.0 million then outstanding under the 2014 Revolver. There were no borrowings outstanding under the 2014 Revolveroverdraft facilities as of December 31, 20172023 and December 31, 2022.
During 2022, we terminated the 2018 Revolver and entered into the 2022 Revolver (the "Revolver"). There were no borrowings outstanding under the Revolver as ofDecember 31, 2023 or December 31, 2016.
Term Loans, Notes2022. We are subject to certain financial covenants in the Revolver and Bonds
We had $2.9 billion, $5.4 billion, and $4.7 billion outstanding under our notes and bonds, and $420.0 million,$420.7 million, and $488.8 million outstanding under our term loan, asCredit Agreement. As of December 31, 2017, December 31, 2016, and December 31, 2015, respectively. On September 29, 2016,2023, we repaid the 1.300% senior notes due 2016 in full.
On March 7, 2016, Perrigo Finance issued $500.0 million in aggregate principal amount of 3.500% senior notes due 2021 and $700.0 million in aggregate principal amount of 4.375% senior notes due 2026 (together, the "2016 Notes") and received net proceeds of $1.2 billion after fees and market discount, which were used to repay the amounts outstanding under the 2015 Revolver and 2014 Revolver mentioned above.
On September 2, 2014, we offered to exchange what were previously private placement senior notes for public bonds registered with the Securities and Exchange Commission. Substantially all of the private placement senior notes have been exchanged.
On December 2, 2014, Perrigo Finance, our 100% owned finance subsidiary, issued $500.0 million in aggregate principal amount of 3.50% senior notes due 2021, $700.0 million in aggregate principal amount of 3.90% senior notes due 2024, and $400.0 million in aggregate principal amount of 4.90% senior notes due 2044 (collectively, the "2014 Bonds").
The 2014 Bonds are fully and unconditionally guaranteed on a senior unsecured basis by Perrigo Company
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
plc, and no other subsidiary of Perrigo Company plc guarantees the 2014 Bonds. We may redeem the 2014 Bonds at any time under the terms of the applicable indenture, subject to the payment of a make-whole premium.
On December 5, 2014, Perrigo Finance entered into a term loan agreement consisting of a €500.0 million ($614.3 million) tranche, with the ability to draw an additional €300.0 million ($368.6 million) tranche, maturing December 5, 2019, and we entered into a $300.0 million term loan tranche maturing December 18, 2015, which we repaid in full on June 25, 2015.
On December 5, 2014, we repaid the remaining $895.0 million outstanding under our 2013 Term Loan described below, then terminated it.
On June 24, 2015, we repaid the $300.0 million portion of the 2014 Term Loan.
On March 30, 2015, we assumed $20.0 million in aggregate principal amount of 6.19% senior notes due 2016 (the "2016 Notes"), €135.0 million ($147.0 million) aggregate principal amount of 5.1045% senior notes due 2023, €300.0 million ($326.7 million) in aggregate principal amount of 5.125% retail bonds due 2017, €180.0 million ($196.0 million) in aggregate principal amount of 4.500% retail bonds due 2017, and €120.0 million ($130.7 million) in aggregate principal amount of 5.000% retail bonds due 2019 (collectively, the "Retail Bonds") in connection with the Omega acquisition.
The fair value of the 2023 Notes and Retail Bondsexceeded par value by €93.6 million($101.9 million) on the date of the acquisition. As a result, a fair value adjustment was recorded as part of the carrying value of the underlying debt and will be amortized as a reduction of interest expense over the remaining terms of the respective debt instruments. The adjustment does not affect cash interest payments.
On May 29, 2015, we repaid the $20.0 million in aggregate principal amount of the 2016 Notes.
Debt Repayments and Related Extinguishment During the Year Ended December 31, 2017
During the year ended December 31, 2017, we reduced our outstanding debt through a variety of transactions (in millions):
|
| | | | | | | | |
| Date | | Series | | Transaction Type | | Principal Retired |
| April 1, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | $ | 13.3 |
|
| May 8, 2017 | | $600.0 2.300% senior notes due 2018 | | Early redemption | | 600.0 |
|
| May 23, 2017 | | €180.0 4.500% retail bonds due 2017 | | Scheduled maturity | | 201.3 |
|
| June 15, 2017 | | $500.0 3.500% senior notes due 2021 | | Tender offer | | 190.4 |
|
| June 15, 2017 | | $500.0 3.500% senior notes due 2021 | | Tender offer | | 219.6 |
|
| June 15, 2017 | | $800.0 4.000% senior notes due 2023 | | Tender offer | | 584.4 |
|
| June 15, 2017 | | $400.0 5.300% senior notes due 2043 | | Tender offer | | 309.5 |
|
| June 15, 2017 | | $400.0 4.900% senior notes due 2044 | | Tender offer | | 96.1 |
|
| July 1, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | 14.3 |
|
| September 30, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | 14.8 |
|
| December 12, 2017 | | €300.0 5.125% senior notes due 2017 | | Scheduled maturity | | 352.3 |
|
| December 31, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | 15.0 |
|
| | | | | | | $ | 2,611.0 |
|
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
As a result of the of the early redemption and tender offer transactions discussed above, we recorded a loss of $135.2 million during the three months ended July 1, 2017 in Loss on extinguishment of debt (in millions):
|
| | | | |
| Premium on debt repayment | | $ | 116.1 |
|
| Transaction costs | | 3.8 |
|
| Write-off of deferred financing fees | | 10.6 |
|
| Write-off of remaining discount on bond | | 4.7 |
|
| Total loss on extinguishment of debt | | $ | 135.2 |
|
We entered into amendments on March 16, 2017 related to the 2014 Revolver and the 2014 Term Loan providing for additional time to deliver certain financial statements, as well as the modification of certain financial and other covenants. We also entered into additional amendments to the 2014 Revolver and the 2014 Term Loan on April 25, 2017 to modify provisions of such agreements necessary as a result of the correction in accounting related to the Tysabri® financial asset, as well as waivers of any default or event of default that may arise from any restatement of or deficiencies in our financial statements for the periods specified in such amendments and waivers. No default or event of default existed prior to entering into these amendments and waivers. We are in compliance with all such covenants under our debt agreements as of December 31, 2017.agreements.
See Item 1. Note 10 for more information on all of the above debt facilities.
Credit Ratings
Our credit ratings onOn December 31, 2017 were Baa32023, our credit rating was Ba2 (negative), BB (stable), and BBB- (stable)BB+ (negative), by Moody's Investors ServiceInvestor Services, S&P Global Ratings, and StandardFitch Ratings Inc., respectively. On March 15, 2023, Moody's downgraded our Corporate Family Rating to Ba2 from Ba1 and Poor's Rating Services, respectively.
senior unsecured notes ratings to Ba3 from Ba2 and the rating outlooks remained negative. Due to the downgrade, the interest of the 3.150% Senior Notes due 2030 stepped up from 4.400% to 4.650% on payments made after June 15, 2023. 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 4.650% Notes due 2030 and the 4.900% Notes due 2044 issued by Perrigo Finance.
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.
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
Basis of Presentation
The following tables include summarized financial information of the obligor groups of debt issued by Perrigo Finance and the Company. 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 with U.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 Perrigo Finance and the Company is presented in the table below:
| | | | | | | | | | | |
| Year Ended |
| (in millions) | December 31, 2023 | | December 31, 2022 |
| Current Assets | $ | 1,999.9 | | | $ | 1,975.7 | |
| Non-current Assets | $ | 4,596.2 | | | $ | 4,819.1 | |
| Current liabilities | $ | 1,888.8 | | | $ | 734.9 | |
| Non-current liabilities | $ | 11,498.4 | | | $ | 11,036.2 | |
| Due to non-guarantors | $ | 7,355.3 | | | $ | 6,346.4 | |
| | | |
| | | |
The summarized results of operations information for the consolidated obligor group of debt issued by Perrigo Finance and the Company is presented in the table below:
| | | | | | | | | | | |
| Year Ended |
| (in millions) | December 31, 2023 | | December 31, 2022 |
| Total Revenues | $ | 3,308.8 | | | $ | 3,273.0 | |
| Gross Profit | $ | 979.2 | | | $ | 858.6 | |
| Operating Income (loss) | $ | 62.1 | | | $ | (36.9) | |
| Net Income (loss) | $ | (10.9) | | | $ | (316.3) | |
| Revenue from non-guarantors | $ | 186.1 | | | $ | 274.7 | |
| Operating Expenses to non-guarantors | $ | (1.1) | | | $ | (0.7) | |
| Other (income) expense to non-guarantors | $ | (97.7) | | | $ | 105.8 | |
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 of December 31, 20172023 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 |
| | 2018 | | 2019-2020 | | 2021-2022 | | After 2022 | | Total |
Short and long-term debt (1) | $ | 198.3 |
| | $ | 746.9 |
| | $ | 791.9 |
| | $ | 2,767.8 |
| | $ | 4,504.9 |
|
| Capital lease obligations | 0.8 |
| | 1.4 |
| | — |
| | — |
| | 2.2 |
|
Purchase obligations (2) | 757.2 |
| | 13.7 |
| | 0.1 |
| | — |
| | 771.0 |
|
Operating leases (3) | 38.1 |
| | 56.2 |
| | 32.3 |
| | 16.6 |
| | 143.2 |
|
| Other contractual liabilities reflected on the consolidated balance sheets: | | | | | | | | | |
Deferred compensation and benefits (4) | — |
| | — |
| | — |
| | 92.1 |
| | 92.1 |
|
Other (5) | 90.0 |
| | 6.6 |
| | 4.9 |
| | 1.5 |
| | 103.0 |
|
| Total | $ | 1,084.4 |
| | $ | 824.8 |
| | $ | 829.2 |
| | $ | 2,878.0 |
| | $ | 5,616.4 |
|
| |
(1)
| Short-term and long-term debt includes interest payments, which were calculated using the effective interest rate at December 31, 2017. |
| |
(2)
| Consists of commitments for both materials and services. |
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payment Due |
| 2024 | | 2025-2026 | | 2027-2028 | | After 2028 | | Total |
Short and long-term debt (1) | $ | 658.3 | | | $ | 1,161.1 | | | $ | 703.8 | | | $ | 2,843.0 | | | $ | 5,366.2 | |
| Finance lease obligations | 2.3 | | | 3.4 | | | 3.1 | | | 8.9 | | | 17.7 | |
Purchase obligations (2) | 355.3 | | | — | | | — | | | — | | | 355.3 | |
Operating leases (3) | 32.6 | | | 53.6 | | | 38.7 | | | 90.7 | | | 215.6 | |
| Other contractual liabilities reflected on the consolidated balance sheets: | | | | | | | | | |
Deferred compensation and benefits (4) | — | | | — | | | — | | | 47.4 | | | 47.4 | |
Other (5) | 51.3 | | | 42.4 | | | 42.4 | | | 21.2 | | | 157.3 | |
| Total | $ | 1,099.8 | | | $ | 1,260.5 | | | $ | 788.0 | | | $ | 3,011.2 | | | $ | 6,159.5 | |
| |
(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 $34.6 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, contingent consideration obligations, restructuring accruals, insurance obligations, and electrical and gas purchase contracts, which were accrued in Other current liabilities and Other non-current liabilities at December 31, 2017 for all years. |
(1)Short-term and long-term debt includes interest payments, which were calculated using the effective interest rate at December 31, 2023.
(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 $37.1 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 at December 31, 2023 for all years.
We fund our U.S. qualified profit-sharing and investment plan in accordance with the Employee Retirement Income Security Act of 1974 regulations for the minimum annual required contribution and Internal Revenue Service regulations for the maximum annual allowable tax deduction. We are committed to making the required minimum contributions, which we expect to be approximately $25.9$39.9 million over the next 12 months. Future contributions are dependent upon various factors, including employees’ eligible compensation, plan participation and changes, if any, to current funding requirements. Therefore, no amounts were included in the Contractual Obligations table above. We generally expect to fund all future contributions with cash flows from operating activities.
As of December 31, 2017,2023, we had approximately $501.7$314.2 million of liabilities for uncertain tax positions.positions, including interest and penalties. These unrecognized tax benefitsliabilities have been excluded from the Contractual Obligations table above, and the related tax benefits have not been recognized, due to uncertainty as to the amounts and timing of settlement with taxing authorities.
Net deferred income tax liabilities were $311.5 million as of December 31, 2017. 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 determinationpreparation of certain amounts in our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions, which affect the usereported earnings, financial position and various disclosures. Critical accounting estimates involve a significant level of estimates.uncertainty and could have a material impact on results. These estimates are based upon our historical experiences combined with management’s understanding of current factson judgment and circumstances. Although the estimates are considered reasonable based on the currently available information, actualinformation. Actual results could differ materially 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.estimates.
Customer-Related Accruals and Allowances
We generally record revenues from product sales when the goods are shipped to the customer. For customers with Free on Board ("FOB") destination terms, a provision is recorded to exclude shipments estimated to be in-transit to these customers at the end of the reporting period. A sales allowance is recorded and accounts receivable are reduced as revenues are recognized for estimated losses on credit sales due to customer claims for discounts, price discrepancies, returned goods, and other items. Revenue is also reduced for any contractual customer program arrangements and related liabilities are recorded concurrently.
We maintain customer-related accruals and allowances that consist primarily of chargebacks, rebates, sales returns, shelf stock allowances, administrative fees, and other incentive programs. Some of these adjustments relate specifically to the RX segment while others relate to the CHCA and CHCI segments. The aggregate gross-to-net adjustments related to RX products can exceed 50% of the segment's gross sales. In contrast, the aggregate gross-to-net adjustments related to CHCA and CHCI typically do not exceed 10% of the segment's gross sales. Certain of these accruals and allowances are recorded on the balance sheet as current liabilities, and others are recorded as a reduction in accounts receivable.
Perrigo Company plc - Item 7
Critical Accounting Estimates
Chargebacks
We market and sell products directly to wholesalers, distributors, warehousing pharmacy chains, and other direct purchasing groups. We also market products indirectly to independent pharmacies, non-warehousing chains, managed care organizations, and group purchasing organizations, collectively referred to as ("indirect customers"). In addition, we enter into agreements with some indirect customers to establish contract pricing for certain products. These indirect customers then independently select a wholesaler from which to purchase the products at these contracted prices. Alternatively, we may pre-authorize wholesalers to offer specified contract pricing to other indirect customers. Under either arrangement, we provide chargeback credit to the wholesaler for any difference between the contracted price with the indirect customer and the wholesaler's invoice price. The accrual for chargebacks is based on historical chargeback experience and confirmed wholesaler inventory levels, as well as estimated sell-through levels by wholesalers to retailers. We regularly assess current pricing dynamics and wholesaler inventory levels to ensure the liability for future chargebacks is fairly stated.
Medicaid Rebates
We participate in certain qualifying U.S. federal and state government programs whereby discounts and rebates are provided to participating government entities. Medicaid rebates are amounts owed based upon contractual agreements or legal requirements with public sector (Medicaid) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. Medicaid reserves are based on expected payments, which are driven by patient usage, contract performance, and field inventory that will be subject to a Medicaid rebate. Medicaid rebates are typically billed up to 180 days after the product is shipped, but can be billed as many as 270 days after the quarter in which the product is dispensed to the Medicaid participant. As a result, our Medicaid rebate provision includes an estimate of outstanding claims for end-customer sales that occurred but for which the related claim has not been billed, and an estimate for future claims that will be made when inventory in the distribution channel is sold through to plan participants. Our calculation also requires other estimates, such as estimates of sales mix, to determine which sales are subject to rebates and the amount of such rebates. Our rebates are reviewed on a monthly basis against actual claims data to ensure the liability is fairly stated.
Returns and Shelf Stock Allowances
Consistent with industry practice, we maintain a return policy that allows our customers to return product within a specified period prior to and subsequent to the expiration date. Generally, product may be returned for a period beginning six months prior to its expiration date to up to one year after its expiration date. The majority of our product returns are the result of product dating, which falls within the range set by our policy, and are settled through the issuance of a credit to the customer. Our estimate of the provision for returns is based upon our historical experience with actual returns, which is applied to the level of sales for the period that corresponds to the period during which our customers may return product. The period is based on the shelf life of the products at the time of shipment. Additionally, when establishing our reserves, we consider factors such as levels of inventory in the distribution channel, product dating and expiration period, size and maturity of the market prior to a product launch, entrance into the market of additional competition, and changes in formulations.
Shelf stock allowances are credits issued to reflect changes in the selling price of a product and are based upon estimates of the amount of product remaining in a customer's inventory at the time of the anticipated price change. In many cases, the customer is contractually entitled to such a credit. The allowances for shelf stock adjustments are based on specified terms with certain customers, estimated launch dates of competing products, and estimated changes in market price.
RX Administrative Fees and Other Rebates
Consistent with pharmaceutical industry practice, rebates or administrative fees are offered to certain wholesale customers, group purchasing organizations, and end-user customers. Settlement of rebates and fees generally may occur from one to 15 months from the date of sale. We provide a provision for rebates at the time of sale based on contracted rates and historical redemption rates. Assumptions used to establish the provision include level of wholesaler inventories, contract sales volumes, and average contract pricing.
Perrigo Company plc - Item 7
Critical Accounting Estimates
CHCA and CHCI Rebates and Other Allowances
In the CHCA and CHCI segments, we offer certain customers a volume incentive rebate if specific levels of product purchases are made during a specified period. The accrual for rebates is based on contractual agreements and estimated levels of purchasing. In addition, we have a reserve for product returns, primarily related to damaged and unsaleable products. We also have agreements with certain customers to cover promotional activities related to our products such as coupon programs, new store allowances, and product displays. The accrual for these activities is based on customer agreements and is established at the time product revenue is recognized.
Allowances for customer-related programs are generally recorded at the time of sale based on the estimates and methodologies described above. We continually monitor product sales provisions and re-evaluate these estimates as additional information becomes available, which includes, among other things, an assessment of current market conditions, trade inventory levels, and customer product mix. We make adjustments to these provisions at the end of each reporting period to reflect any such updates to the relevant facts and circumstances.
The following table summarizes the activity in our customer-related accrual and allowance accounts on the Consolidated Balance Sheets (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Customer-Related Accruals and Allowances |
| | RX | | All Other Segments * | | |
| | Chargebacks | | Medicaid
Rebates | | Returns and Shelf Stock Allowances | | Admin. Fees and Other Rebates | | Rebates and Other Allowances | | Total |
| Balance at June 27, 2015 | $ | 191.4 |
| | $ | 31.6 |
| | $ | 62.1 |
| | $ | 45.3 |
| | $ | 128.8 |
| | $ | 459.2 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | (3.2 | ) | | (3.2 | ) |
| Provisions / Adjustments | 666.3 |
| | 11.7 |
| | 21.3 |
| | 47.8 |
| | 144.3 |
| | 891.4 |
|
| Credits / Payments | (632.7 | ) | | (18.6 | ) | | (20.6 | ) | | (53.1 | ) | | (133.0 | ) | | (858.0 | ) |
| Balance at December 31, 2015 | $ | 225.0 |
| | $ | 24.7 |
| | $ | 62.8 |
| | $ | 40.0 |
| | $ | 136.9 |
| | $ | 489.4 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | (7.5 | ) | | (7.5 | ) |
| Provisions / Adjustments | 1,437.2 |
| | 27.4 |
| | 48.0 |
| | 103.4 |
| | 259.6 |
| | 1,875.6 |
|
| Credits / Payments | (1,445.2 | ) | | (27.5 | ) | | (33.7 | ) | | (108.8 | ) | | (258.0 | ) | | (1,873.2 | ) |
| Balance at December 31, 2016 | $ | 217.0 |
| | $ | 24.6 |
| | $ | 77.1 |
| | $ | 34.6 |
| | $ | 131.0 |
| | $ | 484.3 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | 0.1 |
| | 0.1 |
|
| Provisions / Adjustments | 1,564.3 |
| | 45.1 |
| | 43.7 |
| | 113.8 |
| | 281.2 |
| | 2,048.1 |
|
| Credits / Payments | (1,551.4 | ) | | (32.9 | ) | | (44.6 | ) | | (105.2 | ) | | (286.1 | ) | | (2,020.2 | ) |
| Balance at December 31, 2017 | $ | 229.9 |
| | $ | 36.8 |
| | $ | 76.2 |
| | $ | 43.2 |
| | $ | 126.2 |
| | $ | 512.3 |
|
| |
* | Primarily CHCA and CHCI. |
Revenue Recognition
Revenues from service and royalty arrangements, including revenues from collaborative agreements, consist primarily of royalty payments, payments for research and development services, up-front fees and milestone payments. If an arrangement requires the delivery or performance of multiple deliverables or service elements, we determine whether the individual elements represent "separate units of accounting". If the separate elements meet the requirements, we recognize the revenue associated with each element separately and revenue is allocated among elements based on their relative selling prices. If the elements within a multiple deliverable arrangement are not considered separate units of accounting, the delivery of an individual element is considered not to have occurred if there are undelivered elements that are considered essential to the arrangement. To the extent such arrangements contain refund clauses triggered by non-performance or other adverse circumstances, revenue is not recognized until all contractual obligations are satisfied.
Non-refundable up-front fees are deferred and amortized to revenue over the related performance period. We estimate the performance period based on the specific terms of each collaborative agreement. Revenue
Perrigo Company plc - Item 7
Critical Accounting Estimates
associated with research and development services is recognized on a proportional performance basis over the period that we perform the related activities under the terms of the agreement. Revenue resulting from the achievement of contingent milestone events stipulated in the agreements is recognized when the milestone is achieved. Milestones are based upon the occurrence of a substantive element specified in the contract.
Inventory Reserves
We maintain reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of the inventory and its estimated market value. In estimating the reserves, management considers factors such as excess or slow-moving inventories, product expiration dating, products on quality hold, current and future customer demand, and market conditions. Changes in these conditions may result in additional reserves.
Income Taxes
The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgement is required in determining our worldwide effective tax rate, provision for income taxes and recording the related deferred tax assets and liabilities. Our annual effective tax rate is subject to adjustment overdetermined based on our income, statutory tax rates and the balancetax impacts of the year dueitems treated differently for tax purposes than for financial reporting purposes. Also inherent in determining our annual effective tax rate are judgements and assumptions related 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 valuationrecoverability of ourcertain deferred tax assetsbalances, primarily net operating loss and liabilities;other carryforwards; our ability to uphold certain tax positions; 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 (for example, proposals for fundamental U.S. and international tax reform); changes in U.S. generally accepted accounting principles;GAAP; expiration of or the inability to renew tax rulings or tax holiday incentives; and the repatriation of earnings with respect to which we have not previously provided taxes.
Although There are inherent uncertainties related to the interpretations of tax regulations in the jurisdictions in which we believeoperate and our interpretation of transfer pricing standards. These judgments and estimates made at a point in time may change based on the outcome of tax audits and changes to, or further interpretations of, regulations. If such changes take place, there is a risk that our tax estimatesrate may increase or decrease in any period, which would impact our earnings. Future business results may affect deferred tax liabilities or the valuation of deferred tax assets over time. For the year ended December 31, 2023, we recorded a net increase in valuation allowances of $46.4 million comprised
Perrigo Company plc - Item 7
Critical Accounting Estimates
primarily of additional valuation allowance on certain operating losses being carried forward which are reasonable and that we prepare our tax filings in accordance with all applicable tax laws,no longer realizable.
Additionally, 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, futureFuture period earnings may also be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments. Refer to Item 8. Note 18 for additional details on the Company's income taxes.
Legal Contingencies
We are involved in product liability, patent, commercial, regulatory and other legal proceedings that arise in the normal course of business. WeOther than loss contingencies that are assumed in business combinations for which we can reliably estimate the fair value, 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 evaluate our exposure to loss based on the progress of each contingency, experience in similar contingencies and consultation with our legal counsel and have established reserves for certain of our legal matters (refermatters. We re-evaluate all contingencies as additional information becomes available and adjustments are made to ensure estimates reflect an accurate liability until the contingency in question is ultimately settled. 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. Given the uncertainties inherent in complex litigation and other contingencies, these evaluations can involve significant judgement about future events. The ultimate outcome of any litigation or other contingency may be material to our results of operations, financial condition and cash flows. At December 31, 2023 and 2022, the loss accrual for litigation contingencies reflected on the balance sheet in Other accrued liabilities was $66.9 million and $67.4 million, respectively. Refer to Item 8. Note 1619). We also separately record any insurance recoveries that are probable of occurring. for additional details on the Company's contingencies.
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 net assets acquired is recorded as goodwill. Amounts allocated to acquired In Process Research and Development ("IPR&D") are recognized at fair value and initially characterized as indefinite-lived intangible assets, irrespective of whether the acquired IPR&D has an alternative future use. 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.
The judgments made by managementSignificant judgment is required in determiningestimating the estimated fair value assignedof 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 each class ofbe an indefinite-lived intangible asset acquireduntil the research is completed, at which point it then becomes a definite-lived intangible asset, or is determined to have no future use and liability assumed can materially impact our results of operations. As part of the valuation procedures, we typically consult an independent advisor.is then impaired and charged to expense. There are several methods that can be used to determine the fair value.value of our intangible assets. We typically use an income approach for valuing ourto value the specifically identifiable intangible assets by employing eitherwhich 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 relief from royalty method assumes that, if the acquired company did not own the intangible asset or intellectual property, it would be willing to pay a royalty for its use. The benefit of ownership of the intellectual property is valued as the relief from the royalty
Perrigo Company plc - Item 7
Critical Accounting Estimates
expense that would otherwise be incurred. Typically we use this method for valuing readily transferable intangible assets that have licensing appeal, such as trade namesfair value estimates are based on available historical information and trademarkson future expectations and certain technology assets.
The multi-period excess earnings approach starts with a forecast of the net cash flows expected to be generatedassumptions deemed reasonable by the asset over its estimated useful life. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams.management. We typically use this method for valuingconsult with an independent advisor to assist in the valuation of these intangible assets such as developed product technology, customer relationships, product formulations, and IPR&D.
Some of the more significantassets. Significant estimates and assumptions inherent in one or both of these income approaches include:
the valuations include discount rates, revenue growth assumptions and expected profit margins. We consider marketplace participant assumptions in determining the amount and timing of projected future cash flows adjusted foralong with the probabilitylength of technical and marketing success;
the amount and timing of projected costsour customer relationships, attrition, product or technology life cycles, barriers to develop IPR&D into commercially viable products;
the discount rate selected to measure the risks inherent in the future cash flows;
the estimate of an appropriate market royalty rate; and
an assessment of the asset's life cycleentry and the competitive trends impactingrisk associated with the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry.
We believe the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions; however, unanticipated events and circumstances may occur that may affect the accuracy and validity of such assumptions, estimates or actual results.
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 assets acquiredpurchase accounting. In addition, unanticipated market or macroeconomic events and liabilities assumed withcircumstances may occur that could affect the corresponding offset to goodwill. Upon the conclusionaccuracy or validity of the measurement period or final determinationestimates and assumptions used at the time of the valuesacquisition.
Our assessment as to the useful lives of intangible assets acquiredis based on a number of factors including competitive environment, market share, trademark, brand history, underlying product life cycles, operating plans and the
Perrigo Company plc - Item 7
Critical Accounting Estimates
macroeconomic environment of the countries in which the trademarked or liabilities assumed, whichever comes first, any subsequent adjustmentsbranded products are recorded to our Consolidated Statements of Operations.
sold. Determining the useful life of an intangible asset also requires judgment,judgement, as different types of intangible assets will have different useful lives and certain assetsor may even be considered to have an indefinite useful lives. Useful life is the period over which the intangible asset is expected to contribute directly or indirectly to our future cash flows. We determine the useful lives oflife. Definite-lived intangible assets based on a number of factors, such as legal, regulatory, or contractual provisions that may limit the useful life, and the effects of obsolescence, anticipated demand, existence or absence of competition, and other economic factors onare amortized to expense over their estimated useful life.
Financial Assets
We accounted for the Tysabri® royalty stream as a financial asset and elected to use the fair value option model. We made the election to account for the Tysabri® financial asset using the fair value option as we believed this method was most appropriate for an asset that did not have a par value, a stated interest stream, or a termination date. The change in estimated fair value from investments in royalty rights is presented on our Consolidated Statements of Operations under the caption, "Change in financial assets."
We were entitled to quarterly payments of royalties on Tysabri® sales. We recorded our right to royalty payments from Biogen when earned and when collection was reasonably assured. We recorded the change in fair value of the Tysabri® financial asset in our financial statements each period. Critical estimates in determining the fair value are the underlying revenue assumptions of Tysabri® sales and the discount rates. The revenue assumptions were impacted by product demand and market growth assumptions, inventory target levels, product approval and pricing assumptions. Factors that could cause a change in estimates of future cash flows include a change in estimated market size, entry of a competitive product that would erode market share, manufacturing and approval of a biosimilar equivalent product, a change in pricing strategy or reimbursement coverage, a delay in obtaining regulatory approval, a change in dosage of the product, and a change in the number of treatments.
Perrigo Company plc - Item 7
Critical Accounting Estimates
The Tysabri® financial asset acquired in 2013 as part of the Elan acquisition represented a single unit of accounting. The fair value of the financial asset acquired was determined by using a discounted cash flow analysis related to the expected future cash flows to be generated by the royalty stream from Biogen based on the royalty percentage payments of Tysabri® sales. The financial asset is classified as a Level 3 asset within the fair value hierarchy, as our valuation utilized significant unobservable inputs, including industry analyst estimates for global Tysabri® sales, probability weighted as to the timing and amount of future cash flows along with certain discount rate assumptions. Cash flow forecasts included the estimated effect and timing of future competition, considering patents in effect for Tysabri® through 2024 and contractual rights to receive cash flows into perpetuity. The discounted cash flows are based upon the expected royalty stream forecasted into perpetuity using a 20-year discrete period with a declining rate terminal value. The pre-tax discount rate utilized was 7.72% and 7.83% at December 31, 2015, and June 27, 2015, respectively. Significant judgment is required in selecting appropriate discount rates. At December 31, 2015, and June 27, 2015, we performed an evaluation to assess the discount rate and general market conditions potentially affecting the fair value of our Tysabri® financial asset. As of December 31, 2015, had this discount rate increased or decreased by 0.5%, the fair value of the asset would have increased by $270.0 million or decreased by $260.0 million, respectively. As of June 27, 2015, had this discount rate increased or decreased by 0.5%, the fair value of the asset would have decreased by $260.0 million or increased by $290.0 million, respectively. The estimated fair value of the asset is subject to variation should those cash flows vary significantly from those estimates. Quarterly, we assess the expected future cash flows and to the extent such payments are greater or less than initial estimates, or the timing of such payments is materially different than the original estimates, we will adjust the estimated fair value of the asset. As of December 31, 2015, if the expected royalty cash flows used in the estimation process had increased or decreased by 5.0%, the fair value of the asset would have increased by $270.0 million or decreased by $280.0 million, respectively. As of June 27, 2015, if the expected royalty cash flows used in the estimation process had increased or decreased by 5.0%, the fair value of the asset would have increased by $280.0 million or decreased by $280.0 million, respectively. In November 2016, we announced we were evaluating strategic alternatives for the Tysabri® financial asset. As of December 31, 2016, the financial asset was adjusted based on this strategic review and sale process, see discussion below for additional information on the sale.
The following table summarizes the change in our Consolidated Balance Sheet for the Tysabri® financial asset, which includes our fair value adjustment that is a Level 3 measurement under ASC 820 and is included in our Consolidated Statement of Operations for the years ended December 31, 2017, and December 31, 2016, and the six months ended December 31, 2015 (in millions):
|
| | | | | | | | | | | |
| | Year Ended | | Six Months Ended |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
Tysabri® financial asset | | | | | |
| Beginning balance | $ | 2,350.0 |
| | $ | 5,310.0 |
| | $ | 5,420.0 |
|
| Royalties earned | — |
| | (351.8 | ) | | (167.3 | ) |
| Change in fair value | — |
| | (2,608.2 | ) | | 57.3 |
|
| Divestiture | (2,350.0 | ) | | — |
| | — |
|
| Ending balance | $ | — |
| | $ | 2,350.0 |
| | $ | 5,310.0 |
|
Change in Financial Assets
On March 27, 2017, we announced the completed divestment of our Tysabri® financial asset to Royalty Pharma for up to $2.85 billion, consisting of $2.2 billion in cash and up to $250.0 million and $400.0 million in milestone payments if the royalties on global net sales of Tysabri® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we transferred the entire financial asset to Royalty Pharma and recorded a $17.1 million gain during the three months ended April 1, 2017. We elected to account for the contingent milestone payments using the fair value option method, and these were recorded at an estimated fair value of $134.5 million as of December 31, 2017. We chose the fair value option as we believe it will help investors understand the potential future cash flows we may receive associated with the two contingent milestones.
Perrigo Company plc - Item 7
Critical Accounting Estimates
We valued the contingent milestone payments using a modified Black-Scholes Option Pricing Model ("BSOPM"). Key inputs in the BSOPM are the estimated volatility and rate of return of royalties on global net sales of Tysabri® that are received by Royalty Pharma over time until payment of the contingent milestone payments is completed. Volatility and the estimated fair value of the milestones have a positive relationship such that higher volatility translates to a higher estimated fair value of the contingent milestone payments. In the valuation of contingent milestone payments performed, we assumed volatility of 30.0% and a rate of return of 8.07% as of December 31, 2017. We assess volatility and rate of return inputs quarterly by analyzing certain market volatility benchmarks and the risk associated with Royalty Pharma achieving the underlying projected royalties. During the year ended December 31, 2017, the fair value of the Royalty Pharma contingent milestone payments decreased $42.0 million, as a result of the decrease in the estimated projected Tysabri® revenues due to the launch of Ocrevus® late in the first quarter of 2017.
In addition, payment of the contingent milestone payments is dependent on global net sales of Tysabri®. Of the $134.5 million of estimated fair valued contingent milestone payments as of December 31, 2017, $79.7 million and $54.8 million relates to the 2018 and 2020 contingent milestone payments, respectively. If Tysabri® global net sales do not meet the prescribed threshold in 2018, we will write off the $79.7 million asset as an expense to Change in financial assets on the Consolidated Statement of Operations. If the prescribed threshold is exceeded, we will write up the asset to $250 million and recognize income of $170.3 million in Change in financial assets on the Consolidated Statement of Operations. If Tysabri® global net sales do not meet the prescribed threshold in 2020, we will write off the $54.8 million asset as an expense to Change in financial assets on the Consolidated Statement of Operations. If the prescribed threshold is exceeded, we will write up the asset to $400.0 million and recognize income of $345.2 million in Change in financial assets on the Consolidated Statement of Operations.
Global Tysabri® net sales need to exceed $1.9 billion and $2.0 billion in 2018 and 2020, respectively in order for Royalty Pharma to receive the level of royalties needed to trigger the milestone payments owed to us. Tysabri® net sales are anticipated to decline on a global basis in 2018, compared to 2017, due to increased competition from Ocrevus®, offset by volume growth in Tysabri® international markets (refer to Item 8. Note 6).
The table below presents a reconciliation for the Royalty Pharma contingent milestone payments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in millions). Change in fair value in the table was recorded in Change in financial assets on the Consolidated Statements of Operations.
|
| | | |
| | Year Ended |
| | December 31,
2017 |
| Royalty Pharma Contingent Milestone Payments | |
| Beginning balance | $ | — |
|
| Additions | 184.5 |
|
| Payments | (8.0 | ) |
| Change in fair value | (42.0 | ) |
| Ending balance | $ | 134.5 |
|
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents amounts paid for an acquisition of a business in excess of the fair value of net assets received. We test goodwill for impairment annually, or more frequently if changes in circumstances or the occurrence of events suggest an impairment exists (refer to Item 8. Note 1). Effective in the year ended December 31, 2016, we changed our segment structure. We performed ourperform annual goodwill impairment testing as of October 1, 2017,on the first day of the fourth quarterquarter. As of the year ended December 31, 2017. 2023, we have three reporting units. Our CSCA operating segment is equivalent to our CSCA reporting unit. Our CSCI operating segment includes two reporting units, CSCI and Rare Diseases.
The test for impairment requires us to make several estimates aboutsignificant assumptions that impact our estimate of the fair value most of which are based on projected future cash flowsa reporting unit, including the perpetual growth rate and market valuation multiples. The estimates associated with the goodwill impairment testsdiscount rate. These assumptions are considered critical due to the judgments requiredsensitivity of changes in determiningthese assumptions to the related estimate of fair value amounts, including projected future cash flows that include assumptions about future performance.value. The discount rates used in testing each of our reporting units’ goodwill for impairment as ofduring our annual testing date in the fourth quarter of 2017 arewere based on the weighted average cost of capital determined for each of the Company’sour reporting units and ranged from 7.5% to 13.5%. Perpetual growth rates for each reporting unit ranged from 2.0% to 3.0%. Changes in these estimates may result in the recognition of an impairment loss.
Perrigo Company plc - Item 7
Critical Accounting Estimates
Duringunits. In our annual goodwill testingimpairment test as of October 1, 2017, we determined the fair value of each of2023, discount rates ranged from 10.75% to 12.00%, and perpetual growth rates were 2.50%. In our reporting units exceeded their net book values. The fair values of the BCH, UK AUS, and Animal Health reporting units were each less than 25.0% higher than their respective net book values. As a result, these reporting units are inherently at a higher risk for future impairments if they experience deterioration in business performance or market multiples, or increases in discount rates. These reporting units had the following remaining goodwill balancesannual impairment test as of December 31, 2017:October 2, 2022, discount rates ranged from 10.25% to 11.00%, and perpetual growth rates were 2.50%.
|
| | | | | | | | |
| Reporting Unit | | Goodwill Remaining in Reporting Unit | | Segment | | Fair Value in excess of Carrying Value |
| BCH | | $ | 1,026.0 |
| | CHCI | | 6.6% |
| Animal Health | | $ | 178.9 |
| | CHCA | | 23.6% |
| UK AUS | | $ | 53.1 |
| | CHCI | | 18.3% |
The discounted cash flow forecasts used for theseour reporting units in goodwill impairment testing include assumptions about future activity levels in the near term and longer-term. If growth in theseour reporting units is lower than expected, we may experience deterioration in our cash flow forecasts that may indicate goodwill in theone or more reporting units may beis impaired in future impairment tests. We continue to monitor the progress and assess the reporting units for potential impairment should impairment indicators arise, as applicable, and at least annually during our fourth quarter impairment testing.
Management performed sensitivity analyses on the discounted cash flow valuations that were prepared to estimate the enterprise values of each reporting unit. Discount rates were increased and decreased by increments of 50 basis points, up to cumulative increases and decreases of 150 basis points. Perpetual revenue growth rates were increased and decreased by increments of 50 basis points, up to cumulative increases and decreases of 100 basis points. A summary of the sensitivity analysis results is provided below for the three reporting units for which estimated fair value was less than 25.0% higher than net book value.
BCH
A 50 basis pointAn increase in the discount rate a 100 basis point decrease in the perpetual revenue growth rate, or different combinations thereof, would indicate potential impairment for this reporting unit. Based on the sensitivity of the discount rate assumption on the BCH reporting unit analysis, any increase in the discount rate over the next twelve months could negatively impact the estimated fair value of thisthe reporting unitunits and lead to a future impairment. Certain macroeconomic factors which are not controlled by the reporting unit,units, such as rising inflation or interest rates, could cause an increase in the discount rate to occur. Deterioration in BCH 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 exceeded our carrying amount by less than 10% as of the annual testing date. Therefore, a 25 basis point increase in the discount rate, or a 0 basis point increase in the discount rate combined with a 25 basis point decrease in the perpetual growth rate, would indicate potential impairment for this reporting unit. The CSCI reporting unit's fair value includes material benefits from the Supply Chain Reinvention program and synergies from integrating HRA Pharma, and, as a result, the reporting unit is sensitive to changes in estimates related to the Supply Chain Reinvention Program and the forecasted HRA synergies. Reductions in the net projected benefits could represent a potential indicator of impairment requiring further impairment analysis. For the Rare Diseases reporting unit, the fair value exceeded our carrying amount by less than 10% as of the annual testing date. During the three months ended December 31, 2023, the reporting unit experienced impairment indicators related to market factors that led us to increase discount rates and to lower comparable company multiples. We determined the reporting unit was impaired and recorded an impairment charge of $90.0 million to the unit's goodwill.
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 revenuesrevenue or profitability that has a sustained impact on future periods, could also represent potential indicators of impairment requiring further impairment analysis.
Animal Health
A 100 basis point increase inDuring 2023, we recorded goodwill impairment charges of $90.0 million. We did not record an impairment charge during 2022. We continue to monitor the discount rate combined with a 100 basis point decrease in the perpetual revenue growth rate, or a 150 basis point increase in the discount rate combined with 50 basis point decrease in the perpetual revenue growth rate, would indicateprogress of our reporting units and assess them for potential impairment of this reporting unit. If the expected results for this reporting unit are not achieved, potentialshould impairment indicators of impairment may result, requiring further analysis.
During thearise, as applicable, and at least annually during our fourth quarter of 2017, the Animal Health reporting unit had an indication of potential impairment resulting from the termination of a supply agreement. We prepared an impairment test as of December 31, 2017testing.
See Item 8. Note 9 and determined the fair value of the Animal Health reporting unit continued to exceed net book value, by 8.9%. The 8.9% margin was lower than the excess fair value over carrying value of 23.6% that was estimated as of October 1, 2017. Therefore, while no impairment was recorded in 2017, the supply agreement termination increased the risk of future impairment in this reporting unit. Based on our estimates of fair value and the reported carrying values as of December 31, 2017, a 100 basis point increase in the discount rate, or a 100 basis point decrease in the perpetual revenue growth rate, would indicate potential impairment of this reporting unit. If the expected resultsNote 10 for this reporting unit are not achieved, additional indicators of impairment may result, requiring further analysis.information.
Perrigo Company plc - Item 7
Critical Accounting Estimates
UK AUS
A 150 basis point increase in the discount rate, or a 100 basis point increase in the discount rate combined with a 100 basis point decrease in the perpetual revenue growth rate, would indicate potential impairment of this reporting unit. If the expected results for this reporting unit are not achieved, potential indicators of impairment may result, requiring further analysis.
The sensitivity analyses described above for BCH, UK AUS, and Animal Health, while a useful tool, should not be used as a sole predictor of impairment. A thorough analysis of all the facts and circumstances existing at that time would need to be performed to determine if recording an impairment loss was appropriate.
Certain trade names, trademarks, brands, as well as IPR&D assets, are determined to have an indefinite useful life and are not subject to amortization. We review them for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that any individual asset might be impaired, and adjust the carrying value of the asset as necessary. IPR&D assets are initially recognized at fair value and classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. We recorded the following impairment charges on the Consolidated Statements of Operations (in millions):
|
| | | | | | | | | | | |
| | Year Ended | | Six Months Ended |
| | December 31, 2017 | | December 31,
2016 | | December 31,
2015 |
| Goodwill | $ | — |
| | $ | 1,092.6 |
| | $ | — |
|
| Indefinite-lived intangible assets | $ | — |
| | $ | 849.5 |
| | $ | 185.1 |
|
| IPR&D | $ | 12.7 |
| | $ | 3.5 |
| | $ | — |
|
As of December 31, 2017, the remaining goodwill and indefinite-lived asset balances are $4.2 billion and $90.3 million, respectively (refer to Item 8. Note 3 and Note 6 for additional information regarding goodwill and indefinite-lived intangible asset impairment testing results and assumptions used, respectively).
Definite-Lived Intangible Assets
Definite-lived intangible assets consist of a portfolio of developed product technology/formulation and product rights, distribution and license agreements, customer relationships, non-compete agreements, and certain trademarks, trade names, and brands. The assets are amortized on either a straight-line basis or proportionately to the benefits derived from those relationships or agreements.
For intangible assets subject to amortization, an impairment analysis is performed whenever events or changes in circumstances indicate that the carrying amount of any individual asset may not be recoverable. The carrying amount of an intangible asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is recognized if the carrying amount of the asset is not recoverable and its carrying amount exceeds its fair value. We recorded the following impairment charges on the Consolidated Statements of Operations (in millions):
|
| | | | | | | |
| | Year Ended |
| | December 31, 2017 | | December 31,
2016 |
| Definite-lived Intangible assets | $ | 19.7 |
| | $ | 665.5 |
|
To the extent we experience additional unanticipated competitive market entrants or major adverse macro-economic events, we may incur additional impairment losses (refer to Item 8. Note 3 and Note 6 for a more detailed discussion of the impaired definite-lived intangible assets and assumptions used, respectively).
Perrigo Company plc - Item 7
Critical Accounting Estimates
Guaranteed Liabilities
On November 21, 2017, we completed the sale of our Israel API business, which was previously classified as held-for-sale, to SK Capital (refer to Item 8. Note 2). As a result of the sale, we recognized a guarantee liability. Per the agreement, we will be reimbursed for tax receivables for tax years prior to closing and will need to reimburse SK Capital for the settlement of any uncertain tax liability positions for tax years prior to closing. In addition, after closing and going forward, the Israel API business, will be assessed by and liable to the Israel Tax Authority ("ITA") for any audit findings. We are no longer the primary obligor on the liabilities transferred to SK Capital on November 21, 2017, however, we have provided a guarantee on certain obligations that were recorded at a fair value of $13.8 million, with a maximum possible payout of $34.9 million.Recently Issued Accounting Standards Pronouncements
See Item 8. Note 1 for information regarding recently issued accounting standards.
| |
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
We are a global company with operations primarily throughout North America, Europe, Australia, Mexico,China, and Israel.Australia. We transact business in each location's local currency and in foreign currencies, thereby creating exposures to changes in exchange rates. Our largest exposure is the movement of the U.S. dollar relative to the euro, which has increased due to the Omega acquisition. In addition, our U.S. operations continue to expand their export business, primarily in Canada, China, and Europe, and are subject to fluctuations in the respective exchange rates relative to the U.S. dollar. A large portion of the sales of our Israeli operations is in foreign currencies, primarily U.S. dollars and euros, while these operations largely incur costs in their local currency. Further, a portion of Biogen's global sales of Tysabri® are denominated in local currencies creating exposures to changes in exchange rates relative to the U.S. dollar and thereby impacting the amount of U.S. dollar royalties necessary to achieve our contingent payment thresholds in 2018 and 2020.euro.
Due to different sales and cost structures, certain segments experience a negative impact and certain segments a positive impact as a result of changes in exchange rates. We estimate the translation effect of a ten percent devaluation of the U.S. dollar relative to the other foreign currencies in which we transact business would have increasednot materially affect operating income of our non-U.S.non U.S. operating units by approximately $87.1 million for the year ended December 31, 2017.2023. This sensitivity analysis has inherent limitations. The analysis disregards the possibility that rates of multiple foreign currencies will not always move in the same direction relative to the value of the U.S. dollar over time and does not account for foreign exchange derivatives that we utilize to mitigate fluctuations in exchange rates.
In addition, we enter into certain purchase commitments for materials that, although denominated in U.S. dollars, are linked to foreign currency valuations. These commitments generally contain a range for which the price of materials may fluctuate over time given the value of a foreign currency.
The translation of the assets and liabilities of our non-U.S. dollar denominated operations is made using local currency exchange rates as of the end of the year. Translation adjustments are not included in determining net income but are disclosed in Accumulated Other Comprehensive Income ("AOCI") within shareholders’ equity on the Consolidated Balance Sheets until a sale or substantially complete liquidation of the net investment in the subsidiary takes place. In certain markets, we could recognize a significant gain or loss related to unrealized cumulative translation adjustments if we were to exit the market and liquidate our net investment. As of December 31, 2017,2023, cumulative net currency translation adjustments decreasedincreased shareholders’ equity by $260.6$4.0 million.
We monitor and strive to manage risk related to foreign currency exchange rates. Exposures that cannot be
naturally offset within a local entity to an immaterial amount are often hedged with foreign exchange derivatives or netted with offsetting exposures at other entities (refer to Item 8. Note 8 for further information regarding our derivative and hedging activities).entities. We cannot predict future changes in foreign currency movements and fluctuations that could materially impact earnings. Perrigo Company plc - Item 7A
Interest Rate Risk
We are exposed to interest rate changes primarily as a result of interest income earned on our investment of cash on hand and interest expense on borrowings used to finance acquisitions and other general corporate purposes.
borrowings. We have in the past, and may in the future, enter into certain derivative financial instruments related to the management of interest rate risk, when available on a cost-effective basis (refer to Item 8. Note 8 for further information regarding our derivative and hedging activities).basis. These instruments are managed on a consolidated basis to efficiently net exposures and thus take advantage of any natural offsets. We do not use derivative financial instruments for speculative purposes. Gains and losses on hedging transactions are offset by gains and losses on the underlying exposures being hedged. We do not use derivative financial instruments for speculative purposes. A 1% increase in interest rates would result in approximately $3.6 million of additional annual interest expense in 2024.
Inflation Risk
Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect our operating results. A high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling and administration expenses if the selling prices of our products do not increase with these increased costs. We manage the impact of inflation through pricing and supply chain cost reduction and optimization initiatives. Refer to Item 8. Note 1 and Note 11 for further information regarding our derivative instruments and hedging activities.
Perrigo Company plc - Item 8
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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| INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | PAGE NO. |
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Perrigo Company plc - Item 8
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS
To the Shareholders and the Board of Directors of Perrigo Company plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Perrigo Company plc (the Company) as of December 31, 2017, 20162023 and 2015,2022, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017 and 2016, the period from June 28, 2015 to December 31, 2015, and the fiscal year ended June 27, 2015,2023, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172023 and 2016,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 and 2016, the period from June 28, 2015 to December 31, 2015, and the fiscal year ended June 27, 2015,2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control -– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2018February 27, 2024 expressed an adverseunqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | | | | | | | |
| | Valuation of Goodwill for the CSCI Reporting Unit
|
| Description of the Matter | | At December 31, 2023, goodwill related to the Company’s Consumer Self-Care International segment, including the CSCI reporting unit, was $1,448.2 million. As discussed in Note 1 of the consolidated financial statements, goodwill is not amortized but rather is tested for impairment at least annually at the reporting unit level. The Company’s goodwill is initially assigned to its reporting units as of the acquisition date.
Auditing management’s goodwill impairment test for the CSCI reporting unit was complex due to the significant measurement uncertainty in determining the fair value of the reporting unit. In particular, the fair value estimate was sensitive to significant assumptions such as revenue growth rates, projected margins, and discount rate, which are affected by expected future market or economic conditions.
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Perrigo Company plc - Item 8
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How We Addressed the Matter in Our Audit
| | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment assessment process. For example, we tested controls over the Company’s forecast process as well as controls over management’s review of the significant assumptions discussed above.
To test the fair value of the Company’s CSCI reporting unit, our audit procedures included, among others, assessing methodologies used and testing the significant assumptions discussed above as well as the completeness and accuracy of the underlying data used by the Company. For example, we compared the significant assumptions used by management to current industry and economic trends, changes in the Company’s business model, customer base or product mix and other relevant factors. We performed sensitivity analyses of the significant assumptions to evaluate the change in the fair value of the reporting unit resulting from changes in the assumptions. We also reviewed the reconciliation of the fair value of the reporting units to the market capitalization of the Company and evaluated the implied control premium. We also assessed the historical accuracy of the significant assumptions used by management to determine the fair value of its reporting units. The evaluation of the Company’s methodology and significant assumptions was performed with the assistance of our valuation specialists. |
| | Uncertain Tax Positions
|
| Description of the Matter | | As described in Note 18 to the consolidated financial statements, the Company operates in multiple jurisdictions with complex tax policy and regulatory environments and establishes reserves for uncertain tax positions in accordance with the accounting guidance governing uncertainty in income taxes. Uncertainty in a tax position may arise because tax laws are subject to interpretation. The Company uses significant judgment to (1) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (2) measure the amount of tax benefit that qualifies for recognition. At December 31, 2023, the Company had liabilities of $239.3 million, excluding interest and penalties, relating to uncertain tax positions.
Auditing the measurement of the Company’s uncertain tax positions was challenging because the evaluation of whether a tax position is more likely than not to be sustained and the measurement of the benefit of various tax positions can be complex, involves significant judgment, and is based on interpretations of tax laws and legal rulings.
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| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting process for uncertain tax positions. For example, we tested controls over management’s identification of uncertain tax positions and its application of the recognition and measurement principles for uncertain tax positions.
Our audit procedures included, among others, assessing the Company’s correspondence with the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the Company. To test the Company’s assessment and measurement of uncertain tax positions, we involved our tax professionals to assess whether the uncertain tax positions identified by the Company are more-likely-than-not to be sustained upon audit and, if so, to assist in testing the assumptions made by the Company in measuring the amount of tax benefit that qualifies for recognition. We also used our knowledge of, and experience with, the application of domestic and international income tax laws by the relevant income tax authorities to evaluate the Company’s assessments of whether the uncertain tax position is more-likely-than-not to be sustained and, if so, the potential outcomes that could occur upon an audit by a taxing authority. We tested the completeness and accuracy of the data and calculations used to determine the amount of tax benefit to recognize. We also evaluated the adequacy of the Company’s disclosures to the consolidated financial statements in relation to these matters. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Grand Rapids, Michigan
March 1, 2018February 27, 2024
Perrigo Company plc - Item 8
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Perrigo Company plc is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
All systems of internal control, no matter how well designed, have inherent limitations. Therefore, even those systems deemed to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2023. The framework used in carrying out our evaluation was the 2013 Internal Control - Integrated Framework published by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission. In evaluating our information technology controls, we also used components of the framework contained in the Control Objectives for Information and Related Technology, which was developed by the Information Systems Audit and Control Association’s IT Governance Institute, as a complement to the COSO internal control framework. Management has concluded that our internal control over financial reporting was effective as of December 31, 2023. The results of management’s assessment have been reviewed with our Audit Committee.
Ernst & Young LLP, the independent registered public accounting firm that audited our financial statements included in this Annual Report on Form 10-K, also audited the effectiveness of our internal control over financial reporting, as stated in their report that is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Perrigo Company plc
Opinion on Internal Control Over Financial Reporting
We have audited Perrigo Company plc’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Perrigo Company plc (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and our report dated February 27, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Grand Rapids, Michigan
February 27, 2024
PERRIGO COMPANY PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Net sales | $ | 4,655.6 | | | $ | 4,451.6 | | | $ | 4,138.7 | |
| Cost of sales | 2,975.2 | | | 2,996.2 | | | 2,722.5 | |
| Gross profit | 1,680.4 | | | 1,455.4 | | | 1,416.2 | |
| | | | | |
| Operating expenses | | | | | |
| Distribution | 110.5 | | | 113.0 | | | 93.0 | |
| Research and development | 122.5 | | | 123.1 | | | 122.0 | |
| Selling | 641.8 | | | 584.8 | | | 536.4 | |
| Administration | 522.3 | | | 512.3 | | | 482.0 | |
| Impairment charges | 90.0 | | | — | | | 173.1 | |
| Restructuring | 42.2 | | | 42.5 | | | 16.9 | |
| Other operating (income) expense, net | (0.8) | | | 0.8 | | | (417.6) | |
| Total operating expenses | 1,528.5 | | | 1,376.5 | | | 1,005.8 | |
| | | | | |
| Operating income | 151.9 | | | 78.9 | | | 410.4 | |
| | | | | |
| | | | | |
| Interest expense, net | 173.8 | | | 156.0 | | | 125.0 | |
| Other (income) expense, net | (10.4) | | | 53.1 | | | 26.7 | |
| (Gain) loss on extinguishment of debt | (3.2) | | | 8.9 | | | — | |
| Income (loss) from continuing operations before income taxes | (8.3) | | | (139.1) | | | 258.7 | |
| Income tax (benefit) expense | (3.9) | | | (8.2) | | | 389.6 | |
| Income (loss) from continuing operations | (4.4) | | | (130.9) | | | (130.9) | |
| Income (loss) from discontinued operations, net of tax | (8.3) | | | (9.7) | | | 62.0 | |
| Net income (loss) | $ | (12.7) | | | $ | (140.6) | | | $ | (68.9) | |
| | | | | |
| Earnings (loss) per share | | | | | |
| Basic | | | | | |
| Continuing operations | $ | (0.03) | | | $ | (0.97) | | | $ | (0.98) | |
| Discontinued operations | $ | (0.06) | | | $ | (0.07) | | | $ | 0.46 | |
| Basic earnings (loss) per share | $ | (0.09) | | | $ | (1.04) | | | $ | (0.52) | |
| Diluted | | | | | |
| Continuing operations | $ | (0.03) | | | $ | (0.97) | | | $ | (0.98) | |
| Discontinued operations | $ | (0.06) | | | $ | (0.07) | | | $ | 0.46 | |
| Diluted earnings (loss) per share | $ | (0.09) | | | $ | (1.04) | | | $ | (0.52) | |
| | | | | |
| Weighted-average shares outstanding | | | | | |
| Basic | 135.3 | | | 134.5 | | | 133.6 | |
| Diluted | 135.3 | | | 134.5 | | | 133.6 | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | | | | | |
| | Year Ended | | Six Months Ended | | Year Ended |
| | December 31, 2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| Net sales | $ | 4,946.2 |
| | $ | 5,280.6 |
| | $ | 2,632.2 |
| | $ | 4,227.1 |
|
| Cost of sales | 2,966.7 |
| | 3,228.8 |
| | 1,553.3 |
| | 2,582.9 |
|
| Gross profit | 1,979.5 |
| | 2,051.8 |
| | 1,078.9 |
| | 1,644.2 |
|
| | | | | | | | |
| Operating expenses | | | | | | | |
| Distribution | 87.0 |
| | 88.3 |
| | 47.9 |
| | 67.7 |
|
| Research and development | 167.7 |
| | 184.0 |
| | 88.2 |
| | 187.8 |
|
| Selling | 598.4 |
| | 665.0 |
| | 325.9 |
| | 319.0 |
|
| Administration | 461.1 |
| | 452.2 |
| | 306.8 |
| | 385.3 |
|
| Impairment charges | 47.5 |
| | 2,631.0 |
| | 215.6 |
| | 6.8 |
|
| Restructuring | 61.0 |
| | 31.0 |
| | 26.9 |
| | 5.1 |
|
| Other operating income | (41.4 | ) | | — |
| | — |
| | — |
|
| Total operating expenses | 1,381.3 |
| | 4,051.5 |
| | 1,011.3 |
| | 971.7 |
|
| | | | | | | | |
| Operating income (loss) | 598.2 |
| | (1,999.7 | ) | | 67.6 |
| | 672.5 |
|
| | | | | | | | |
| Change in financial assets | 24.9 |
| | 2,608.2 |
| | (57.3 | ) | | (78.5 | ) |
| Interest expense, net | 168.1 |
| | 216.6 |
| | 89.9 |
| | 146.0 |
|
| Other expense (Income), net | (10.1 | ) | | 22.7 |
| | 25.2 |
| | 334.2 |
|
| Loss on extinguishment of debt | 135.2 |
| | 1.1 |
| | 0.9 |
| | 10.5 |
|
| Income (loss) before income taxes | 280.1 |
| | (4,848.3 | ) | | 8.9 |
| | 260.3 |
|
| Income tax expense (benefit) | 160.5 |
| | (835.5 | ) | | (33.6 | ) | | 124.2 |
|
| Net income (loss) | $ | 119.6 |
| | $ | (4,012.8 | ) | | $ | 42.5 |
| | $ | 136.1 |
|
| | | | | | | | |
| Earnings (loss) per share | | | | | | | |
| Basic | $ | 0.84 |
| | $ | (28.01 | ) | | $ | 0.29 |
| | $ | 0.97 |
|
| Diluted | $ | 0.84 |
| | $ | (28.01 | ) | | $ | 0.29 |
| | $ | 0.97 |
|
| | | | | | | | |
| Weighted-average shares outstanding | | | | | | | |
| Basic | 142.3 |
| | 143.3 |
| | 145.6 |
| | 139.3 |
|
| Diluted | 142.6 |
| | 143.3 |
| | 146.1 |
| | 139.8 |
|
| | | | | | | | |
| Dividends declared per share | $ | 0.64 |
| | $ | 0.58 |
| | $ | 0.25 |
| | $ | 0.46 |
|
See accompanying Notes to Consolidated Financial Statements.
PERRIGO COMPANY PLC
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Assets | | | |
| | | |
| Cash, cash equivalents and restricted cash | $ | 751.3 | | | $ | 600.7 | |
| Accounts receivable, net of allowance for credit losses of $7.8 and $6.8, respectively | 739.6 | | | 697.1 | |
| Inventories | 1,140.9 | | | 1,150.3 | |
| | | |
| Prepaid expenses and other current assets | 201.1 | | | 271.8 | |
| | | |
| Total current assets | 2,832.9 | | | 2,719.9 | |
| Property, plant and equipment, net | 916.4 | | | 926.3 | |
| Operating lease assets | 183.6 | | | 217.1 | |
| Goodwill and indefinite-lived intangible assets | 3,534.4 | | | 3,549.0 | |
| Definite-lived intangible assets, net | 2,980.8 | | | 3,230.2 | |
| Deferred income taxes | 25.8 | | | 7.1 | |
| | | |
| Other non-current assets | 335.2 | | | 367.7 | |
| Total non-current assets | 7,976.2 | | | 8,297.4 | |
| Total assets | $ | 10,809.1 | | | $ | 11,017.3 | |
| Liabilities and Shareholders’ Equity | | | |
| | | |
| Accounts payable | $ | 477.7 | | | $ | 537.3 | |
| Payroll and related taxes | 127.0 | | | 136.4 | |
| Accrued customer programs | 163.5 | | | 139.1 | |
| Other accrued liabilities | 335.4 | | | 250.2 | |
| Accrued income taxes | 42.1 | | | 14.4 | |
| | | |
| Current indebtedness | 440.6 | | | 36.2 | |
| | | |
| Total current liabilities | 1,586.3 | | | 1,113.6 | |
| | | |
| Long-term debt, less current portion | 3,632.8 | | | 4,070.4 | |
| Deferred income taxes | 262.3 | | | 368.2 | |
| Other non-current liabilities | 559.8 | | | 623.0 | |
| | | |
| Total non-current liabilities | 4,454.9 | | | 5,061.6 | |
| Total liabilities | 6,041.2 | | | 6,175.2 | |
| Contingencies - Refer to Note 19 | | | |
| Shareholders’ equity | | | |
| Controlling interests: | | | |
| Preferred shares, $0.0001 par value per share, 10 shares authorized | — | | | — | |
| Ordinary shares, €0.001 par value per share, 10,000 shares authorized | 6,837.5 | | | 6,936.7 | |
| Accumulated other comprehensive income | 10.7 | | | (27.0) | |
| Retained earnings (accumulated deficit) | (2,080.3) | | | (2,067.6) | |
| | | |
| | | |
| Total shareholders’ equity | 4,767.9 | | | 4,842.1 | |
| Total liabilities and shareholders' equity | $ | 10,809.1 | | | $ | 11,017.3 | |
| | | |
| Supplemental Disclosures of Balance Sheet Information | | | |
| Preferred shares, issued and outstanding | — | | | — | |
| Ordinary shares, issued and outstanding | 135.5 | | | 134.7 | |
See accompanying Notes to Consolidated Financial Statements.
Perrigo Company plc - Item 8
PERRIGO COMPANY PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| | | | | |
| Net income (loss) | $ | (12.7) | | | $ | (140.6) | | | $ | (68.9) | |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation adjustments | 54.6 | | | (126.0) | | | (339.9) | |
Change in fair value of derivative financial instruments (1) | (7.4) | | | 46.5 | | | (21.3) | |
| | | | | |
| Change in post-retirement and pension liability | (9.5) | | | 17.0 | | | 1.7 | |
| Other comprehensive income (loss), net of tax | 37.7 | | | (62.5) | | | (359.5) | |
| Comprehensive income (loss) | $ | 25.0 | | | $ | (203.1) | | | $ | (428.4) | |
(1) Net of tax of $(7.2) million, $13.1 million and $(0.7) million, respectively. |
| | | | | | | | | | | | | | | |
| | Year Ended | | Six Months Ended | | Year Ended |
| | December 31, 2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| | | | | | | | |
| Net income (loss) | $ | 119.6 |
| | $ | (4,012.8 | ) | | $ | 42.5 |
| | $ | 136.1 |
|
| Other comprehensive income: | | | | | | | |
| Foreign currency translation adjustments | 328.5 |
| | (63.3 | ) | | (135.5 | ) | | (33.5 | ) |
Change in fair value of derivative financial instruments(1) | 9.7 |
| | (5.3 | ) | | 2.1 |
| | (0.2 | ) |
Change in fair value of investment securities(2) | (14.1 | ) | | 8.7 |
| | 9.3 |
| | (5.3 | ) |
Change in post-retirement and pension liability(3) | 10.8 |
| | (6.6 | ) | | 5.3 |
| | 2.9 |
|
| Other comprehensive income (loss), net of tax | 334.9 |
| | (66.5 | ) | | (118.8 | ) | | (36.1 | ) |
| Comprehensive income (loss) | $ | 454.5 |
| | $ | (4,079.3 | ) | | $ | (76.3 | ) | | $ | 100.0 |
|
| |
(1)
| Includes tax effect of $3.5 million, $2.1 million, $0.4 million and $5.7 million for the years ended December 31, 2017, December 31, 2016, the six months ended December 31, 2015, and the year ended June 27, 2015, respectively. |
| |
(2)
| Includes tax effect of $0.5 million, $4.1 million, $3.6 million and $2.7 million for the years ended December 31, 2017, December 31, 2016, the six months ended December 31, 2015, and the year ended June 27, 2015, respectively. |
| |
(3)
| Includes tax effect of $0.0 million, $2.5 million, $2.8 million and $0.6 million for the years ended December 31, 2017, December 31, 2016, the six months ended December 31, 2015, and the year ended June 27, 2015, respectively. |
See accompanying Notes to Consolidated Financial Statements.
Perrigo Company plc - Item 8
PERRIGO COMPANY PLC
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
|
| | | | | | | | | | | |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Assets | | | | | |
| Cash and cash equivalents | $ | 678.7 |
| | $ | 622.3 |
| | $ | 417.8 |
|
| Accounts receivable, net of allowance for doubtful accounts of $6.2, $6.3 and $4.5, respectively | 1,130.8 |
| | 1,176.0 |
| | 1,189.0 |
|
| Inventories | 806.9 |
| | 795.0 |
| | 898.7 |
|
| Prepaid expenses and other current assets | 203.2 |
| | 212.0 |
| | 286.1 |
|
| Total current assets | 2,819.6 |
| | 2,805.3 |
| | 2,791.6 |
|
| Property, plant and equipment, net | 833.1 |
| | 870.1 |
| | 886.2 |
|
| Financial assets | — |
| | 2,350.0 |
| | 5,310.0 |
|
| Goodwill and other indefinite-lived intangible assets | 4,265.7 |
| | 4,163.9 |
| | 7,069.0 |
|
| Other intangible assets, net | 3,290.5 |
| | 3,396.8 |
| | 2,973.1 |
|
| Non-current deferred income taxes | 10.4 |
| | 72.1 |
| | 71.4 |
|
| Other non-current assets | 409.5 |
| | 211.9 |
| | 248.3 |
|
| Total non-current assets | 8,809.2 |
| | 11,064.8 |
| | 16,558.0 |
|
| Total assets | $ | 11,628.8 |
| | $ | 13,870.1 |
| | $ | 19,349.6 |
|
| Liabilities and Shareholders’ Equity | | | | | |
| Accounts payable | $ | 450.2 |
| | $ | 471.7 |
| | $ | 555.8 |
|
| Payroll and related taxes | 148.8 |
| | 115.8 |
| | 125.3 |
|
| Accrued customer programs | 419.7 |
| | 380.3 |
| | 396.0 |
|
| Accrued liabilities | 230.8 |
| | 263.3 |
| | 351.9 |
|
| Accrued income taxes | 116.1 |
| | 32.4 |
| | 62.7 |
|
| Current indebtedness | 70.4 |
| | 572.8 |
| | 1,060.5 |
|
| Total current liabilities | 1,436.0 |
| | 1,836.3 |
| | 2,552.2 |
|
| Long-term debt, less current portion | 3,270.8 |
| | 5,224.5 |
| | 4,971.6 |
|
| Non-current deferred income taxes | 321.9 |
| | 389.9 |
| | 1,372.7 |
|
| Other non-current liabilities | 429.5 |
| | 461.8 |
| | 346.3 |
|
| Total non-current liabilities | 4,022.2 |
| | 6,076.2 |
| | 6,690.6 |
|
| Total liabilities | 5,458.2 |
| | 7,912.5 |
| | 9,242.8 |
|
| Commitments and contingencies - Note 16 |
| |
| |
|
| Shareholders’ equity | | | | | |
| Controlling interest: | | | | | |
| Preferred shares, $0.0001 par value per share, 10 shares authorized | — |
| | — |
| | — |
|
| Ordinary shares, €0.001 par value per share, 10,000 shares authorized | 7,892.9 |
| | 8,135.0 |
| | 8,142.6 |
|
| Accumulated other comprehensive income (loss) | 253.1 |
| | (81.8 | ) | | (15.3 | ) |
| Retained earnings (accumulated deficit) | (1,975.5 | ) | | (2,095.1 | ) | | 1,980.1 |
|
| Total controlling interest | 6,170.5 |
| | 5,958.1 |
| | 10,107.4 |
|
| Noncontrolling interest | 0.1 |
| | (0.5 | ) | | (0.6 | ) |
| Total shareholders’ equity | 6,170.6 |
| | 5,957.6 |
| | 10,106.8 |
|
| Total liabilities and shareholders' equity | $ | 11,628.8 |
| | $ | 13,870.1 |
| | $ | 19,349.6 |
|
| | | | | | |
| Supplemental Disclosures of Balance Sheet Information | | | | | |
| Preferred shares, issued and outstanding | — |
| | — |
| | — |
|
| Ordinary shares, issued and outstanding | 140.8 |
| | 143.4 |
| | 143.1 |
|
See accompanying Notes to Consolidated Financial Statements.
Perrigo Company plc - Item 8
PERRIGO COMPANY PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | Year Ended | | Six Months Ended | | Year Ended | | Year Ended |
| | December 31,
2017 | | December 31,
2016 |
| December 31,
2015 | | June 27,
2015 | | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Cash Flows From (For) Operating Activities |
| | |
|
| |
|
| Net income (loss) | $ | 119.6 |
| | $ | (4,012.8 | ) |
| $ | 42.5 |
| | $ | 136.1 |
|
| Adjustments to derive cash flows |
| | |
| | |
|
| Net income (loss) | |
| Net income (loss) | |
| Adjustments to derive cash flows: | |
| Depreciation and amortization | 444.8 |
| | 457.0 |
|
| 182.4 |
| | 258.7 |
|
| Loss on acquisition-related foreign currency derivatives | — |
| | — |
| | — |
| | 326.4 |
|
| Depreciation and amortization | |
| Depreciation and amortization | |
| Impairment charges | |
| Share-based compensation | 43.8 |
| | 23.0 |
|
| 22.8 |
| | 31.6 |
|
| Impairment charges | 47.5 |
| | 2,631.0 |
| | 215.6 |
| | 6.8 |
|
| Change in financial assets | 24.9 |
| | 2,608.2 |
| | (57.3 | ) | | (78.5 | ) |
| Loss on extinguishment of debt | 135.2 |
| | 1.1 |
|
| 0.9 |
| | 10.5 |
|
| Restructuring charges | 61.0 |
| | 31.0 |
|
| 26.9 |
| | 5.1 |
|
| Amortization of debt discount (premium) | |
| Loss on sale of business | |
| Foreign currency remeasurement loss | |
| Gain on sale of assets | |
| Deferred income taxes | (48.9 | ) | | (990.9 | ) |
| (120.0 | ) | | (16.3 | ) |
| Amortization of debt premium | (22.4 | ) | | (24.7 | ) | | (10.2 | ) | | 0.2 |
|
| Other non-cash adjustments, net | (2.7 | ) | | 33.5 |
| | 18.1 |
| | 10.2 |
|
| Subtotal | 802.8 |
| | 756.4 |
|
| 321.7 |
| | 690.8 |
|
| Increase (decrease) in cash due to: |
| | |
|
| |
|
| Accounts receivable | 3.2 |
| | (0.6 | ) |
| 52.5 |
| | (51.1 | ) |
| Accounts receivable | |
| Accounts receivable | |
| Inventories | (16.0 | ) | | 100.7 |
|
| (29.6 | ) | | (11.4 | ) |
| Prepaid expenses and other current assets | |
| Accounts payable | (39.6 | ) | | (75.7 | ) |
| (194.1 | ) | | 120.5 |
|
| Payroll and related taxes | (27.4 | ) | | (41.1 | ) |
| (38.2 | ) | | (30.2 | ) |
| Accrued customer programs | 34.6 |
| | (13.9 | ) |
| 34.4 |
| | 71.3 |
|
| Accrued liabilities | (47.8 | ) | | (79.5 | ) |
| 108.1 |
| | 42.8 |
|
| Accrued income taxes | (6.1 | ) | | 20.9 |
|
| (56.8 | ) | | 21.9 |
|
| Other, net | (4.8 | ) | | (12.3 | ) |
| 2.9 |
| | 0.6 |
|
| Other operating, net | |
| Subtotal | (103.9 | ) | | (101.5 | ) |
| (120.8 | ) | | 164.4 |
|
| Net cash from operating activities | 698.9 |
| | 654.9 |
|
| 200.9 |
| | 855.2 |
|
| Cash Flows From (For) Investing Activities |
| | |
|
| |
|
| Proceeds from royalty rights | 87.3 |
| | 353.7 |
| | 166.3 |
| | 344.6 |
|
| Proceeds from royalty rights | |
| Proceeds from royalty rights | |
| Acquisitions of businesses, net of cash acquired | (0.4 | ) | | (427.4 | ) |
| (791.6 | ) | | (2,177.8 | ) |
| Asset acquisitions | — |
| | (65.1 | ) | | — |
| | (4.0 | ) |
| Asset acquisitions (sales), net | |
| Settlement of acquisition-related foreign currency derivatives | — |
| | — |
| | (1.3 | ) | | (329.9 | ) |
| Proceeds from sale of securities | — |
| | 4.5 |
|
| — |
| | — |
|
| Additions to property, plant and equipment | (88.6 | ) | | (106.2 | ) |
| (77.8 | ) | | (137.0 | ) |
| Net proceeds from sale of business and other assets | 154.6 |
| | 69.1 |
|
| — |
| | — |
|
Proceeds from sale of the Tysabri® financial asset | 2,200.0 |
| | — |
| | — |
| | — |
|
| Net proceeds from sale of businesses | |
| Other investing, net | (14.8 | ) | | (3.6 | ) | | (3.7 | ) | | 1.8 |
|
| Net cash from (for) investing activities | 2,338.1 |
| | (175.0 | ) |
| (708.1 | ) | | (2,302.3 | ) |
| Net cash (for) from investing activities | |
| Cash Flows From (For) Financing Activities |
| | |
|
| |
|
| Borrowings (repayments) of revolving credit agreements and other financing, net | 6.8 |
| | (802.5 | ) |
| 718.0 |
| | (54.0 | ) |
| Issuances of long-term debt | |
| Issuances of long-term debt | |
| Issuances of long-term debt | — |
| | 1,190.3 |
|
| — |
| | 2,504.3 |
|
| Payments on long-term debt | (2,611.0 | ) | | (559.2 | ) |
| (28.3 | ) | | (1,823.5 | ) |
| Premium on early debt retirement | (116.1 | ) | | (0.6 | ) |
| — |
| | — |
|
| Deferred financing fees | (4.8 | ) | | (2.8 | ) |
| (0.3 | ) | | (28.1 | ) |
| Issuance of ordinary shares | 0.7 |
| | 8.3 |
|
| 4.9 |
| | 1,043.5 |
|
| Equity issuance costs | — |
| | (10.3 | ) |
| — |
| | (35.7 | ) |
| Repurchase of ordinary shares | (191.5 | ) | | — |
| | (500.0 | ) | | — |
|
| | Premiums on early debt retirement | |
| Premiums on early debt retirement | |
| Premiums on early debt retirement | |
| Payments for debt issuance costs | |
| | Cash dividends | |
| | Cash dividends | |
| | Cash dividends | (91.1 | ) | | (83.2 | ) |
| (36.3 | ) | | (64.8 | ) |
| Other financing, net | 2.3 |
| | (8.7 | ) | | (8.4 | ) | | (19.3 | ) |
| Net cash from (for) financing activities | (3,004.7 | ) | | (268.7 | ) |
| 149.6 |
| | 1,522.4 |
|
| Net cash (for) from financing activities | |
| Effect of exchange rate changes on cash and cash equivalents | 24.1 |
| | (6.7 | ) |
| (10.2 | ) | | (89.2 | ) |
| Net increase (decrease) in cash and cash equivalents | 56.4 |
| | 204.5 |
|
| (367.8 | ) | | (13.9 | ) |
| Cash and cash equivalents, beginning of period | 622.3 |
| | 417.8 |
|
| 785.6 |
| | 799.5 |
|
| Cash and cash equivalents, end of period | $ | 678.7 |
| | $ | 622.3 |
|
| $ | 417.8 |
| | $ | 785.6 |
|
| Cash and cash equivalents of continuing operations, beginning of period | |
| Cash and cash equivalents held for sale, beginning of period | |
| Less cash and cash equivalents held for sale, end of period | |
| Cash, cash equivalents and restricted cash of continuing operations, end of period | |
| | | | | | | | |
Perrigo Company plc - Item 8
| | | | Year Ended | | Six Months Ended | | Year Ended |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| Year Ended | | | Year Ended |
| December 31, 2023 | | | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Supplemental Disclosures of Cash Flow Information | | | | | | | |
| Cash paid/received during the year for: | | | | | | | |
| Cash paid/received during the year for: | |
| Cash paid/received during the year for: | |
| Interest paid | |
| Interest paid | |
| Interest paid | $ | 187.6 |
| | $ | 205.1 |
| | $ | 84.2 |
| | $ | 143.2 |
|
| Interest received | $ | 9.3 |
| | $ | 1.2 |
| | $ | 0.7 |
| | $ | 1.1 |
|
| Income taxes paid | $ | 186.9 |
| | $ | 139.5 |
| | $ | 87.8 |
| | $ | 131.0 |
|
| Income taxes refunded | $ | 3.6 |
| | $ | 9.3 |
| | $ | 1.7 |
| | $ | 9.6 |
|
See accompanying Notes to Consolidated Financial Statements.
Perrigo Company plc - Item 8
PERRIGO COMPANY PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ordinary Shares
Issued | | Accumulated
Other
Comprehensive
Income | | Retained
Earnings
(Accumulated Deficit) | | Total |
| | Shares | | Amount |
| Balance at December 31, 2020 | 133.1 | | | $ | 7,118.2 | | | $ | 395.0 | | | $ | (1,858.1) | | | $ | 5,655.1 | |
| | | | | | | | | |
| Net loss | — | | | — | | | — | | | (68.9) | | | (68.9) | |
| Other comprehensive loss | — | | | — | | | (359.5) | | | — | | | (359.5) | |
| Issuance of ordinary shares under: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Restricted stock plan | 1.0 | | | — | | | — | | | — | | | — | |
| Compensation for stock options | — | | | 0.9 | | | — | | | — | | | 0.9 | |
| Compensation for restricted stock | — | | | 66.9 | | | — | | | — | | | 66.9 | |
| Cash dividends, $0.96 per share | — | | | (129.6) | | | — | | | — | | | (129.6) | |
| | | | | | | | | |
Shares withheld for payment of employees'
withholding tax liability | (0.3) | | | (13.2) | | | — | | | — | | | (13.2) | |
| | | | | | | | | |
| Balance at December 31, 2021 | 133.8 | | | 7,043.2 | | | 35.5 | | | (1,927.0) | | | 5,151.7 | |
| | | | | | | | | |
| | | | | | | | | |
| Net loss | — | | | — | | | — | | | (140.6) | | | (140.6) | |
| Other comprehensive income | — | | | — | | | (62.5) | | | — | | | (62.5) | |
| Issuance of ordinary shares under: | | | | | | | | | |
| | | | | | | | | |
| Restricted stock plan | 1.4 | | | — | | | — | | | — | | | — | |
| | | | | | | | | |
| Compensation for restricted stock | — | | | 54.9 | | | — | | | — | | | 54.9 | |
| Cash dividends, 1.04 per share | — | | | (142.4) | | | — | | | — | | | (142.4) | |
| | | | | | | | | |
Shares withheld for payment of employees'
withholding tax liability | (0.5) | | | (19.0) | | | — | | | — | | | (19.0) | |
| | | | | | | | | |
| | | | | | | | | |
| Balance at December 31, 2022 | 134.7 | | | 6,936.7 | | | (27.0) | | | (2,067.6) | | | 4,842.1 | |
| | | | | | | | | |
| | | | | | | | | |
| Net loss | — | | | — | | | — | | | (12.7) | | | (12.7) | |
| Other comprehensive income | — | | | — | | | 37.7 | | | — | | | 37.7 | |
| Issuance of ordinary shares under: | | | | | | | | | |
| | | | | | | | | |
| Restricted stock plan | 1.3 | | | — | | | — | | | — | | | — | |
| | | | | | | | | |
| Compensation for restricted stock | — | | | 68.8 | | | — | | | — | | | 68.8 | |
| Cash dividends, 1.09 per share | — | | | (149.7) | | | — | | | — | | | (149.7) | |
| | | | | | | | | |
Shares withheld for payment of employees'
withholding tax liability | (0.5) | | | (18.3) | | | — | | | — | | | (18.3) | |
| | | | | | | | | |
| Balance at December 31, 2023 | 135.5 | | | $ | 6,837.5 | | | $ | 10.7 | | | $ | (2,080.3) | | | $ | 4,767.9 | |
|
| | | | | | | | | | | | | | | | | | |
| | Ordinary Shares
Issued | | Accumulated
Other
Comprehensive
Income (Loss) | | Retained
Earnings
(Accumulated Deficit) | | Total |
| | Shares | | Amount | | |
| Balance at June 28, 2014 | 133.8 |
| | $ | 6,678.2 |
| | $ | 139.6 |
| | $ | 1,902.6 |
| | $ | 8,720.4 |
|
| | | | | | | |
|
| | |
| Net income | — |
| | — |
| | — |
| | 136.1 |
| | 136.1 |
|
| Other comprehensive loss | — |
| | — |
| | (36.1 | ) | | — |
| | (36.1 | ) |
| Issuance of ordinary shares under: | | | | | | | | | |
| Equity offering | 6.8 |
| | 1,035.0 |
| | — |
| | — |
| | 1,035.0 |
|
| Omega acquisition | 5.4 |
| | 904.9 |
| | — |
| | — |
| | 904.9 |
|
| Stock options | 0.2 |
| | 8.5 |
| | — |
| | — |
| | 8.5 |
|
| Restricted stock plan | 0.2 |
| | — |
| | — |
| | — |
| | — |
|
| Compensation for stock options | — |
| | 6.9 |
| | — |
| | — |
| | 6.9 |
|
| Compensation for restricted stock | — |
| | 24.7 |
| | — |
| | — |
| | 24.7 |
|
| Cash dividends, $0.46 per share | — |
| | — |
| | — |
| | (64.8 | ) | | (64.8 | ) |
| Tax effect from stock transactions | — |
| | 7.0 |
| | — |
| | — |
| | 7.0 |
|
| Shares withheld for payment of employee's withholding tax liability | (0.1 | ) | | (7.6 | ) | | — |
| | — |
| | (7.6 | ) |
| Equity issuance costs | — |
| | (35.7 | ) | | — |
| | — |
| | (35.7 | ) |
| Balance at June 27, 2015 | 146.3 |
| | 8,621.9 |
| | 103.5 |
| | 1,973.9 |
| | 10,699.3 |
|
|
|
| |
|
| | | | | |
|
|
| Net income | — |
| | — |
| | — |
| | 42.5 |
| | 42.5 |
|
| Other comprehensive loss | — |
| | — |
| | (118.8 | ) | | — |
| | (118.8 | ) |
| Issuance of ordinary shares under: | | | | | | | | | |
| Stock options | 0.1 |
| | 4.9 |
| | — |
| | — |
| | 4.9 |
|
| Restricted stock plan | 0.1 |
| | — |
| | — |
| | — |
| | — |
|
| Compensation for stock options | — |
| | 2.5 |
| | — |
| | — |
| | 2.5 |
|
| Compensation for restricted stock | — |
| | 20.3 |
| | — |
| | — |
| | 20.3 |
|
| Cash dividends, $0.25 per share | — |
| | — |
| | — |
| | (36.3 | ) | | (36.3 | ) |
| Tax effect from stock transactions | — |
| | 3.3 |
| | — |
| | — |
| | 3.3 |
|
| Shares withheld for payment of employee's withholding tax liability | (0.1 | ) | | (10.3 | ) | | — |
| | — |
| | (10.3 | ) |
| Repurchases of ordinary shares | (3.3 | ) |
| (500.0 | ) |
| — |
|
| — |
|
| (500.0 | ) |
| Balance at December 31, 2015 | 143.1 |
| | 8,142.6 |
| | (15.3 | ) | | 1,980.1 |
| | 10,107.4 |
|
| | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | (4,012.8 | ) | | (4,012.8 | ) |
| Other comprehensive loss | — |
| | — |
| | (66.5 | ) | | — |
| | (66.5 | ) |
| Issuance of ordinary shares under: | | | | | | | | | |
| Stock options | 0.2 |
| | 8.3 |
| | — |
| | — |
| | 8.3 |
|
| Restricted stock plan | 0.2 |
| | — |
| | — |
| | — |
| | — |
|
| Compensation for stock options | — |
| | 5.0 |
| | — |
| | — |
| | 5.0 |
|
| Compensation for restricted stock | — |
| | 18.0 |
| | — |
| | — |
| | 18.0 |
|
| Cash dividends, $0.58 per share | — |
| | (20.8 | ) | | — |
| | (62.4 | ) | | (83.2 | ) |
| Tax effect from stock transactions | — |
| | (1.5 | ) | | — |
| | — |
| | (1.5 | ) |
Shares withheld for payment of employee's
withholding tax liability | (0.1 | ) | | (6.3 | ) | | — |
| | — |
| | (6.3 | ) |
| Equity issuance costs | — |
| | (10.3 | ) | | — |
| | — |
| | (10.3 | ) |
| Balance at December 31, 2016 | 143.4 |
| | 8,135.0 |
| | (81.8 | ) | | (2,095.1 | ) | | 5,958.1 |
|
| | | | | | | | | | |
| Net income | — |
| | — |
| | — |
| | 119.6 |
| | 119.6 |
|
| Other comprehensive income | — |
| | — |
| | 334.9 |
| | — |
| | 334.9 |
|
| Stock options | 0.1 |
| | 0.7 |
| | — |
| | — |
| | 0.7 |
|
| Restricted stock plan | 0.1 |
| | — |
| | — |
| | — |
| | — |
|
| Compensation for stock options | — |
| | 8.9 |
| | — |
| | — |
| | 8.9 |
|
Perrigo Company plc - Item 8
|
| | | | | | | | | | | | | | | | | | |
| | Ordinary Shares
Issued | | Accumulated
Other
Comprehensive
Income (Loss) | | Retained
Earnings
(Accumulated Deficit) | | Total |
| | Shares | | Amount | | |
| Compensation for restricted stock | — |
| | 34.9 |
| | — |
| | — |
| | 34.9 |
|
| Cash dividends, $0.64 per share | — |
| | (91.1 | ) | | — |
| | — |
| | (91.1 | ) |
Shares withheld for payment of employee's
withholding tax liability | (0.1 | ) | | (4.0 | ) | | — |
| | — |
| | (4.0 | ) |
| Repurchases of ordinary shares | (2.7 | ) | | (191.5 | ) | | — |
| | — |
| | (191.5 | ) |
| Balance at December 31, 2017 | 140.8 |
| | $ | 7,892.9 |
| | $ | 253.1 |
| | $ | (1,975.5 | ) | | $ | 6,170.5 |
|
See accompanying Notes to Consolidated Financial Statements.
Perrigo Company plc - Item 8
Note 1
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Information
The Company
Perrigo Company plc was incorporated under the laws of Ireland on June 28, 2013 and became the successor registrant of Perrigo Company, a Michigan corporation, on December 18, 2013 in connection with the acquisition of Elan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo," the "Company," "we," "our," "us," and similar pronouns used herein refer to Perrigo Company plc, its subsidiaries, and all predecessors of Perrigo Company plc and its subsidiaries.
We are a leading global healthcare company, delivering value to our customers and consumers by providing Quality Affordable Healthcare Products®. Founded in 1887 as a packager of home remedies, we have built a unique business model that is best described as the convergence of a fast-moving consumer goods company, a high-quality pharmaceutical manufacturing organization and a world-class supply chain network. We believe we are one of the world's largest manufacturers of over-the-counter (“OTC”) healthcare products and suppliers of infant formulas for the store brand market. We are a leading provider of branded OTC products throughout Europe,over-the-counter ("OTC") health and also a leading producer of generic pharmaceutical topical products such as creams, lotions,wellness solutions that are designed to enhance individual well-being and gels, as well as nasal sprays and injection ("extended topical") prescription drugs.empower consumers to proactively prevent or treat conditions that can be self-managed. Our vision is to make lives better by bringing Quality, Affordable Self-Care Products that consumers trust everywhere they are sold. We are headquartered in Ireland and sell our products primarily in North America and Europe as well as in other markets including Australia, Israel and China.around the world.
Basis of Presentation
Our Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include our accounts and accounts of all majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. Our fiscal year previously consisted of a 52- or 53-week year ending on or around June 30 of each year with each quarter ending on the Saturday closest to each calendar quarter end. Beginning on January 1, 2016, we changed our fiscal year to beginbegins on January 1 and endends on December 31 of each year. As a result of our change in year31. We end this report on Form 10-K discloses the results of our operations for:
The twelve-month period from January 1, 2017 through December 31, 2017;
The twelve-month period from January 1, 2016 through December 31, 2016;
The six-month period from June 28, 2015 through December 31, 2015;
The twelve-month period from June 29, 2014 to June 27, 2015; and
The six-month period from June 29, 2014 through December 27, 2014.
We cut off our quarterly accounting periods on the Saturday closest to the end of the calendar quarter, with the fourth quarter ending on December 31 of each year.
Segment Reporting
Our reporting segments are as follows:
Consumer Healthcare Americas("CHCA"),comprises our U.S., Mexico and Canada consumer healthcare business (OTC, contract, infant formula and animal health categories).
Consumer Healthcare International ("CHCI"),comprises our branded consumer healthcare business primarily in Europe and our consumer focused businesses in the U.K., Australia, and Israel. This segment also includes our U.K. liquid licensed products business.
Prescription Pharmaceuticals("RX"),comprises our U.S. Prescription Pharmaceuticals business.
We also had two legacy operating segments, Specialty Sciences and Other, which contained our Tysabri® financial asset and Active Pharmaceuticals business ("API") businesses, respectively, which we divested (refer to Note 2 and Note 6). Following these divestitures, there were no substantial assets or operations left in either of these segments. Effective January 1, 2017, all expenses associated with our former Specialty Sciences segmentPerrigo Company plc - Item 8
Note 1
were moved to unallocated expenses. Our segments reflect the way in which our management makes operating decisions, allocates resources and manages the growth and profitability of the Company.
Principles of Consolidation
The consolidated financial statements include our accounts and accounts of all majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Unconsolidated Variable Interest Entities
We have research and development ("R&D") arrangements with certain biotechnology companies that we determined to be variable interest entities ("VIEs"). We did not consolidate the VIEs in our financial statements becauseas we lack the power to direct the activities that most significantly impact their economic performance and thus are not considered the primary beneficiaries of these entities. These arrangements provide us with certain rights
Segment Reporting
Our reporting and obligations to purchase product candidates fromoperating segments are as follows:
•Consumer Self-Care Americas ("CSCA") comprises our consumer self-care business in the VIEs, dependent upon the outcomeU.S. and Canada. CSCA previously included our Latin American businesses until they were disposed on March 9, 2022.
•Consumer Self-Care International ("CSCI") comprises our consumer self-care business outside of the development activities.U.S. and Canada, primarily in Europe and Australia.
We previously had an Rx segment which was comprised of our generic prescription pharmaceuticals business in the U.S., and other pharmaceuticals and diagnostic business in Israel, which have been divested. Following the divestiture, there were no substantial assets or operations left in this segment. The Rx segment was reported as Discontinued Operations in 2021 and is presented as such for all periods in this report (refer to Note 4).
Our segments reflect the way in which our chief operating decision maker, who is our CEO, makes operating decisions, allocates resources and manages the growth and profitability of the Company. Financial information related to our business segments and geographic locations can be found in Note 2 and Note 20.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP")GAAP requires management to make estimates and assumptions, which affect the reported earnings, financial position and various disclosures. Although theThese estimates are considered reasonable, actualbased on judgment and available information. Actual results could differ materially from the estimates.
Perrigo Company plc - Item 8
Note 1
Foreign Currency Translation and Transactions
We translate our non-U.S. dollar-denominated operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in the cumulative translation account, a component of Accumulated Other Comprehensive Incomeother comprehensive income (loss) ("AOCI"). Gains or losses from foreign currency transactions are included in Other (income) expense, net.
Revenues
We generally record revenues from product sales when the goods are shipped to the customer. For customers with Free on Board destination terms, a provision is recorded to exclude shipments estimated to be in-transit to these customers at the end of the reporting period. A sales allowance is recorded and accounts receivable are reduced as revenues are recognized for estimated losses on credit sales due to customer claims for discounts, price discrepancies, returned goods and other items. Revenue is also reduced for any contractual customer program arrangements and related liabilities are recorded concurrently.
We maintain customer-related accruals and allowances that consist primarily of chargebacks, rebates, sales returns, shelf stock allowances, administrative fees and other incentive programs. Some of these adjustments relate specifically to the RX segment while others relate only to the CHCA and CHCI segments. Certain of these accruals and allowances are recorded in the balance sheet as current liabilities and others are recorded as a reduction in accounts receivable. Changes in these estimates and assumptions related to customer programs may result in additional accruals or allowances. Customer-related accruals and allowances were $512.3 million,
$484.3 million, and $489.4 million at December 31, 2017, December 31, 2016, and December 31, 2015, respectively.
Revenues from service and royalty arrangements, including revenues from collaborative agreements, consist primarily of royalty payments, payments for R&D services, up-front fees and milestone payments. If an arrangement requires the delivery or performance of multiple deliverables or service elements, we determine whether the individual elements represent separate units of accounting. If the separate elements represent separate units of accounting, we recognize the revenue associated with each element separately and revenue is allocated among elements based on their relative selling prices. If the elements within a multiple deliverable arrangement are
Perrigo Company plc - Item 8
Note 1
not considered separate units of accounting, the delivery of an individual element is considered not to have occurred if there are undelivered elements that are considered essential to the arrangement.
To the extent such arrangements contain refund clauses triggered by non-performance or other adverse circumstances, revenue is not recognized until all contractual obligations are satisfied. Non-refundable up-front fees are deferred and amortized to revenue over the related performance period. We estimate the performance period based on the specific terms of each collaborative agreement. Revenue associated with R&D services is recognized on a proportional performance basis over the period that we perform the related activities under the terms of the agreement. Revenue resulting from the achievement of contingent milestone events stipulated in the agreements is recognized when the milestone is achieved. Milestones are based upon the occurrence of a substantive element specified in the contract.
Shipping and handling costs billed to customers are included in net sales. Conversely, shipping and handling expenses we incur are included in cost of sales.
Cash, and Cash Equivalents and Restricted Cash
Cash and cash equivalents consist primarily of demand deposits and other short-term investments with maturities of three months or less at the date of purchase. The carrying amount of cash and cash equivalents approximates its fair value.
Accounts Receivable
We maintainhave $7.0 million of restricted cash as of December 31, 2023 in the Consolidated Balance Sheets. We entered into an agreement to extend a credit line to an existing customer in exchange for a cash security deposit. The agreement requires the cash to be held in a separate account and will be returned to the customer at the expiration of the agreement provided all credits have been paid as agreed.
Allowance for Credit Losses
Expected credit losses on trade receivables and contract assets are measured collectively by geographic location. Historical credit loss experience provides the primary basis for estimation of expected credit losses and is adjusted for current conditions and for reasonable and supportable forecasts. Receivables that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. The following table presents the allowance for doubtful accounts that reduces ourcredit losses activity (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Balance at beginning of period | | | $ | 6.8 | | | $ | 7.2 | | | $ | 6.5 | |
| Provision for credit losses, net | | | 1.1 | | | 3.2 | | | 4.0 | |
| Receivables written-off | | | (0.6) | | | (4.0) | | | (0.7) | |
| Recoveries collected | | | 0.3 | | | — | | | — | |
| Transfer to held for sale | | | — | | | — | | | (1.4) | |
| Currency translation adjustment | | | 0.2 | | | 0.4 | | | (1.2) | |
| Balance at end of period | | | $ | 7.8 | | | $ | 6.8 | | | $ | 7.2 | |
Trade receivables to amounts thatand contract assets are expected to be collected. In estimating the allowance, management considers factors such as current overall and industry-specific economic conditions, statutory requirements, historical and anticipated customer performance, historical experience with write-offs and the level of past-due amounts. Changes in these conditions may result in additional allowances. After all attempts to collect a receivable have failed, the receivable is writtencharged off against the allowance.
In addition, included in our accounts receivableallowance when the balance is $84.4 million and $83.4 million related to our Tysabri® financial asset at December 31, 2016 and December 31, 2015, respectively, for amounts earned that have not yet been received.no longer deemed collectible.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determinedvalue using the first-in first-out method. Costs include material and conversion costs. Inventory related to research and development ("R&D&D") is expensed at the point when it is determined the materials have no alternative future use.
We maintain reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of the inventory and its estimated net realizable value. In estimatingFactors utilized in the reserves, management considers factors such asdetermination of net realizable value include excess or slow-moving inventories, product expiration dating, products on quality hold, current and future customer demand and market conditions. Changes in these conditions may result in additional reserves (refer to Note 5). Investments
Available for Sale Investments
We determine the appropriate classification of securities as held-to-maturity, available-for-sale, or trading. The classification depends on the purpose for which the financial assets were acquired. Marketable equity securities are classified as available-for-sale. These securities are carried at fair value with unrealized gains and losses included in AOCI. The assessment for impairment of marketable securities classified as available-for-sale is based on established financial methodologies, including quoted market prices for publicly traded securities. If we determine that a loss in the value of an investment is other than temporary, the investment is written down to its estimated fair value. Any such losses are recorded in Other expense, net (refer to Note 7).
Perrigo Company plc - Item 8
Note 1
Cost Method Investments
Non-marketable equity securities are carried at cost, less any write down for impairments, and are adjusted for impairment based on methodologies, an assessment of the impact of general private equity market conditions, and discounted projected future cash flows. Non-marketable equity securities are recorded in Other non-current assets (refer to Note 7).
Equity Method Investments
The equity method of accounting is used for unconsolidated entities over which we have significant influence; generally, this represents ownership interests of at least 20% and not more than 50%. Under the equity method of accounting, we record the investments at carrying value and adjust for a proportionate share of the profits and losses of these entities each period. We evaluate our equity method investments for recoverability. If we determine that a loss in the value of an investment is other than temporary, the investment is written down to its estimated fair value. Any such losses are recorded in Other expense, net. Evaluations of recoverability are based primarily on projected cash flows. Due
Perrigo Company plc - Item 8
Note 1
Fair Value Method Investments
Equity investments in which we own less than a 20% interest and cannot exert significant influence are recorded at fair value with unrealized gains and losses included in net income. For equity investments without readily determinable fair values, we may use the Net Asset Value ("NAV") per share as a practical expedient to
uncertainties inmeasure the
estimation process, actual results could differ from such estimates. Equityfair value, if eligible. If the NAV practical expedient cannot be applied, we may elect to use a measurement alternative until the investment’s fair value becomes readily determinable. Under the alternative method,
the equity investments are
recordedaccounted for at cost, less any impairment, plus or minus changes resulting from observable price changes in
Other non-current assets (refer to Note 7).an orderly transaction for an identical or similar investment of the same issuer.
Derivative Instruments
We recognize the entire change in the fair value of the derivatives designated as:
•Cash flow hedges in Other Comprehensive Income ("OCI"). The amounts recorded in OCI are reclassified to earnings in the same line item on the Consolidated Statements of Operations as impacted by the hedged item when the hedged item affects earnings;
•Fair value hedges in the same line item on the Consolidated Statements of Operations that is used to present the earnings effect of the hedged item; and
•Net investment hedges in OCI classified as a currency translation adjustment. The amounts recorded in OCI are reclassified to earnings when the net investment in foreign operations is sold or substantially liquidated.
We exclude option premiums, forward points, and cross-currency basis spread from our assessment of hedge effectiveness, as allowable excluded components from certain of our cash flow and net investment hedges. We have elected to recognize the initial value of the excluded component on a straight-line basis over the life of the derivative instrument, within the same line item on the Consolidated Statements of Operations that is used to present the earnings effect of the hedged item.
We record derivative instruments on the balance sheet on a gross basis as either an asset or liability measured at fair value (refer to Note 810). Additionally, changesChanges in a derivative's fair value which are measured at the end of each period and are recognized in earnings unless specifica derivative can be designated in a qualifying hedging relationship. All realized and unrealized gains and losses are included within operating activities in the Consolidated Statements of Cash Flows.
Designated derivatives meet hedge accounting criteria, are met. If hedge accounting criteria are met for cash flow hedges,which means the changes in a derivative’s fair value areof the hedge is recorded in shareholders’ equity as a component of other comprehensive income ("OCI"),OCI, net of tax. TheseThe deferred gains and losses are recognized in income in the period in which the hedged item and hedging instrument affectaffects earnings. Any ineffective portionAll of our designated derivatives are assessed for hedge effectiveness quarterly.
We also have economic non-designated derivatives that we have not elected hedge accounting. These derivative instruments are adjusted to current market value at the change in fair value is immediately recognized inend of each period through earnings. Gains or losses on these instruments are offset substantially by the remeasurement adjustment on the related hedged item.
We are exposed to credit loss in the event of nonperformance by the counterparties on derivative contracts. It is our policy toWe manage our credit risk on these transactions by dealing only with financial institutions having athat have short-term credit ratings of at least A-2/P-2 and long-term credit ratingratings of "A" or betterat least A-/A3, and by distributing the contracts among several financial institutions to diversify credit concentration risk. Should a counterparty default, our maximum exposure to loss is the asset balance of the instrument. The maximum term of our forward currency exchange contracts is 1860 months.
We enter into certain derivative financial instruments, when available on a cost-effective basis, to mitigate our risk associated with changes in interest rates and foreign currency exchange rates as follows:
Interest rate risk management - We are exposed to the impact of interest rate changes through our cash investments and borrowings. We utilize a variety of strategies to manage the impact of changes in interest rates including using a mix of debt maturities along with both fixed-rate and variable-rate debt. In addition, we may enter into treasury-lock agreements and interest rate swap agreements on certain investing and borrowing transactions to manage our exposure to interest rate changes and our overall cost of borrowing.
Perrigo Company plc - Item 8
Note 1
Foreign currency exchange risk management - We conduct business in several major currencies other than the U.S. dollar and are subject to risks associated with changing foreign exchange rates. Our objective is to reduce cash flow volatility associated with foreign exchange rate changes on a consolidated basis to allow management to focus its attention on business operations. Accordingly, we enter into various contracts that change in value as foreign exchange rates change to protect the value of existing foreign currency assets and liabilities, commitments, anticipated foreign currency sales and expenses, and net investments in foreign operations.
All derivative instruments are managed on a consolidated basis to efficiently net exposures and thus, take advantage of any natural offsets. Gains and losses related to the derivative instruments are expected to be offset largely by gains and losses on the original underlying asset or liability. We do not use derivative financial instruments for speculative purposes.
The impact of gains and losses on foreign exchange contracts not designated as hedging instruments related to changes in the fair value of assets and liabilities denominated in foreign currencies are generally offset by net foreign exchange gains and losses, which are also included on the Consolidated Statements of Operations in Other (income) expense, net for all periods presented. When we enter into foreign exchange contracts not designated as hedging instruments to mitigate the impact of exchange rate volatility in the translation of foreign earnings, gains and losses will generally be offset by fluctuations in the U.S. dollar-translated amounts of each Income Statement account in current and/or future periods.
For more information on our derivatives, refer to Note 11.
Property, Plant and Equipment, net
Property, plant and equipment, net areis recorded at cost and areis depreciated using the straight-line method. Useful lives for financial reporting range from 3 to 20 years forWe capitalize certain computer software and development costs, included in machinery and equipment, and 10 to 45 yearswhen incurred in connection with developing or obtaining computer software for buildings.internal use. Maintenance and repair costs are charged to earnings, while expenditures that increase asset lives are capitalized. Depreciation
Leases
Lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. We evaluate arrangements at inception to determine if lease components are included. For new leases beginning January 1, 2019 or later, we have elected not to separate lease components from the non-lease components included in an arrangement when measuring the leased asset and leased liability for all asset classes.
Lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense includes amortizationfor leases on a straight-line basis over the lease term. We apply the portfolio approach to certain groups of computer equipment and vehicle leases when the term, classification, and asset type are identical. The discount rate selected is the incremental borrowing rate we would obtain for a secured financing of the lease asset over a similar term.
Many of our leases include one or more options to extend the lease term. Certain leases also include options to terminate early or purchase the leased property, all of which are executed at our sole discretion. Optional periods may be included in the lease term and measured as part of the lease asset and lease liability if we are reasonably certain to exercise our right to use the leased asset during the optional periods. We generally consider renewal options to be reasonably certain of execution and included in the lease term when significant leasehold improvements have been made by us to the leased assets. The depreciable lives of assets recorded under capitaland leasehold improvements are limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise.
Certain of our lease agreements include contingent rental payments based on per unit usage over contractual levels (e.g., miles driven or machine hours used) and others include rental payments adjusted periodically for market reviews or inflationary indexes. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. For more information on our leases, and totaled $95.2 million, $100.2 million, $53.8 million, and$84.3 million, for the years ended December 31, 2017andDecember 31, 2016, the six months endedDecember 31, 2015, and the year ended June 27, 2015, respectively.refer to Note 8.
We held the following property, plant and equipment, net (in millions):
|
| | | | | | | | | | | |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Land | $ | 45.5 |
| | $ | 45.0 |
| | $ | 47.5 |
|
| Buildings | 514.3 |
| | 520.2 |
| | 508.2 |
|
| Machinery and equipment | 1,078.6 |
| | 1,094.7 |
| | 1,103.3 |
|
| Gross property, plant and equipment | 1,638.4 |
| | 1,659.9 |
| | 1,659.0 |
|
| Less accumulated depreciation | (805.3 | ) | | (789.8 | ) | | (772.8 | ) |
| Property, plant and equipment, net | $ | 833.1 |
| | $ | 870.1 |
| | $ | 886.2 |
|
Perrigo Company plc - Item 8
Note 1
Financial Assets
Prior to its divestiture on March 27, 2017, we accounted for the Tysabri® royalty stream as a financial asset and have elected to use the fair value option model (refer to Note 6). We made the election to account for the Tysabri® financial asset using the fair value option as we believe this method is most appropriate for an asset that does not have a par value, a stated interest stream, or a termination date. The fair value of the Tysabri® financial asset is determined by using a discounted cash flow analysis related to the expected future cash flows to be received. This asset is classified as Level 3 assets within the fair value hierarchy, as our valuation estimates utilize significant unobservable inputs, including estimates as to the probability and timing of future sales of the related products. Critical estimates in determining the fair value are the underlying revenue assumptions of Tysabri® sales and the discount rates. The revenue assumptions are impacted by product demand and market growth assumptions, inventory target levels, product approval, currency movements and pricing assumptions. Factors that could cause a change in estimates of future cash flows include a change in estimated market size, entry of a competitive product that would erode market share, manufacturing and approval of a biosimilar equivalent product, a change in pricing strategy or reimbursement coverage, a delay in obtaining regulatory approval, a change in dosage of the product, or a change in the number of treatments.
Goodwill and Intangible Assets
Goodwill
Goodwill represents amounts paid for an acquisition in excess of the fair value of net assets received.acquired. Goodwill is not amortized but rather is tested for impairment annually on the first day of our fourth quarter, or more frequently if changes in circumstances or the occurrence of events suggest an impairment exists.
The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows and market valuation multiples. The estimates associated with the goodwill impairment tests are considered critical due to the judgments required in determining fair value amounts, includinginclude projected discounted future cash flows. Changes in these estimates may result in the recognition of anWe have three reporting units that are evaluated for impairment loss. Our annual impairment tests were performed as of October 1, 2017, October 2, 2016, September 27, 2015, and March 29, 2015, for the years ended December 31, 2017 and December 31, 2016, the six months ended December 31, 2015, and the year endedJune 27, 2015, respectively.2023.
Intangible Assets
We have intangible assets that we have acquired through various business acquisitions and include trademarks, trade names and brands, in-process research and development ("IPR&D"), developed product technology/formulation and product rights, distribution and license agreements, customer relationships and distribution networks, and non-compete agreements. The assets are typically valued initially valued using one of the following valuation methods:
Reliefrelief from royalty method: This method assumes that if or the acquired company did not own the intangible asset or intellectual property, it would be willing to pay a royalty for its use. The benefit of ownership of the intellectual property is valued as the relief from the royalty expense that would otherwise be incurred. We typically use this method for valuing readily transferable intangible assets that have licensing appeal, such as trade names and trademarks and certain technology assets.
Multi-periodmulti-period excess earnings method: This method starts with a forecast of the net cash flows expected to be generated by the asset over its estimated useful life. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. We typically use this method for valuing intangible assets such as developed product technology, customer relationships, product formulations and IPR&D.
Lost income method: This method estimates the fair value of an asset by comparing the value of the business, inclusive of the asset, to the hypothetical value of the same business excluding the asset.
Perrigo Company plc - Item 8
Note 1
Indefinite-lived intangible assets include IPR&D and certain trademarks, trade names, and brands. IPR&D assets are recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. If the associated research and development is completed, the IPR&D asset becomes a definite-lived intangible asset and is amortized over the asset's assigned useful life. If it is abandoned, an impairment loss is recorded.
("MPEEM"). We test indefinite-lived trademarks, trade names, and brands for impairment quarterly,annually, or more frequently if changes in circumstances or the occurrence of events suggest impairment exists, by comparing the carrying value of the assets to their estimated fair values. An impairment loss is recognized if the carrying amount of the asset is not recoverable and its carrying amount exceeds its fair value.
Definite-lived intangible assets consist of a portfolio of developed product technology/formulation and product rights, distribution and license agreements, customer relationships, non-compete agreements, and certain trademarks, trade names, and brands. The assets are amortized on either a straight-line basis or proportionately to the benefits derived from those relationships or agreements. Useful lives vary by asset type and are determined based on the period over which the intangible asset is expected to contribute directly or indirectly to our future cash flows. We also review all other long-lived assets that have finite lives and that are not held for sale for impairment when indicators of impairment are evident by comparing the carrying value of the assets to their estimated future undiscounted cash flows.
In-process research and development ("IPR&D") assets are recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated R&D efforts. If the associated R&D is completed, the IPR&D asset becomes a definite-lived intangible asset and is amortized over the asset's assigned useful life. If it is abandoned, an impairment loss is recorded.
Goodwill, indefinite-lived intangible asset, and definite-lived intangible asset impairments are recorded in Impairment charges on the Consolidated Statement of Operations. See Note 39 for further information on our goodwill and intangible assets.
Assets Held for Sale
We classify assets as "held for sale" when management approves and commits to a formal plan of sale with the expectation the sale will be completed within one year. The net assets of the business held for sale are then recorded at the lower of their current carrying value and the fair market value, less costs to sell (refer to Note 9).Deferred Financing Fees
We record deferred financing fees as a reduction of long-term debt.
Share-Based Awards
We measure and record compensation expense for all share-based awards based on estimated grant date fair values, and net of any estimated forfeitures over the vesting period of the awards. Forfeiture rates are estimated at the grant date based on historical experience and adjusted in subsequent periods for any differences in actual forfeitures from those estimates.
We estimate the fair value of stock option awards granted based on the Black-Scholes option pricing model, which requires the use of subjective and complex assumptions. These assumptions include estimating the expected term that awards granted are expected to be outstanding, the expected volatility of our stock price for a period commensurate with the expected term of the related options, and the risk-free rate with a maturity closest to the expected term of the related awards. Restricted stock and restricted stock units are valued based on our stock price on the day the awards are granted. The estimated fair value of outstanding Relative Total Shareholder Return performance units (“RTSR”) is based on the grant date fair value of RTSR awards using a Monte Carlo simulation, which includes estimating the movement of stock prices and the effects of volatility, interest rates, and dividends (refer to Note 12).
Income Taxes
We record deferred income tax assets and liabilities on the balance sheet as noncurrent based upon the difference between the financial reporting and the tax reporting basis of assets and liabilities using the enacted tax rates. To the extent that available evidence raises doubt about the realization of a deferred income tax asset, a valuation allowance is established.
We have provided for income taxes for certain earnings of certain foreign subsidiaries which have not been
Perrigo Company plc - Item 8
Note 1
deemed to be permanently reinvested. For those foreign subsidiaries we have deemed to be permanently reinvested, we have provided no further tax provision.
We record reserves for uncertain tax positions to the extent it is more likely than not that the tax position will be sustained on audit, based on the technical merits of the position. Periodic changes in reserves for uncertain tax positions are reflected in the provision for income taxes. We include interest and penalties attributable to uncertain tax positions and income taxes as a component of our income tax provision (refer to Note 14).
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 Note 16). We also separately record any insurance recoveries that are probable of occurring.
Research and Development
All R&D costs, including payments related to products under development and research consulting agreements, are expensed as incurred. We may continue to make non-refundable payments to third parties for new technologies and for R&D work that has been completed. These payments may be expensed at the time of payment depending on the nature of the payment made. R&D expense was $167.7 million, $184.0 million, $88.2 million, and $187.8 million for the years ended December 31, 2017, and December 31, 2016, the six months endedDecember 31, 2015 and the year ended June 27, 2015, respectively.
The year ended December 31, 2017 included R&D expense related to new product development and clinical trial expenses in our CHCA, CHCI and RX segments. The year ended December 31, 2016 included R&D expense related to clinical trials primarily in our CHCA and RX segments. The six months ended December 31, 2015 included incremental R&D expense attributable to the Omega Pharma Invest N.V. ("Omega") acquisition. The year ended June 27, 2015 included incremental R&D expense related to a collaboration agreement entered into as a result the Omega acquisition.
We actively collaborate with other pharmaceutical companies to develop, manufacture and market certain products or groups of products. We may choose to enter into these types of agreements to, among other things, leverage our or others’ scientific research and development expertise or utilize our extensive marketing and distribution resources. Our policy on accounting for costs of strategic collaborations determines the timing of the recognition of certain development costs. In addition, this policy determines whether the cost is classified as development expense or capitalized as an asset. Management is required to form judgments with respect to the commercial status of such products in determining whether development costs meet the criteria for immediate expense or capitalization. For example, when we acquire certain products for which there is already an Abbreviated New Drug Application ("ANDA") or New Drug Application ("NDA") approval directly related to the product, and there is net realizable value based on projected sales for these products, we capitalize the amount paid as an intangible asset. If we acquire product rights that are in the development phase and as to which we have no assurance that the third party will successfully complete its development milestones, we expense the amount paid (refer to Note 17 for more information on our current collaboration agreements).
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Note 1
Advertising Costs
We expense advertising costs as incurred. Advertising costs relate primarily to print advertising, direct mail, on-line advertising and social media communications. For the year ended December 31, 2017, 94% of advertising expense was attributable to our CHCI segment. Advertising costs were as follows (in millions):
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| | | | | | | | | | | | | | |
| Year Ended | Six Months Ended | | Year Ended |
December 31,
2017 | | December 31, 2016 | | December 31,
2015 | | June 27,
2015 |
| $ | 145.3 |
| | $ | 155.9 |
| | $ | 77.5 |
| | $ | 55.7 |
|
Earnings per Share ("EPS")
Basic EPS is calculated using the weighted-average number of ordinary shares outstanding during each period. It excludes both the dilutive effects of additional common shares that would have been outstanding if the shares issued under stock incentive plans had been exercised and the dilutive effect of restricted shares and restricted share units, to the extent those shares and units have not vested. Diluted EPS is calculated including the effects of shares and potential shares issued under stock incentive plans, following the treasury stock method.
Defined Benefit Plans
We operate a number of defined benefit plans for employees globally.
Two significant assumptions, the discount rate and the expected rate of return on plan assets, are important elements of expense and liability measurement. We evaluate these assumptions annually. Other assumptions involve employee demographic factors, such as retirement patterns, mortality, turnover, and the rate of compensation increase.
The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The defined benefit obligation is calculated periodically by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of either high quality corporate bonds or long term government bonds depending on the depth and liquidity of the high quality corporate bond market in the different geographies where we have pension liabilities. The bonds are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability. As a result, annual updates related to discount rate and the expected rate of return on plan assets are among the most important elements of expense and liability measurement.
Actuarial gains and losses are recognized on the Consolidated Statement of Operations using the corridor method. Under the corridor method, to the extent that any cumulative unrecognized net actuarial gain or loss exceeds 10% of the greater of the present value of the defined benefit obligation and the fair value of the plan assets, that portion is recognized over the expected average remaining working lives of the plan participants. Otherwise, the net actuarial gain or loss is recorded in OCI. We recognize the funded status of benefit plans on the Consolidated Balance Sheets. In addition, we recognize the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic pension cost of the period as a component of OCI (refer to Note 13).
Perrigo Company plc - Item 8
Note 1
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 legal matters (refer to 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.
Revenue
Product Revenue
Revenue is recognized when or as a customer obtains control of promised products. The amount of revenue recognized reflects the consideration we expect to be entitled to receive in exchange for these products. We generally recognize product revenue for our contract performance obligations at a point in time, typically upon shipment or delivery of products to customers. For point in time customers for which control transfers on delivery to the customer due to free on board destination terms (“FOB”), an adjustment is recorded to defer revenue recognition over an estimate of days until control transfers at the point of delivery. Where we recognize revenue at a point in time, the transfer of title is the primary indicator that control has transferred. In other limited instances, primarily relating to those contracts that relate to contract manufacturing performed for our customers and certain store branded products, control transfers as the product is manufactured. Control is deemed to transfer over time for these contracts as the product does not have an alternative use and we have a contractual right to payment for performance completed to date. Revenue for contract manufacturing contracts is recognized over the transfer period using an input method that measures progress towards completion of the performance obligation as costs are incurred. For store branded product revenue recognized over time, an output method is used to recognize revenue when production of a unit is completed because product customization occurs when the product is packaged as a finished good under the store brand label of the customer.
Net product sales include estimates of variable consideration for which accruals and allowances are established. Provisions for certain rebates, customer promotional programs, product returns, and discounts to customers are accounted for as variable consideration and recorded on the Consolidated Balance Sheets as Accrued customer programs. A reduction to sales for these programs is recorded in the same period as the associated sale.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.
Other Revenue Policies
We receive payments from our customers based on billing schedules established in each contract. Amounts are recorded as accounts receivable when our right to consideration is unconditional. In most cases, the timing of the unconditional right to payment aligns with shipment or delivery of the product and the recognition of revenue; however, for those customers where revenue is recognized at a time prior to shipment or delivery due to over time revenue recognition, a contract asset is recorded and is reclassified to accounts receivable when it becomes unconditional under the contract upon shipment or delivery to the customer.
Our performance obligations are generally expected to be fulfilled in less than one year. Therefore, we do not provide quantitative information about remaining performance obligations.
We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised products to the customer will be one year or less, which is the case with substantially all customers.
Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue.
Perrigo Company plc - Item 8
Note 1
Shipping and handling costs billed to customers are included in Net sales. Conversely, shipping and handling expenses we incur are included in Cost of sales.
Share-Based Awards
We measure and record compensation expense for all share-based awards based on estimated grant date fair values. For awards with only service conditions that are based on graded vesting schedules, we recognize the compensation expense on a straight-line basis over the entire award. Forfeitures on share-based awards are recognized in compensation expense in the period in which they occur.
We estimate the fair value of stock option awards granted based on the Black-Scholes option pricing model, which requires the use of subjective and complex assumptions. These assumptions include estimating the expected term that awards granted are expected to be outstanding, the expected volatility of our stock price for a period commensurate with the expected term of the related options, and the risk-free rate with a maturity closest to the expected term of the related awards. Restricted stock and restricted stock units, both service based and performance based restricted share units, are valued based on our stock price on the day the awards are granted. The estimated fair value of outstanding Relative Total Shareholder Return performance units (“RTSR”) is based on the grant date fair value of RTSR awards using a Monte Carlo simulation, which includes estimating the movement of stock prices and the effects of volatility, interest rates, and dividends (refer to Note 15).
Research and Development
All R&D costs, including payments related to products under development and research consulting agreements, are expensed as incurred. We incur costs throughout the development cycle, including costs for research, clinical trials, manufacturing validation, and other pre-commercialization approval costs that are included in R&D. We may continue to make non-refundable payments to third parties for new technologies and for R&D work that has been completed. These payments may be expensed at the time of payment depending on the nature of the payment made.
Advertising Costs
Advertising costs are included in Selling Operating expenses and shipping and handling costs billed to customers are included in Net sales. Costs relate primarily to print advertising, direct mail, online advertising, social media communications, and television advertising and are expensed as incurred. For the year ended December 31, 2023, 71.0% of advertising expense was attributable to our CSCI segment. Advertising costs were as follows (in millions):
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| Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| $ | 138.5 | | | $ | 119.3 | | | $ | 130.9 | |
Income Taxes
We record deferred income tax assets and liabilities on the balance sheet as non-current based upon the difference between the financial reporting and the tax reporting basis of assets and liabilities using the enacted tax rates. To the extent that available evidence raises doubt about the realization of a deferred income tax asset, a valuation allowance is established.
We have provided for income taxes for undistributed earnings of certain foreign subsidiaries which have not been deemed to be permanently reinvested. For those foreign subsidiaries we have deemed to be permanently reinvested, we have provided no further tax provision.
We record reserves for uncertain tax positions to the extent it is more likely than not the tax return position will be sustained on audit, based on the technical merits of the position. Periodic changes in reserves for uncertain tax positions are reflected in the provision for income taxes. We include interest and penalties attributable to uncertain tax positions and income taxes as a component of our income tax provision (refer to Note 18).
Perrigo Company plc - Item 8
Note 1
Earnings per Share ("EPS")
Basic EPS is calculated using the weighted-average number of ordinary shares outstanding during each period. It excludes both the dilutive effects of additional common shares that would have been outstanding if the shares issued under stock incentive plans had been exercised and the dilutive effect of restricted share units, to the extent those shares and units have not vested. Diluted EPS is calculated including the effects of shares and potential shares issued under stock incentive plans, following the treasury stock method.
Recent Accounting Standard Pronouncements
Below are recent accounting standard updatesAccounting Standard Updates ("ASU") that we have adopted or are still assessing to determine the effect on our Consolidated Financial Statements.
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| Standard | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
| ASU 2021-08: Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers | | This guidance amends ASC 805 to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. Under current GAAP, an acquirer generally recognizes such items at fair value at acquisition date. | | January 1, 2023 | | As of January 1, 2023 we adopted ASU 2021-8. There was no impact from applying the recognition and measurement principles of Topic 606 to contract assets or liabilities acquired as part of a business combination. |
| ASU 2023-09: Income Taxes Topic 740: Improvements to Income Tax Disclosures | | This guidance requires entities to annually (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income [or loss] by the applicable statutory income tax rate). | | January 1, 2025 | | The guidance dictates the standard to be applied on a prospective basis with the option to apply retrospectively. As of December 31, 2023 we are currently evaluating the potential disclosure impact of adopting the standard including whether to adopt retrospectively. |
| ASU 2023-07: Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures | | This guidance improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. | | January 1, 2024 for annual periods, January 1, 2025 for interim periods | | The guidance will be applied on a retrospective basis. As of December 31, 2023 we are currently evaluating the potential disclosure impact of adopting the standard. |
We do not believe that any other recently issued accounting standards could have a material effect on our Consolidated Financial Statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.
Perrigo Company plc - Item 8
Note 1
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Recently Issued Accounting Standards Adopted |
Standard | | Description | | Date of adoption | | Effect on the Financial Statements or Other Significant Matters |
Clarifying the Definition of a Business | | This update clarifies the definition of a business and addresses whether transactions should be accounted for as asset acquisitions or business combinations (or divestitures). The guidance includes an initial threshold that an acquired set of assets will not be considered a business if substantially all of the fair value of the assets acquired is concentrated in a single tangible or identifiable intangible asset (or group of similar assets). If the acquired set does not pass the initial threshold, then the guidance requires that, to be a business, the set must include an input and a substantive process that together significantly contribute to the ability to create outputs. Different factors are considered to determine whether the set includes a substantive process, such as the inclusion of an organized workforce. Further, the guidance removes language stating that a business need not include all of the inputs and processes that the seller used in operating the business. | | January 1, 2017 | | We early adopted this new standard and will apply it prospectively when determining whether transactions should be accounted for as asset acquisitions (divestitures) or business combinations (divestitures). During the year ended December 31, 2017, we applied the new guidance when determining whether certain product divestitures represented sales of assets or businesses.
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Improvements to Employee Share-Based Payment Accounting
| | This guidance is intended to simplify several aspects of the accounting for share-based payment award transactions. It will require all income tax effects of awards to be recorded through the income statement when the awards vest or settle as opposed to certain amounts being recorded in additional paid-in capital. An entity will also have to elect whether to account for forfeitures as they occur or by estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change (as currently required). The guidance will also increase the amount an employer can withhold to cover income taxes on awards. | | January 1, 2017 | | We adopted this standard as of January 1, 2017. We elected to estimate the number of awards expected to be forfeited and adjust the estimate when it is likely to change, consistent with past practice. We did not change the amounts that we withhold to cover income taxes on awards. As the requirement to record all income tax effects of vested or settled awards through the income statement is prospective in nature, there was no cumulative effect of adopting the standard on our balance sheet. |
Perrigo Company plc - Item 8
Note 1
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Recently Issued Accounting Standards Not Yet Adopted |
Standard | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
Revenue from Contracts with Customers | | The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. This guidance allows for two adoption methods, full retrospective approach or modified retrospective approach. | | January 1, 2018 | | We have substantially completed our evaluation of the impact of adoption of the new revenue standard on our Consolidated Financial Statements. We will adopt the new revenue standard effective January 1, 2018 using the modified retrospective method. Upon adoption, we anticipate recognizing an adjustment of $5.4 million to the opening balance of retained earnings. The impact of adoption relates primarily to the new guidance on when revenue should be recognized, focusing on indicators of the customer gaining control. Under this new model, in certain cases revenue may be recognized over-time as opposed to a point in time. In our business, revenue may be recognized over-time for certain of our contract manufacturing and private label arrangements in which we produce products that do not have an alternative use, and if the contracts with customers were canceled, we would have an enforceable right to payment for performance completed to date, inclusive of a reasonable profit margin. As a result, we expect to recognize revenue earlier in the performance period for these arrangements as product is customized, as opposed to when units are shipped or delivered. Our assessment of the new revenue standard has also included, but has not been limited to, estimation of variable consideration and identification of performance obligations and we have determined that the related accounting is not materially different compared to our current practice. |
Intra-Entity Asset Transfers of Assets Other Than Inventory | | Under the new guidance, the tax impact to the seller on the profit from the transfers and the buyer’s deferred tax benefit on the increased tax basis would be recognized when the transfers occur, resulting in the recognition of expense sooner than under historical guidance. The guidance excludes intra-entity transfers of inventory. For intra-entity transfers of inventory, the Financial Accounting Standards Board ("FASB") decided to retain current GAAP, which requires an entity to recognize the income tax consequences when the inventory has been sold to an outside party. | | January 1, 2018 | | We have identified certain intra-entity asset transfers that will require an adjustment; based on our current analysis, no material adjustments have been identified at this time.
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Financial Instruments - Recognition and Measurement of Financial Assets and Liabilities | | The objective of this simplification update is to improve the decision usefulness of financial instrument reporting, and it principally affects accounting for equity investments currently classified as available for sale and financial liabilities where the fair value option has been elected. Entities will have to measure many equity investments at fair value and recognize changes in fair value in net income rather than other comprehensive income as required under current U.S. GAAP. | | January 1, 2018 | | We have identified certain investments that will require an adjustment; based on our current analysis, no material adjustments have been identified at this time. |
Perrigo Company plc - Item 8
Note 1
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Recently Issued Accounting Standards Not Yet Adopted (continued) |
Standard | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
Leases | | This guidance was issued to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. For leases with a term of 12 months or less, lessees are permitted to make an election to not recognize right-of-use assets and lease liabilities. Upon adoption, lessees will apply the new standard as of the beginning of the earliest comparative period presented in the financial statements, however lessees will be able to exclude leases that expire as of the implementation date. Early adoption is permitted. | | January 1, 2019 | | We are currently evaluating the implications of adoption on our Consolidated Financial Statements. The actual impact will depend on our lease portfolio at the time of adoption. We have commenced the first step of identifying a task force to take the lead in implementing the new lease standard. |
Derivatives and Hedging | | This update was issued to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. In addition, the amendments simplify the application of hedge accounting in certain situations. Under the new rule, the entity’s ability to hedge non-financial and financial risk components is expanded. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and also eases certain documentation and assessment requirements. Early adoption is permitted. | | January 1, 2019 | | We are currently evaluating the implications of adoption on our Consolidated Financial Statements.
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Measurement of Credit Losses on Financial Instruments | | This guidance changes the impairment model for most financial assets and certain other instruments, replacing the current "incurred loss" approach with an "expected loss" credit impairment model, which will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, and off-balance sheet credit exposures such as letters of credit. Early adoption is permitted. | | January 1, 2020 | | We are currently evaluating the new standard for potential impacts on our receivables, debt, and other financial instruments. |
Intangibles - Goodwill and Other Simplifying the Test for Goodwill | | The objective of this update is to reduce the cost and complexity of subsequent goodwill accounting by simplifying the impairment test by removing the Step 2 requirement to perform a hypothetical purchase price allocation when the carrying value of a reporting unit exceeds its fair value. If a reporting unit’s carrying value exceeds its fair value, an entity would record an impairment charge based on that difference, limited to the amount of goodwill attributed to that reporting unit. The proposal would not change the guidance on completing Step 1 of the goodwill impairment test. The proposed guidance would be applied prospectively. Early adoption is permitted. | | January 1, 2020 | | We are currently evaluating the implications of adoption on our Consolidated Financial Statements.
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Perrigo Company plc - Item 8
Note 2
NOTE 2 - REVENUE RECOGNITION
We generated net sales in the following geographic locations(1) (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| U.S. | $ | 2,916.8 | | | $ | 2,870.0 | | | $ | 2,565.9 | |
Europe(2) | 1,622.5 | | | 1,474.3 | | | 1,393.0 | |
All other countries(3) | 116.3 | | | 107.3 | | | 179.8 | |
| Total net sales | $ | 4,655.6 | | | $ | 4,451.6 | | | $ | 4,138.7 | |
(1) The net sales by geography is derived from the location of the entity that sells to a third party.
(2) Includes Ireland net sales of $40.8 million, $29.3 million, and $23.7 million for the years ended December 31, 2023, December 31, 2022, and December 31, 2021, respectively.
(3) Includes revenue generated primarily in Australia and Canada during the year ended December 31, 2023. During the years ended December 31, 2022 and 2021, includes revenue generated primarily in Australia, Canada, and Mexico.
Product Category
As a result of the completed acquisition of Héra SAS (“HRA Pharma”), the Company updated its global reporting product categories. These product category updates have been adjusted retroactively to reflect the changes. Such changes 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, in addition to legacy Perrigo women's health products; the creation of a new "Skin Care" reporting category, comprised of all of the products in the legacy Perrigo "Skincare and Personal Hygiene" category, except for legacy Perrigo women's health products, and the skin care products of HRA Pharma; and the "Other" category in the CSCI segment includes the Rare Diseases business acquired with HRA Pharma.
The following is a summary of our net sales by category (in millions):
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| Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
CSCA(1) | | | | | |
| Nutrition | $ | 563.2 | | | $ | 520.4 | | | $ | 401.9 | |
| Upper Respiratory | 559.2 | | | 564.6 | | | 483.1 | |
| Digestive Health | 505.3 | | | 495.5 | | | 475.1 | |
| Pain and Sleep-Aids | 396.4 | | | 412.2 | | | 405.4 | |
| Oral Care | 313.9 | | | 312.9 | | | 311.9 | |
| Healthy Lifestyle | 311.7 | | | 288.9 | | | 295.0 | |
| Skin Care | 196.2 | | | 187.8 | | | 183.7 | |
| Women's Health | 46.9 | | | 45.2 | | | 38.2 | |
| Vitamins, Minerals, and Supplements ("VMS") | 17.5 | | | 27.9 | | | 31.7 | |
Other CSCA(2) | 52.0 | | | 70.5 | | | 67.1 | |
| Total CSCA | 2,962.3 | | | 2,925.9 | | | 2,693.1 | |
| CSCI | | | | | |
| Skin Care | 372.5 | | | 334.6 | | | 324.0 | |
| Upper Respiratory | 299.1 | | | 268.7 | | | 219.4 | |
| Healthy Lifestyle | 225.7 | | | 209.7 | | | 227.6 | |
| Pain and Sleep-Aids | 222.9 | | | 200.2 | | | 184.8 | |
| VMS | 185.5 | | | 183.9 | | | 225.8 | |
| Women's Health | 119.7 | | | 96.1 | | | 54.5 | |
| Oral Care | 101.5 | | | 94.8 | | | 94.0 | |
| Digestive Health | 41.0 | | | 35.5 | | | 25.6 | |
Other CSCI(3) | 125.4 | | | 102.2 | | | 89.9 | |
| Total CSCI | 1,693.3 | | | 1,525.7 | | | 1,445.6 | |
| Total net sales | $ | 4,655.6 | | | $ | 4,451.6 | | | $ | 4,138.7 | |
(1) Includes net sales from OTC contract manufacturing products.
(2) Consists primarily of product sales and royalty income related to supply and distribution agreements and other miscellaneous or otherwise uncategorized product lines and markets, none of which is greater than 10% of the segment net sales.
(3) Consists primarily of our rare diseases business and other miscellaneous or otherwise uncategorized product lines, none of which is greater than 10% of the segment net sales.
Perrigo Company plc - Item 8
Note 2
While the majority of revenue is recognized at a point in time, certain of our product revenue is recognized on an over time basis. Predominately, over time customer contracts exist in contract manufacturing arrangements, which occur in both the CSCA and CSCI segments. Contract manufacturing revenue was $337.3 million, $350.1 million, and $299.7 million for the years ended December 31, 2023, December 31, 2022, and December 31, 2021, respectively.
We also recognize a portion of the store brand OTC product revenues in the CSCA segment on an over time basis; however, the timing difference between over time and point in time revenue recognition for store brand contracts is not significant due to the short time period between the customization of the product and shipment or delivery.
The following table provides information about contract assets from contracts with customers (in millions):
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| Balance Sheet Location | | December 31, 2023 | | December 31, 2022 |
| Short-term contract assets | Prepaid expenses and other current assets | | $ | 28.5 | | | $ | 41.5 | |
NOTE 23 - ACQUISITIONS AND DIVESTITURES
All of the below acquisitions, with the exception of the generic Benzaclin™ product purchase, have been accounted for under the acquisition method of accounting based on our analysis of the acquired inputs and processes, and the related assets acquired and liabilities assumed were recorded at fair value as of the acquisition date.
Fair value estimates are based on a complex series of judgments about future events and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets and liabilities assumed, as well as asset lives, can materially impact our results of operations.
The effects of all of the acquisitions described below were included in the Consolidated Financial Statements prospectively from the date of each acquisition. Unless otherwise indicated, acquisition costs incurred were immaterial and were recorded in Administration expense.
Acquisitions Completed During the Year Ended December 31, 20162022
Generic Benzaclin™ ProductHRA Pharma
On AugustApril 29, 2022, we completed the previously announced acquisition of 100% of the outstanding equity interest in HRA Pharma for total consideration of €1.8 billion, or approximately $1.9 billion. We funded the transaction with cash on hand and borrowings under our Senior Secured Credit Facilities (as defined in Note 12).
HRA Pharma is a self-care based company with consumer brands such as Compeed®, ellaOne® and Mederma®, as well as a trusted rare disease portfolio. The acquisition completed our transformation to a consumer self-care company. HRA Pharma’s operations are reported in both our CSCA and CSCI segments.
The acquisition of HRA Pharma was accounted for as a business combination and has been reported in our Consolidated Statements of Operations as of the acquisition date. From April 29, 2022 through December 31, 2022, HRA Pharma generated net sales of $193.6 million and a net operating loss of $59.4 million, inclusive of $23.8 million of cost of goods sold related to the acquisition step up to fair value on inventories sold and $67.6 million of amortization related to intangible assets recognized on acquisition.
During the twelve months ended December 31, 2022, we incurred $46.9 million of transaction costs related to the acquisition (legal, banking and other professional fees). The amounts were recorded in Administration expense and were not allocated to an operating segment.
Perrigo Company plc - Item 8
Note 3
The following table summarizes the consideration paid for HRA Pharma and the provisional amounts of the assets acquired and liabilities assumed (in millions):
| | | | | |
| HRA Pharma |
| Purchase Price | $ | 1,945.6 | |
| |
| Assets Acquired: | |
| Cash and cash equivalents | $ | 44.2 | |
| Accounts receivable | 78.1 | |
| Inventories | 48.3 | |
| Prepaid expenses and other current assets | 16.6 | |
| Property, plant and equipment | 4.6 | |
| Operating lease assets | 9.7 | |
| Goodwill | 559.5 | |
| Definite-lived intangible assets: | |
| Trademarks and trade names | 1,124.0 | |
| Developed product technology | 185.1 | |
| Distribution networks | 84.4 | |
| Indefinite lived intangibles | |
| In-process research and development | 52.7 | |
| Total intangible assets | 1,446.2 | |
| Deferred income taxes | 12.4 | |
| Other non-current assets | 0.8 | |
| Total assets | 2,220.4 | |
| Liabilities assumed: | |
| Accounts payable | $ | 43.4 | |
| Payroll and related taxes | 16.1 | |
| Accrued customer programs | 9.0 | |
| Other accrued liabilities | 8.9 | |
| Accrued income taxes | 0.5 | |
| Deferred income taxes | 186.2 | |
| Other non-current liabilities | 10.6 | |
| Total liabilities | 274.7 | |
| Non-Controlling Interest | 0.1 | |
| Net Assets Acquired | $ | 1,945.6 | |
We recorded the preliminary purchase price allocation in the second quarter of 2022. During the first quarter of 2023, we recorded measurement period adjustments resulting in an increase to goodwill of $80.6 million, which consisted of a $104.3 million decrease in definite-lived intangibles, $27.2 million decrease in net Deferred income tax liabilities, a net increase of $2.0 million to other non-current liabilities, and a $1.5 million decrease in Prepaid expenses and other current assets. Current year earnings adjustments of $3.5 million to Cost of sales were recorded that would have been recognized during the year-ended December 31, 2022, if the measurement period adjustments to the provisional opening balance sheet were reflected as of the acquisition date.
Perrigo Company plc - Item 8
Note 3
Goodwill of $559.5 million arising from the acquisition consists largely of the anticipated growth from new product sales, sales to new customers, HRA Pharma's assembled workforce, and the synergies expected from combining the operations of Perrigo and HRA Pharma. Goodwill of $141.7 million and $417.8 million was allocated to our CSCA and CSCI segments, respectively, none of which is deductible for income tax purposes. The definite-lived intangible assets acquired consist of trademarks and trade names, developed product technologies, and distribution networks. Trademarks and trade names were assigned useful lives of 20 years. Developed product technologies were assigned 8 to 18-year useful lives. Distribution networks were assigned useful lives ranging from 2 2016,to 21-years reflecting the intent to integrate certain external distributors and sales forces within the CSCI segment. Trademarks and trade names, developed product technology, and IPR&D were valued using the multi-period excess earnings method. Significant judgment was applied in estimating the fair value of the intangible assets acquired, which involved the use of significant estimates and assumptions with respect to the timing and amounts of cash flow projections, including revenue growth rates, projected profit margins, and discount rates.
Nestlé’s Gateway Infant Formula Plant and GoodStart® infant formula brand Acquisition
On November 1, 2022, we purchased the remaining 60.9% product rights to a generic Benzaclin™ product ("Generic Benzaclin™"), which we had developed and marketedNestlé’s Gateway infant formula plant in collaborationEau Claire, Wisconsin, along with Barr Laboratories, Inc. ("Barr"), a subsidiary of Teva Pharmaceuticals, for $62.0 million in cash. In September 2007, we entered into an initial development, marketing and commercialization agreement with Barr, in which Barr contributed to the product's development costs and we developed and marketed the product in the U.S. and Israel. Under this agreement, we paid Barr a percentage of net income from the product's sales in these territories, adjusted for Barr's contributionsCanadian rights to the product's development costs. By purchasing the remaining product rights from Barr, we are now entitled to 100% of income from sales of the product. Operating results attributable to Generic Benzaclin™ are included within our RX segment. The intangible asset acquired is a distribution and license agreement with a nine-year useful life.
Tretinoin Product Portfolio
On January 22, 2016GoodStart® infant formula brand ("Gateway"), we acquired a portfolio of generic dosage forms and strengths of Retin-A® (tretinoin), a topical prescription acne treatment, from Matawan Pharmaceuticals, LLC, for $416.4$110.0 million in cash, ("Tretinoin Products"), which further expanded our standard topical products suchsubject to customary post-closing adjustments. The acquisition was accounted for as creams, lotionsa business combination and gels, as well as inhalants and injections ("extended topicals") portfolio. We were the authorized generic distributor of these products from 2005 to 2013. Operatingoperating results attributable to the acquisitionproducts are included in our CSCA segment in the Nutrition product category. This purchase was the first major initiative in our recently announced Supply Chain Reinvention Program and is expected to strengthen and expand our U.S. infant formula manufacturing capabilities.
During the year ended December 31, 2022, we incurred $4.9 million of general transaction costs (legal, banking and other professional fees). The amounts were recorded in Administration expense within our RXthe CSCA segment.
From November 1, 2022 through December 31, 2022 the acquisition generated net sales of $42.7 million and operating income of $11.5 million, which included $7.9 million of inventory costs stepped up to acquisition date fair value.
There were no measurement period adjustments to the provisional opening balance sheet as of the acquisition date.
The following table summarizes the consideration paid and provisional amounts of the assets acquired (in millions):
| | | | | | | | |
| | Gateway |
| Purchase price paid | | $ | 110.0 | |
| | |
| Assets acquired: | | |
| Inventories | | $ | 29.8 | |
| Property, plant and equipment | | 61.5 | |
| Distribution and license agreements and supply agreements | | 14.0 | |
| Customer relationships and distribution networks | | 4.7 | |
| Total intangible assets | | $ | 18.7 | |
| Net assets acquired | | $ | 110.0 | |
The definite-lived intangible assets acquired included generic product rightsconsisted of license agreements, and customer relationships which are being amortized over a weighted average useful life of 13.3 years. Customer relationships were valued using the multi-period excess earnings method and assigned a 20-year useful life, and non-compete agreements valued using the lost income method and assigned a five-year useful life. The goodwill acquired is deductible for tax purposes.
Development-Stage Rx Products
In May 2015, we entered into anlicensing agreement with a clinical stage biotechnology company for two specialty pharmaceutical products in development ("Development-Stage Rx Products"). We paid $18.0 million for an option to acquire the two products, which was recorded in R&D expense. On March 1, 2016, to further invest in our specialty "prescription only" ("Rx") portfolio, we exercised the option for both products, which requires us to make contingent payments if we obtain regulatory approval and achieve certain sales milestones. We will also be obligated to make certain royalty payments over periods ranging from seven to ten years from the launch of each product.
We accounted for the option exercise as a business acquisition within our RX segment, recording IPR&D and contingent consideration on the balance sheet. The IPR&D was valued using the multi-period excess earnings method and has an indefinite useful life until such time asRelief from Royalty Method. Significant judgment was applied in estimating the research is completed (at which time it will become a definite-lived intangible asset), or is determined to have no future use (at which time it would be impaired). The contingent consideration is an estimatefair value of the future milestone paymentsintangible assets acquired, which involved the use of significant estimates and royalties based on probability-weighted outcomes, sensitivity analysis,assumptions with respect to the timing and amounts of cash flow projections, including revenue growth rates, projected profit margins, and discount rates reflective of the risk involved. The amount of contingent consideration recognized was $24.9 million and was recorded in Other non-current liabilities. On December 20,rates.
Perrigo Company plc - Item 8
Note 2
3
Pro Forma Impact of Business Combinations
2017, we completed
Pro forma information has been prepared as if the saleHRA Pharma and Gateway acquisitions had occurred on January 1, 2022. The following table presents the unaudited pro forma information as if the acquisitions had been combined with the results reported in our Consolidated Statements of oneOperations for all periods presented (in millions):
| | | | | | | | | | | | | | | | | | |
| | Year Ended | | | | | | | | | | |
| (Unaudited) | | December 31, 2022 | | | | | | | | | | |
| Net sales | | $ | 4,745.9 | | | | | | | | | | | |
| Income (loss) from continuing operations | | $ | (9.6) | | | | | | | | | | | |
The unaudited pro forma information is presented for information purposes only and is not indicative of the Development-Stage Rx Products to an ophthalmic pharmaceutical company (see belowresults that would have been achieved if the acquisition had taken place at such time. The unaudited pro forma information presented above includes adjustments primarily for additional details on the divestiture).amortization charges for acquired intangible assets, incremental financing costs, certain acquisition-related charges, and related tax effects.
Purchase Price Allocation of Acquisitions CompletedDivestitures During the Year Ended December 31, 2016 2022
The Tretinoin Products, Developed-Stage Rx Products, and four product acquisitions opening balance sheets are final. The below table indicates the purchase price allocations for acquisitions completed during the year endedDecember 31, 2016 (in millions):Latin American businesses
|
| | | | | | | | | | | |
| | Tretinoin Products | | Development-Stage Rx Products | | All Other(1) |
| Purchase price paid | $ | 416.4 |
| | $ | — |
| | $ | 17.1 |
|
| Contingent consideration | — |
| | 24.9 |
| | 26.2 |
|
| Total purchase consideration | $ | 416.4 |
| | $ | 24.9 |
| | $ | 43.3 |
|
| | | | | | |
| Assets acquired: | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | — |
| | $ | 3.8 |
|
| Accounts receivable | — |
| | — |
| | 4.9 |
|
| Inventories | 1.4 |
| | — |
| | 7.1 |
|
| Prepaid expenses and other current assets | — |
| | — |
| | 0.1 |
|
| Property, plant and equipment, net | — |
| | — |
| | 1.2 |
|
| Goodwill | 1.7 |
| | — |
| | — |
|
Definite-lived intangibles: | | | | | |
| Distribution and license agreements, supply agreements | $ | — |
| | $ | — |
| | $ | 1.8 |
|
| Developed product technology, formulations, and product rights | 411.0 |
| | — |
| | 18.0 |
|
| Customer relationships and distribution networks | — |
| | — |
| | 8.2 |
|
| Non-compete agreements | 2.3 |
| | — |
| | — |
|
Indefinite-lived intangibles: | | | | | |
| In-process research and development | $ | — |
| | $ | 24.9 |
| | $ | 4.9 |
|
| Total intangible assets | $ | 413.3 |
| | $ | 24.9 |
| | $ | 32.9 |
|
| Total assets | $ | 416.4 |
| | $ | 24.9 |
| | $ | 50.0 |
|
| Liabilities assumed: | | | | | |
| Accounts payable | $ | — |
| | $ | — |
| | $ | 2.8 |
|
| Accrued liabilities | — |
| | — |
| | 0.1 |
|
| Long-term debt | — |
| | — |
| | 3.3 |
|
| Net deferred income tax liabilities | — |
| | — |
| | 0.5 |
|
| Total liabilities | $ | — |
| | $ | — |
| | $ | 6.7 |
|
| Net assets acquired | $ | 416.4 |
| | $ | 24.9 |
| | $ | 43.3 |
|
| |
(1) | Consists of four product acquisitions in our CHCA, CHCI and RX segments. |
Perrigo Company plc - Item 8
Note 2
Acquisitions Completed During the Six Months Ended December 31, 2015
Entocort®
On December 15, 2015, we completed our acquisition of Entocort® (budesonide) capsules, as well as the authorized generic capsules, for sale within the U.S., from AstraZeneca plc for $380.2 million in cash. Entocort® is a gastroenterology medicine for patients with mild to moderate Crohn's disease. The acquisition complemented our Rx portfolio. Operating results attributable to the acquisition are included within our RX segment. The intangible assets acquired included branded and authorized generic product rights with useful lives of 10 and 15 years, respectively, which were valued using the multi-period excess earnings method. During the year ended December 31, 2016, we recorded an impairment charge of $342.2 million (refer to Note 3).
Naturwohl Pharma GmbH
On September 15, 2015, we completed our acquisition of 100% of Naturwohl Pharma GmbH ("Naturwohl"), a Munich, Germany-based nutritional business known for its leading German dietary supplement brand, Yokebe®. The acquisition built on our CHCI segment's OTC product portfolio and European commercial infrastructure. The assets were purchased through an all-cash transaction valued at €133.5 million ($150.4 million). Operating results attributable to Naturwohl are included in the CHCI segment. The intangible assets acquired included a trademark with a 20-year useful life, customer relationships with a 15-year useful life, non-compete agreements with a three-year useful life, and a licensing agreement with a three-year useful life. We utilized the relief from royalty method for valuing the trademark, the multi-period excess earnings method for valuing the customer relationships, and the lost income method for valuing the non-compete agreements and the licensing agreement. The goodwill acquired is not deductible for tax purposes.
ScarAway®
On August 28, 2015, we completed our acquisition of ScarAway®, a leading U.S. OTC scar management brand portfolio comprised of five products, from Enaltus, LLC, for $26.7 million in cash. This acquisition served as our entry into the niche branded OTC business in the U.S. Operating results attributable to ScarAway® are included in the CHCA segment. The intangible assets acquired included a trademark with a 25-year useful life, non-compete agreements with a four-year useful life, developed product technology with an eight-year useful life, and customer relationships with a 15-year useful life. We utilized the relief from royalty method for valuing the trademark and developed product technology, the multi-period excess earnings method for valuing the customer relationships, and the lost income method for valuing the non-compete agreements. The goodwill acquired is deductible for tax purposes.
GlaxoSmithKlineConsumer Healthcare Product Portfolio
On August 28, 2015, we completed our acquisition of a portfolio of well-established OTC brands from GlaxoSmithKline Consumer Healthcare (“GSK Products”). This acquisition further leveraged our European market share and expanded our product offerings. The assets were purchased through an all-cash transaction valued at €200.0 million ($223.6 million). Operating results attributable to the acquired GSK Products are included primarily in the CHCI segment. The intangible assets acquired included trademarks with a 20-year useful life and customer relationships with a 15-year useful life. We utilized the relief from royalty method for valuing the trademarks and the multi-period excess earnings method for valuing the customer relationships. The goodwill acquired is deductible for tax purposes.
Perrigo Company plc - Item 8
Note 2
Purchase Price Allocation of Acquisitions Completed During the Six Months Ended December 31, 2015
The Entocort®, Naturwohl, ScarAway®, GSK Products, and eight product development acquisitions opening balance sheets are final.The below table indicates the purchase price allocations for acquisitions completed during the six months ended December 31, 2015(in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Entocort® | | Naturwohl | | ScarAway® | | GSK Products | | All Other(1) |
| Purchase price paid | $ | 380.2 |
| | $ | 150.4 |
| | $ | 26.7 |
| | $ | 223.6 |
| | $ | 15.3 |
|
| Contingent consideration | — |
| | — |
| | — |
| | — |
| | 13.9 |
|
| Total purchase consideration | $ | 380.2 |
| | $ | 150.4 |
| | $ | 26.7 |
| | $ | 223.6 |
| | $ | 29.2 |
|
| | | | | | | | | | |
| Assets acquired: | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 4.6 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Accounts receivable | — |
| | 3.3 |
| | — |
| | — |
| | — |
|
| Inventories | 0.2 |
| | 1.5 |
| | 1.0 |
| | — |
| | — |
|
| Goodwill | — |
| | 61.0 |
| | 3.5 |
| | 32.6 |
| | — |
|
Definite-lived intangibles: | | | | | | | | | |
| Distribution and license agreements, supply agreements | $ | — |
| | $ | 21.4 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Developed product technology, formulations, and product rights | 380.0 |
| | — |
| | 0.5 |
| | — |
| | — |
|
| Customer relationships and distribution networks | — |
| | 25.9 |
| | 9.8 |
| | 61.5 |
| | — |
|
| Trademarks, trade names, and brands | — |
| | 64.2 |
| | 11.4 |
| | 129.5 |
| | — |
|
| Non-compete agreements | — |
| | 0.3 |
| | 0.5 |
| | — |
| | — |
|
Indefinite-lived intangibles: | | | | | | | | | |
| In-process research and development | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 29.2 |
|
| Total intangible assets | $ | 380.0 |
| | $ | 111.8 |
| | $ | 22.2 |
| | $ | 191.0 |
| | $ | 29.2 |
|
| Total assets | $ | 380.2 |
| | $ | 182.2 |
| | $ | 26.7 |
| | $ | 223.6 |
| | $ | 29.2 |
|
| Liabilities assumed: | | | | | | | | | |
| Accounts payable | $ | — |
| | $ | 2.8 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Accrued liabilities | — |
| | 1.6 |
| | — |
| | — |
| | — |
|
| Net deferred income tax liabilities | — |
| | 27.4 |
| | — |
| | — |
| | — |
|
| Total liabilities | $ | — |
| | $ | 31.8 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Net assets acquired | $ | 380.2 |
| | $ | 150.4 |
| | $ | 26.7 |
| | $ | 223.6 |
| | $ | 29.2 |
|
| |
(1)
| Consists of eight product development acquisitions in our CHCA, CHCI and RX segments. |
Acquisitions Completed During the Year Ended June 27, 2015
Gelcaps Exportadora de Mexico, S.A. de C.V.
On May 12, 2015, we completed our acquisition of 100% of Gelcaps Exportadora de Mexico, S.A. de C.V. ("Gelcaps"), the Mexican operations of Durham, North Carolina-based Patheon Inc., for $37.9 million in cash. The acquisition added softgel manufacturing technology to our supply chain capabilities and broadened our presence, product portfolio, and customer network in Mexico. Operating results attributable to Gelcaps are included in the CHCA segment. The intangible assets acquired included a trademark with a 25-year useful life and customer relationships with a 20-year useful life. We utilized the relief from royalty method for valuing the trademark and the multi-period excess earnings method for valuing the customer relationships.
Perrigo Company plc - Item 8
Note 2
Based on valuation estimates utilizing the comparative sales method, a step-up in the value of inventory of $0.6 million was recorded in the opening balance sheet, which was charged to cost of goods sold during the three months ended June 27, 2015. In addition, property, plant and equipment was written up by $0.9 million to its estimated fair market value based on a valuation method that included both the cost and market approaches. This additional step-up in value is being depreciated over the estimated remaining useful lives of the assets. The goodwill recorded is not deductible for tax purposes.
Omega Pharma Invest N.V.
On March 30, 2015, we completed our acquisition of Omega, a limited liability company incorporated under the laws of Belgium. Omega was a leading European OTC company and is providing us several key benefits, including advancing our growth strategy outside the U.S. by providing access across a larger global platform with critical mass in key European countries, establishing commercial infrastructure in the high barrier-to-entry European OTC marketplace, strengthening our product portfolio while enhancing scale and distribution, and expanding our international management presence.
We purchased95.77% of the issued and outstanding share capital of Omega (685,348,257 shares) from Alychlo N.V. (“Alychlo”) and Holdco I BE N.V. (together with Alychlo, the “Sellers”), limited liability companies incorporated under the laws of Belgium, under the terms of the Share Purchase Agreement dated November 6, 2014 (the "Share Purchase Agreement"). Omega holds the remaining 30,243,983 shares as treasury shares.
The acquisition was a cash and stock transaction made up of the following consideration (in millions except per share data):
|
| | | | |
| Perrigo ordinary shares issued | | 5.4 |
|
| Perrigo per share price at transaction close on March 30, 2015 | | $ | 167.64 |
|
| Total value of Perrigo ordinary shares issued | | $ | 904.9 |
|
| Cash consideration | | 2,078.3 |
|
| Total consideration | | $ | 2,983.2 |
|
The cash consideration shown in the above table was financed by a combination of debt and equity. We issued $1.6 billion of debt and issued 6.8 million ordinary shares, which raised $999.3 million, net of issuance costs (refer to Note 10).
The Sellers agreed to indemnify us for certain potential future losses. The Sellers’ indemnification and other obligations to us under the Share Purchase Agreement are secured by up to €120.9 million ($127.2 million as of December 31, 2017) in cash that has been escrowed and 1.08 million of our ordinary shares, which are both being held in escrow to secure such obligations. Under the terms of the Share Purchase Agreement, Alychlo and its affiliates are subject to a three-year non-compete in Europe, and the Sellers are subject to a two-year non-solicit, in each case subject to certain exceptions. The Share Purchase Agreement contains other customary representations, warranties, and covenants of the parties, thereto. On December 16, 2016, we commenced an arbitral claim against the Sellers in connection with the Sellers' obligations to us under the Share Purchase Agreement. The fact of the claim has been made public, but the proceedings otherwise remain confidential. The Sellers deny liability (refer to Note 16 for additional information).
The operating results attributable to Omega are included in the CHCI segment. We incurred general transaction costs (legal, banking and other professional fees), financing fees, and debt extinguishment charges in connection with the Omega acquisition. The amounts recorded were not allocated to a reporting segment. The table below details the acquisition costs, as well as losses on hedging activities associated with the acquisition purchase price, and where they were recorded (in millions):
Perrigo Company plc - Item 8
Note 2
|
| | | |
| | Year Ended |
| Line item | June 27,
2015 |
| Administration | $ | 29.7 |
|
| Interest expense, net | 23.7 |
|
| Other expense, net | 324.0 |
|
| Loss on extinguishment of debt | 9.6 |
|
| Total acquisition-related costs | $ | 387.0 |
|
See Note 8 for further details on losses on the Omega-related hedging activities shown above in Other expense, net, and Note 10 for details on the loss on extinguishment of debt.
We acquired the following intangible assets: indefinite-lived brands, a definite-lived trade name with an eight-year useful life, definite-lived brands with a 22-year useful life, a distribution network with a 21-year useful life, and developed product technology with useful lives ranging from fourto 13 years. We also recorded goodwill, which is not deductible for tax purposes and represents the value we assigned to the expected synergies described above, in our CHCI segment. We utilized the multi-period excess earnings method to value the indefinite-lived brands, the definite-lived brands, and distribution network. We utilized the relief from royalty method to value the developed product technology and definite-lived trade name. The weighted-average useful life of all intangible assets acquired is 20.6 years (refer to Note 3 for further detail on Goodwill and Other Intangible Assets).
Based on valuation estimates utilizing the comparative sales method, a step-up in the value of inventory of $15.1 million was recorded in the opening balance sheet and was charged to cost of goods sold during the three months ended June 27, 2015. In addition, property, plant and equipment were written up $41.5 million to their estimated fair market value based on a valuation method that included both the cost and market approaches. This additional step-up in value is being depreciated over the estimated remaining useful lives of the assets. Additionally, the fair value of the debt assumedon the date of acquisition exceeded par value by $101.9 million, which was recorded as part of the carrying value of the underlying debt and will be amortized as a reduction of interest expense over the remaining terms of the respective debt instruments (refer to Note 10 for more information on the debt we assumed from Omega and our subsequent payments on the debt).
Lumara Health, Inc.
On October 31, 2014, we acquired a portfolio of women's healthcare products from Lumara Health, Inc., ("Lumara") a privately-held, Chesterfield, Missouri-based specialty pharmaceutical company, for $83.0 million in cash. The acquisition of this portfolio further expanded our women's healthcare product offerings. Operating results attributable to the acquired Lumara products are included in the RX segment. The intangible assets acquired consisted of three product formulations with useful lives ranging from eight to 12 years. The assets were valued utilizing the multi-period excess earnings method.
Perrigo Company plc - Item 8
Note 2
Purchase Price Allocation of Acquisitions Completed During the Year Ended June 27, 2015
The Gelcaps, Omega, and Lumara opening balance sheets are final. Measurement period adjustments to the Gelcaps opening balance sheet were not material; there were no measurement period adjustments to the Lumara opening balance sheet. Measurement period adjustment made to the Omega opening balance sheet are shown below.
|
| | | | | | | | | | | |
| | June 27,
2015 | | Measurement Period Adjustments | | December 31,
2015 |
| Accounts receivable | $ | 227.4 |
| | $ | (4.5 | ) | | $ | 222.9 |
|
| Inventories | $ | 288.9 |
| | $ | (11.9 | ) | | $ | 277.0 |
|
| Property, plant and equipment, net | $ | 121.2 |
| | $ | 9.6 |
| | $ | 130.8 |
|
| Goodwill | $ | 1,269.6 |
| | $ | 419.1 |
| | $ | 1,688.7 |
|
| Intangible assets: | | | | | |
| Developed product technology, formulations, and product rights | $ | 36.9 |
| | $ | (5.5 | ) | | $ | 31.4 |
|
| Customer relationships and distribution networks | 1,342.7 |
| | (286.4 | ) | | 1,056.3 |
|
| Definite-lived trademarks, trade names, and brands | 282.0 |
| | 5.5 |
| | 287.5 |
|
| Indefinite-lived trademarks, trade names, and brands | 2,145.2 |
| | (141.4 | ) | | 2,003.8 |
|
| Total intangible assets | $ | 3,806.8 |
| | $ | (427.8 | ) | | $ | 3,379.0 |
|
| Accrued liabilities | $ | 50.0 |
| | $ | (0.7 | ) | | $ | 49.3 |
|
| Net deferred income tax liabilities | $ | 771.1 |
| | $ | 14.4 |
| | $ | 785.5 |
|
| Other non-current liabilities | $ | 88.9 |
| | $ | (29.0 | ) | | $ | 59.9 |
|
The measurement period changes in the Omega purchase accounting were due primarily to refinements in the underlying valuation assumptions for the intangible assets, including updates to the allocations of projected cash flows to the intangible assets and the related jurisdictional tax rates that were used in those projections, the accounting of intangible assets as definite-lived versus indefinite-lived assets, and finalization of the related deferred taxes. Valuation adjustments made during the measurement period resulted in a $10.2 million reduction of amortization expense (recorded primarily in Selling expense) for the six months ended December 31, 2015 that were related to the year ended June 27, 2015 (refer to Note 3 for further detail on Goodwill and Other Intangible Assets).
Perrigo Company plc - Item 8
Note 2
The below table indicates the purchase price allocation for acquisitions completed during the year ended June 27, 2015 (in millions):
|
| | | | | | | | | | | |
| | Gelcaps | | Omega | | Lumara |
| Total purchase consideration | $ | 37.9 |
| | $ | 2,983.2 |
| | $ | 83.0 |
|
| Assets acquired: | | | | | |
| Cash and cash equivalents | $ | 4.6 |
| | $ | 14.7 |
| | $ | — |
|
| Accounts receivable | 7.3 |
| | 222.9 |
| | 2.9 |
|
| Inventories | 7.2 |
| | 277.0 |
| | 1.5 |
|
| Prepaid expenses and other current assets | 2.1 |
| | 51.2 |
| | 0.4 |
|
| Property, plant and equipment, net | 6.0 |
| | 130.8 |
| | 0.1 |
|
| Goodwill | 6.0 |
| | 1,688.7 |
| | — |
|
Definite-lived intangibles: | | | | | |
| Developed product technology, formulations, and product rights | $ | — |
| | $ | 31.4 |
| | $ | 82.0 |
|
| Customer relationships and distribution networks | 6.6 |
| | 1,056.3 |
| | — |
|
| Trademarks, trade names, and brands | — |
| | 287.5 |
| | — |
|
Indefinite-lived intangibles: | | | | | |
| Trademarks, trade names, and brands | 4.4 |
| | 2,003.8 |
| | — |
|
| Total intangible assets | $ | 11.0 |
| | $ | 3,379.0 |
| | $ | 82.0 |
|
| Other non-current assets | 0.4 |
| | 2.4 |
| | — |
|
| Total assets | $ | 44.6 |
| | $ | 5,766.7 |
| | $ | 86.9 |
|
| Liabilities assumed: | | | | | |
| Accounts payable | $ | 3.3 |
| | $ | 225.0 |
| | $ | — |
|
| Short-term debt | — |
| | 112.6 |
| | — |
|
| Accrued liabilities | 1.6 |
| | 49.3 |
| | 3.9 |
|
| Payroll and related taxes | — |
| | 51.3 |
| | — |
|
| Accrued customer programs | — |
| | 28.9 |
| | — |
|
| Long-term debt | — |
| | 1,471.0 |
| | — |
|
| Net deferred income tax liabilities | 1.4 |
| | 785.5 |
| | — |
|
| Other non-current liabilities | 0.4 |
| | 59.9 |
| | — |
|
| Total liabilities | $ | 6.7 |
| | $ | 2,783.5 |
| | $ | 3.9 |
|
| Net assets acquired | $ | 37.9 |
| | $ | 2,983.2 |
| | $ | 83.0 |
|
Perrigo Company plc - Item 8
Note 2
Actual and Unaudited Pro Forma Impact of Acquisitions
Our Consolidated Financial Statements include operating results from the Tretinoin Products, Entocort®, Naturwohl, GSK Products, ScarAway®, Omega, Gelcaps, and Lumara® acquisitions as well as from three small product acquisitions, from the date of each acquisition through December 31, 2017. Net sales and operating income attributable to the Tretinoin Products and two small product acquisitions included in our financial statements for the year ended December 31, 2016 totaled $85.3 million and $45.1 million, respectively. Net sales and operating income attributable to the Entocort®, Naturwohl, ScarAway®, and GSK acquisitions included in our financial statements for the six months ended December 31, 2015 totaled $51.0 million and $20.6 million, respectively. Net sales and operating income attributable to the Omega, Gelcaps, and Lumara acquisitions included in our financial statements for the year ended June 27, 2015 totaled $418.2 million and $18.9 million, respectively.
The following unaudited pro forma information gives effect to the Tretinoin Products, Entocort®, Naturwohl, GSK Products, ScarAway®, Omega, Gelcaps, and Lumara acquisitions, as well as two small product acquisitions, as if the acquisitions had occurred on the first day of the year ended ended June 27, 2015 and had been included in our Results of Operations for all periods presented thereafter (in millions):
|
| | | | | | | | | | | |
| | Year Ended | | Six Months Ended | | Year Ended |
| (Unaudited) | December 31, 2016 | | December 31,
2015 | | June 27,
2015 |
| Net sales | $ | 5,288.6 |
| | $ | 2,748.8 |
| | $ | 5,682.5 |
|
| Net income (loss) | $ | (4,011.0 | ) | | $ | 81.0 |
| | $ | 250.2 |
|
The historical consolidated financial information of Perrigo, and the Tretinoin Products, Entocort®, Naturwohl, GSK Products, and ScarAway®, Omega, Gelcaps, and Lumara® acquisitions and the two small product acquisitions, has been adjusted in the pro forma information to give effect to pro forma events that are (1) directly attributable to the transactions, (2) factually supportable and (3) expected to have a continuing impact on combined results. In order to reflect the occurrence of the acquisitions on the first day of the year ended June 27, 2015 as required, the unaudited pro forma results include adjustments to reflect the incremental amortization expense to be incurred based on the current values of each acquisition's identifiable intangible and tangible assets, along with the reclassification of acquisition-related costs from the period ended December 31, 2016 to the period ended June 27, 2015. The unaudited pro forma results do not reflect future events that have occurred or may occur after the acquisitions.
Divestitures Completed During the Year Ended December 31, 2017
On January 3, 2017, we sold certain ANDAs for $15.0 million to a third party, which was recorded as a gain in Other operating income on the Consolidated Statements of Operations in our RX segment.
On February 1, 2017, we completed the sale of the animal health pet treats plant fixed assets within our CHCA segment, which were previously classified as held-for sale. We received $7.7 million in proceeds, which resulted in an immaterial loss.
On April 6, 2017,9, 2022, we completed the sale of our India API businessMexico and Brazil-based OTC businesses ("Latin American businesses"), both within our CSCA segment, to Strides Shasun Limited. We received $22.2Advent International for total consideration of $23.9 million, consisting of proceeds, inclusive$5.4 million in cash, installment receivables due 12 and 18 months from completion totaling $11.3 million based on the Mexican peso exchange rate at the time of an estimated working capital adjustment, whichsale, and contingent consideration of $7.2 million based on the Brazilian real exchange rate at the time of sale. The sale resulted in an immaterial gaina pre-tax loss of $1.4 million, net of professional fees, recorded in our Other segment. Prior to closingoperating expense, net on the sale,Consolidated Statements of Operations.
At July 3, 2021, we determined that the carrying value of the India APInet assets held for sale of this business exceeded itstheir fair value less the cost to sell, resulting in an impairment charge of $35.3$152.5 million. At December 31, 2021 and October 2, 2021, we recorded additional impairment charge of $1.0 million which wasand $2.6 million, respectively resulting in a total impairment charge of $156.1 million. We also recorded a goodwill impairment charge of $6.1 million within our CSCA segment, resulting in a total impairment charge of $162.2 million.
ScarAway®
On March 24, 2022, we completed the sale of ScarAway®, a U.S. OTC scar management brand, to Alliance Pharmaceuticals Ltd. for cash consideration of $20.7 million. The sale resulted in a pre-tax gain of $3.6 million recorded in Impairment chargesour CSCA segment in Other operating expense, net on the Consolidated Statements of Operations.
Divestitures During the Year Ended December 31, 2021
Rx business
NOTE 4 - DISCONTINUED OPERATIONS
Our discontinued operations primarily consist of our former Rx segment, which held our prescription pharmaceuticals business in the U.S. and our pharmaceuticals and diagnostic businesses in Israel (collectively, the “Rx business”). The Rx business met the criteria to be classified as a discontinued operation in 2021 and, as a result, its historical financial results are reflected in our consolidated financial statements as such. There were no balance sheet amounts related to discontinued operations at either balance sheet date presented.
On July 6, 2021, we completed the sale of the Rx business to Altaris Capital Partners, LLC ("Altaris") for aggregate consideration of $1.55 billion. The consideration included a $53.3 million reimbursement related to Abbreviated New Drug Applications ("ANDAs") for a generic topical lotion which was received in 2022. The sale resulted in a pre-tax gain, net of professional fees, of $47.5 million recorded in Other (income) expense, net on the Consolidated 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 transaction gain
Perrigo Company plc - Item 8
Note 4
was subject to final settlements under the Agreement, which were finalized in the first quarter of 2022 with no change to the gain reported.
During the year ended December 31, 2021, we incurred $40.8 million of separation costs related to the sale of the Rx business. We incurred no such costs in 2022. The costs incurred included selling costs, which were reported in gain on discontinued operations before tax as part of the gain on sale of the Rx business. Separation costs incurred in prior periods were included in administration expenses.
Under the terms of a transition services agreement ("TSA"), we provided transition services which were substantially completed as of the end of the third quarter of 2022. We also entered into reciprocal supply agreements pursuant to which Perrigo will supply certain products to the Rx business and the Rx business will supply certain products to Perrigo. The supply agreements have a term of four years, extendable up to seven years by the party who is the purchaser of the products under such agreement. We also extended distribution rights to the Rx business for certain OTC products owned and manufactured by Perrigo that may be fulfilled through pharmacy channels, in return for a share of the net profits.
In connection with the sale, Perrigo retained certain pre-closing liabilities arising out of antitrust (refer to Note 19 - Contingencies under the header "Price-Fixing Lawsuits") and opioid matters and the Company’s Albuterol recall, subject to, in each case, the buyer's obligation to indemnify the Company for fifty percent of these liabilities up to an aggregate cap on the buyer's obligation of $50.0 million. We have not requested payments from the buyer related to the indemnity of these liabilities as of December 31, 2023.
(Loss) income from discontinued operations, net of tax was as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Net sales | $ | — | | | $ | — | | | $ | 405.1 | |
| Cost of sales | — | | | — | | | 258.4 | |
| Gross profit | — | | | — | | | 146.7 | |
| | | | | |
| Operating expenses | | | | | |
| Distribution | — | | | — | | | 6.1 | |
| Research and development | — | | | — | | | 30.8 | |
| Selling | — | | | — | | | 16.3 | |
| Administration | 10.4 | | | 4.6 | | | 36.4 | |
| | | | | |
| | | | | |
| Other operating income, net | — | | | — | | | (0.4) | |
| Total operating expenses | 10.4 | | | 4.6 | | | 89.2 | |
| | | | | |
| Operating (loss) income | (10.4) | | | (4.6) | | | 57.5 | |
| | | | | |
| Interest expense, net | — | | | — | | | 0.8 | |
| Other income, net | — | | | — | | | (1.6) | |
| | | | | |
| (Loss) income from discontinued operations before tax | (10.4) | | | (4.6) | | | 58.3 | |
| Gain on sale of business | — | | | — | | | (47.5) | |
| (Loss) income before income taxes | (10.4) | | | (4.6) | | | 105.8 | |
| Income tax (benefit) expense | (2.1) | | | 5.1 | | | 43.8 | |
| (Loss) income from discontinued operations, net of tax | $ | (8.3) | | | $ | (9.7) | | | $ | 62.0 | |
Perrigo Company plc - Item 8
Note 4
Select cash flow information related to discontinued operations was as follows (in millions):
| | | | | | | | | | | | | | | |
| | Year Ended(1) |
| | | | December 31, 2022 | | December 31, 2021 |
| Cash flows from discontinued operations operating activities: | | | | | |
| Depreciation and amortization | | | $ | — | | | $ | 15.4 | |
| | | | | |
| | | | | |
| Share-based compensation | | | — | | | 10.8 | |
| Gain on sale of business | | | — | | | (47.5) | |
| | | | | |
| | | | | |
| | | | | |
| Cash flows from discontinued operations investing activities: | | | | | |
| Asset acquisitions | | | $ | — | | | $ | (69.7) | |
| Additions to property, plant and equipment | | | — | | | (16.1) | |
| Net proceeds from sale of business | | | 53.3 | | | 1,491.9 | |
(1) Cash flows from discontinued operations for the year ended December 31, 2016.2023 were not significant.
Perrigo Company plc - Item 8
Note 2
Asset acquisitions related to discontinued operations consisted of two Abbreviated ANDAs purchased under a contractual arrangement. On August 25, 2017,December 31, 2020, we completed the sale of our Russian business, which was previously classified as held-for-sale, to Alvogen Pharma LLC. The total sale price was €12.7 million ($15.1 million), inclusive ofpurchased an estimated working capital adjustment, which resulted in an immaterial gain recorded in our CHCI segment. Prior to closing the sale, we determined that the carrying value of the Russian business exceeded its fair value less the cost to sell, resulting in an impairment charge of $3.7ANDA for a generic topical gel for $16.4 million, which was recorded in Impairment charges on the Consolidated Statements of Operations forsubsequently paid during the three months ended July 1, 2017.
On November 21, 2017,April 3, 2021 and on March 8, 2021, we completed the sale of our Israel API business, which was previously classified as held-for-sale, to SK Capitalpurchased an ANDA for a sale price of $110.0 million, which resulted in an immaterial gain recorded in our Other segment in Other expense (Income), net on the Consolidated Statements of Operations.
As a result of the sale, we recognized a guarantee liability (refer to Note 6). Per the agreement, we will be reimbursedgeneric topical lotion for tax receivables for tax years prior to closing and will need to reimburse SK Capital for the settlement of any uncertain tax liability positions for tax years prior to closing. In addition, after closing and going forward, the Israel API business, will be assessed by and liable to the Israel Tax Authority ("ITA") for any audit findings. We are no longer the primary obligor on the liabilities transferred to SK Capital on November 21, 2017, however, we have provided a guarantee on certain obligations that were recorded at a fair value of $13.8 million, with a maximum possible payout of $34.9 million.
On December 20, 2017, we completed the sale of one of the Development-Stage Rx Products to an ophthalmic pharmaceutical company. We will potentially receive the following consideration: (1) a milestone payment of $1.5 million after the buyer achieves net sales of $25.0 million in any given calendar year; (2) a milestone payment of $5.0 million after the buyer achieves $50.0 million in net sales in any given year; and (3) royalty payments of 2.5% of all net sales of the product from the date of the first commercial sales of the product and continuing until market entry of a generic equivalent of the product.
Divestitures Completed During the Year Ended December 31, 2016
On August 5, 2016, we completed the sale of our U.S. Vitamins, Minerals, and Supplements ("VMS") business within our CHCA segment to International Vitamins Corporation ("IVC") for $61.8 million inclusive of an estimated working capital adjustment. Prior to closing the sale, we determined that the carrying value of the VMS business exceeded its fair value less the cost to sell, resulting in an impairment charge of $6.2$53.3 million which was subsequently paid during the three months ended April 2, 2022. These ANDAs were acquired by Altaris as part of the Rx business sale.
NOTE 5 - INVENTORIES
Major components of inventory were as follows (in millions):
| | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 |
| Finished goods | $ | 646.8 | | | $ | 620.3 | |
| Work in process | 241.9 | | | 262.2 | |
| Raw materials | 252.2 | | | 267.8 | |
| Total inventories | $ | 1,140.9 | | | $ | 1,150.3 | |
NOTE 6 - INVESTMENTS
The following table summarizes the measurement category, balance sheet location, and balances of our equity securities (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended |
| Measurement Category | | Balance Sheet Location | | December 31, 2023 | | December 31, 2022 |
| Fair value method | | Prepaid expenses and other current assets | | $ | 0.1 | | | $ | 0.1 | |
Fair value method(1) | | Other non-current assets | | $ | 1.3 | | | $ | 1.7 | |
| Equity method | | Other non-current assets | | $ | 60.1 | | | $ | 63.4 | |
(1) Measured at fair value using the Net Asset Value practical expedient.
The following table summarizes the expense (income) recognized in earnings of our equity securities (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Year Ended |
| Measurement Category | | Income Statement Location | | | | | | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Fair value method | | Other (income) expense, net | | | | | | $ | 0.4 | | | $ | 0.4 | | | $ | 2.0 | |
| Equity method | | Other (income) expense, net | | | | | | $ | 1.9 | | | $ | 1.5 | | | $ | 1.1 | |
Perrigo Company plc - Item 8
Note 7
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT, NET
We held the following property, plant and equipment, net (in millions):
| | | | | | | | | | | | | | | | | |
| Useful life range | | December 31, 2023 | | December 31, 2022 |
| Land | — | | $ | 50.6 | | | $ | 51.6 | |
| Buildings | 10 to 45 years | | 611.3 | | | 593.0 | |
| Machinery and equipment | 3 to 10 years | | 1,326.9 | | | 1,271.7 | |
| Gross property and equipment | | | 1,988.8 | | | 1,916.3 | |
| Less accumulated depreciation | | | (1,072.4) | | | (990.0) | |
| Property and equipment, net | | | $ | 916.4 | | | $ | 926.3 | |
We recorded in Impairment chargesa $4.6 million charge on the Consolidated Statements of Operations fordisposed assets during the year ended December 31, 2016.2022. No charge was recorded on disposed assets during the year ended December 31, 2023. Depreciation expense includes amortization of assets recorded under finance leases and totaled $93.7 million, $86.2 million, and$86.8 million for the years ended December 31, 2023, December 31, 2022, and December 31, 2021, respectively.
NOTE 8 - LEASES
We lease certain assets, principally warehouse facilities and computer equipment, under agreements that expire at various dates through the year ended December 31, 2040. Certain leases contain provisions for renewal and purchase options and require us to pay various related expenses. Rent expense under all leases was $51.4 million, $49.6 million, and $44.5 million for the years ended December 31, 2023, December 31, 2022, and December 31, 2021, respectively.
The balance sheet locations of our lease assets and liabilities were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Assets | | Balance Sheet Location | | December 31, 2023 | | December 31, 2022 |
| Operating | | Operating lease assets | | $ | 183.6 | | | $ | 217.1 | |
| Finance | | Other non-current assets | | 13.7 | | | 22.0 | |
| Total | | | | $ | 197.3 | | | $ | 239.1 | |
| | | | | | | | | | | | | | | | | | | | |
| Liabilities | | Balance Sheet Location | | December 31, 2023 | | December 31, 2022 |
| Current | | | | | | |
| Operating | | Other accrued liabilities | | $ | 27.5 | | | $ | 28.4 | |
| Finance | | Current indebtedness | | 1.9 | | | 3.3 | |
| Non-Current | | | | | | |
| Operating | | Other non-current liabilities | | 159.6 | | | 189.5 | |
| Finance | | Long-term debt, less current portion | | 13.2 | | | 17.4 | |
| Total | | | | $ | 202.2 | | | $ | 238.6 | |
The below tables show our lease assets and liabilities by reporting segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets | |
| | Operating | | Financing |
| | December 31, 2023 | | December 31, 2022 | | December 31, 2023 | | December 31, 2022 | |
| CSCA | | $ | 79.3 | | | $ | 100.5 | | | $ | 12.8 | | | $ | 13.8 | | |
| CSCI | | 44.7 | | | 49.5 | | | 0.3 | | | 6.6 | | |
| | | | | | | | | |
| | | | | | | | | |
| Unallocated | | 59.6 | | | 67.1 | | | 0.6 | | | 1.6 | | |
| Total | | $ | 183.6 | | | $ | 217.1 | | | $ | 13.7 | | | $ | 22.0 | | |
Perrigo Company plc - Item 8
Note 38
NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Liabilities | | |
| | | Operating | | | | Financing | | |
| | | December 31, 2023 | | December 31, 2022 | | | | December 31, 2023 | | December 31, 2022 | | |
| CSCA | | | $ | 81.6 | | | $ | 102.2 | | | | | $ | 14.2 | | | $ | 14.9 | | | |
| CSCI | | | 47.8 | | | 51.7 | | | | | 0.3 | | | 4.1 | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Unallocated | | | 57.7 | | | 64.0 | | | | | 0.6 | | | 1.7 | | | |
| Total | | | $ | 187.1 | | | $ | 217.9 | | | | | $ | 15.1 | | | $ | 20.7 | | | |
Lease expense was as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
Operating leases(1) | $ | 45.1 | | | $ | 44.2 | | | $ | 38.6 | |
| | | | | |
| Finance leases | | | | | |
| Amortization | $ | 6.3 | | | $ | 5.4 | | | $ | 5.9 | |
| Interest | 0.6 | | | 0.7 | | | 0.8 | |
| Total finance leases | $ | 6.9 | | | $ | 6.1 | | | $ | 6.7 | |
(1) Includes short-term leases and variable lease costs, which are immaterial.
The annual future maturities of our leases as of December 31, 2023 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Operating Leases | | Finance Leases | | Total |
| 2024 | | $ | 32.6 | | | $ | 2.3 | | | $ | 34.9 | |
| 2025 | | 29.8 | | | 1.9 | | | 31.7 | |
| 2026 | | 23.8 | | | 1.6 | | | 25.4 | |
| 2027 | | 22.3 | | | 1.6 | | | 23.9 | |
| 2028 | | 16.3 | | | 1.5 | | | 17.8 | |
| After 2028 | | 90.7 | | | 8.9 | | | 99.6 | |
| Total lease payments | | 215.5 | | | 17.8 | | | 233.3 | |
| Less: Interest | | 28.4 | | | 2.7 | | | 31.1 | |
| Present value of lease liabilities | | $ | 187.1 | | | $ | 15.1 | | | $ | 202.2 | |
Our weighted average lease terms and discount rates are as follows:
| | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 |
| Weighted-average remaining lease term (in years) | | | | |
| Operating leases | | 10.65 | | 10.97 |
| Finance leases | | 9.14 | | 9.47 |
| Weighted-average discount rate | | | | |
| Operating leases | | 3.17 | % | | 2.48 | % |
| Finance leases | | 3.41 | % | | 2.92 | % |
Our lease cash flow classifications are as follows (in millions):
| | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2023 | | December 31, 2022 |
| Cash paid for amounts included in the measurement of lease liabilities | | | | |
| Operating cash flows for operating leases | | $ | 35.7 | | | $ | 39.3 | |
| Operating cash flows for finance leases | | $ | 0.6 | | | $ | 0.7 | |
| Financing cash flows for finance leases | | $ | 3.5 | | | $ | 4.9 | |
| | | | |
| Leased assets (used) obtained in exchange for new finance lease liabilities | | $ | (2.2) | | | $ | — | |
| Leased assets (used) obtained in exchange for new operating lease liabilities | | $ | (3.9) | | | $ | 73.9 | |
Perrigo Company plc - Item 8
Note 9
NOTE 9 -GOODWILL AND INTANGIBLE ASSETS
Goodwill
Changes in the carrying amount of goodwill, by reportable segment, were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| CSCA(1) | | CSCI(2) | | Total |
| Balance at December 31, 2021 | $ | 1,902.4 | | | $ | 1,097.0 | | | $ | 2,999.4 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Business acquisitions | 141.7 | | | 417.8 | | | 559.5 | |
| Currency translation adjustments | 0.3 | | | (68.8) | | | (68.5) | |
| | | | | |
| Balance at December 31, 2022 | 2,044.4 | | | 1,446.0 | | | 3,490.4 | |
| Impairments | — | | | (90.0) | | | (90.0) | |
| | | | | |
| | | | | |
| Purchase accounting adjustments | 35.2 | | | 45.4 | | | 80.6 | |
| | | | | |
| Currency translation adjustments | 1.3 | | | 46.8 | | | 48.1 | |
| | | | | |
| Balance at December 31, 2023 | $ | 2,080.9 | | | $ | 1,448.2 | | | $ | 3,529.1 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | CHCA | | CHCI | | RX | | Specialty Sciences | | Other | | Total |
| Balance at June 27, 2015 | $ | 1,817.2 |
| | $ | 1,530.2 |
| | $ | 1,086.0 |
| | $ | 199.6 |
| | $ | 88.2 |
| | $ | 4,721.2 |
|
| Business acquisitions | 9.7 |
| | 87.4 |
| | — |
| | — |
| | — |
| | 97.1 |
|
| Changes in assets held-for-sale | (13.0 | ) | | — |
| | — |
| | — |
| | (14.6 | ) | | (27.6 | ) |
| Currency translation adjustments | (0.8 | ) | | (53.3 | ) | | (1.9 | ) | | — |
| | (2.1 | ) | | (58.1 | ) |
| Purchase accounting adjustments | 1.2 |
| | 418.9 |
| | — |
| | — |
| | — |
| | 420.1 |
|
| Balance at December 31, 2015 | 1,814.3 |
| | 1,983.2 |
| | 1,084.1 |
| | 199.6 |
| | 71.5 |
| | 5,152.7 |
|
| Business acquisitions | — |
| | — |
| | 1.7 |
| | — |
| | — |
| | 1.7 |
|
| Changes in assets held-for-sale | 4.5 |
| | — |
| | — |
| | — |
| | 9.0 |
| | 13.5 |
|
| Impairments | (24.5 | ) | | (868.4 | ) | | — |
| | (199.6 | ) | | — |
| | (1,092.5 | ) |
| Currency translation adjustments | (0.9 | ) | | (27.5 | ) | | 0.8 |
| | — |
| | 0.9 |
| | (26.7 | ) |
| Purchase accounting adjustments | 17.2 |
| | (16.5 | ) | | — |
| | — |
| | — |
| | 0.7 |
|
| Balance at December 31, 2016 | 1,810.6 |
| | 1,070.8 |
| | 1,086.6 |
| | — |
| | 81.4 |
| | 4,049.4 |
|
Re-allocation of goodwill(1) | 35.3 |
| | — |
| | 27.7 |
| | — |
| | (63.0 | ) | | — |
|
| Business divestitures | — |
| | (4.1 | ) | | — |
| | — |
| | (26.4 | ) | | (30.5 | ) |
| Currency translation adjustments | 1.5 |
| | 139.0 |
| | 8.0 |
| | — |
| | 8.0 |
| | 156.5 |
|
| Balance at December 31, 2017 | $ | 1,847.4 |
| | $ | 1,205.7 |
| | $ | 1,122.3 |
| | $ | — |
| | $ | — |
| | $ | 4,175.4 |
|
(1) Certain cash flow associated with the API business were retained. We performed a relative fair value allocationhad accumulated goodwill impairments of the business retained and allocated it among the two segments where the business was allocated.
The increase in goodwill in the year ended December 31, 2017 was due primarily to foreign currency translation adjustments. The decrease in goodwill for the year ended December 31, 2016 was due primarily to impairment charges recorded in the CHCI and Specialty Sciences segments as discussed below. The increase in goodwill in the six months ended December 31, 2015 was due primarily to purchase accounting adjustments to the Omega acquisition, as well as the Naturwohl and GSK acquisitions recorded in the CHCI segment (refer to Note 2).
As required by our policy, we tested goodwill for impairment in the fourth quarter of 2017 (refer to Note 1). We determined the fair value of each of our reporting units exceeded their net book values. The fair values of the BCH, UK AUS and Animal Health reporting units were each less than 25.0% higher than their respective net book values as of the annual assessment date. As a result, these reporting units are inherently at a higher risk for future impairments if they experience deterioration in business performance or market multiples, or increases in discount rates. These reporting units had the following remaining goodwill balances$6.1 million as of December 31, 2017 (in millions):2023. |
| | | | | | | | |
| Reporting Unit | | Goodwill Remaining in Reporting Unit | | Segment | | Fair Value in excess of Carrying Value |
| BCH | | $ | 1,026.0 |
| | CHCI | | 6.6% |
| Animal Health | | $ | 178.9 |
| | CHCA | | 23.6% |
| UK AUS | | $ | 53.1 |
| | CHCI | | 18.3% |
Subsequently, at the end(2) We had accumulated goodwill impairments of the fourth quarter of 2017, the Animal Health reporting unit had an indication of potential impairment resulting from the termination of a supply agreement. We prepared an impairment test$968.4 million and $878.4 million as of December 31, 20172023 and determined the fair valueDecember 31, 2022, respectively.
As of the Animal HealthDecember 31, 2023, we have three reporting unit continuedunits. Our CSCA operating segment is equivalent to exceed net book value, by 8.9%. The 8.9% margin was lower than the excess fair value over carrying value of 23.6% that was estimated as of October 1, 2017. Therefore, while no impairment was recorded in 2017, the supply agreement termination increased the risk of future impairment in thisour CSCA reporting unit.
Perrigo Company plc - Item 8
Note 3
The discounted cash flow forecasts used for these Our CSCI operating segment includes two reporting units, in goodwill impairment testing include assumptions about future activity levels in both the near termCSCI and longer-term. If growth in these reporting units is lower than expected, we may experience deterioration in our cash flow forecasts that may indicate goodwill in the reporting units may be impaired in future impairment tests. We continue to monitor the progress and assess the reporting units for potential impairment should impairment indicators arise, as applicable, and at least annually during our fourth quarter impairment testing.Rare Diseases.
During the year ended December 31, 2016, we identified indicators of goodwill impairment for certain of our reporting units, which required us to complete interim goodwill impairment testing (refer to Note 1 for our impairment process). Step one of the goodwill impairment test involves determining the fair value of the reporting unit using a discounted cash flow technique and comparing it to the reporting unit’s carrying value. The main assumptions supporting the cash flow projections used to determine the reporting units’ fair value include revenue growth based on product line extensions, product life cycle strategies, and geographical expansion within the markets in which the reporting unit distributes products, gross margins consistent with historical trends, and advertising and promotion investments largely consistent with the reporting unit's growth plans. If a reporting unit does not pass step one of the goodwill impairment test, step two is completed. The second step of the goodwill impairment test requires that we determine the implied fair value of the reporting unit’s goodwill, which involves determining the value of the reporting unit’s individual assets and liabilities. If the reporting unit’s carrying value exceeds its book value, an impairment charge is recorded.
During the three months ended April 2, 2016,December 31, 2023, we identified indicators of impairment fortested our Branded Consumer Healthcare - Rest of World ("BCH-ROW")Rare Diseases reporting unit which comprises primarily operations attributablefor impairment in response to identified impairment indicators. Market information specific to the Omega acquisition in all geographic regions except for Belgium. The primaryreporting unit became available during the fourth quarter requiring additional consideration to the valuation methods utilized. As a result, we determined goodwill related to the reporting unit was impaired by $90.0 million and recorded the charge within our CSCI segment.
In conjunction with our 2021 annual impairment indicators includedtest, during the declinethree months ended December 31, 2021, we recorded an impairment charge in our 2016 performance expectations and a reduction inOral Care International reporting unit within our long-range revenue growth forecast. BCH-ROW did not pass step oneCSCI segment of goodwill impairment testing.$10.0 million. The change in fair value from previous estimates was due primarilydriven by reduced projections of future cash flows resulting from increased costs throughout the global supply chain (refer to the changes in the market and performance of the brands such that the evaluation of brand prioritization and product extensions or launches in new regions are being more focused to maximize the potential of all brands in the segment's portfolio. Based on our evaluation and initial estimates of the fair values of the assets and liabilities and the deficit of the fair value when compared to the related book value, we recorded $130.5 million in impairment charges on the Consolidated Statement of Operations within our CHCI segment.Note 10). During the three months ended October 1, 2016, we identified additional indicators of goodwill impairment in both our BCH-ROW and our Branded Consumer Healthcare - Belgium ("BCH-Belgium") reporting units. With respect to both reporting units, the primary impairment indicators included an additional decline in our 2016 performance expectations for the remainder of the year and a reduction in our long-range revenue growth and margin forecasts due to the factors outlined below. Neither the BCH-ROW nor the BCH-Belgium reporting units passed step one of goodwill impairment testing.
As it relates to the BCH-ROW reporting unit, the changes in fair value from previous estimates were due primarily to (1) changes in the market and performance of certain brands due to moderated new product launch assumptions, (2) execution of certain key product strategies falling short of expectations causing a reduction to baseline forecast models in France, Germany and Italy and (3) certain macro-economic factors continuing to impact the business more than expected in France, Russia and Turkey in addition to unfavorable foreign currency impacts experienced (primarily in the UK related to Brexit.) As it relates to the BCH-Belgium reporting unit, the changes in fair value from previous estimates were due to changes in the forecasts as a result of a reduction in volume with a major wholesaler due to factors consistent with those outlined for the BCH-ROW reporting unit.
Based on our estimates of the fair values of the assets and liabilities and the deficit of the fair value when compared to the related book value, we recorded an impairment charge of $675.6 million related to the BCH-ROW reporting unit and $62.3 million related to the BCH-Belgium reporting unit on the Consolidated Statement of Operations within our CHCI segment.
During the three months ended December 31, 2016, we identified indicators of goodwill impairment in the BCH-Belgium reporting unit related to the early termination of a distribution agreement. We prepared a goodwill impairment test as of December 3, 2016, which was the end of the month in which the impairment indicator
Perrigo Company plc - Item 8
Note 39
occurred. Step one of the goodwill impairment test indicated that the fair value of the BCH-Belgium reporting unit as greater than its net book value. As a result, we did not perform the second step of the goodwill impairment test.
During the three months ended December 31, 2016, we identified indicators of goodwill impairment in the Animal Health reporting unit related to changes in the market and performance of certain brands. We prepared a goodwill impairment test as of October 2, 2016 as part of our annual goodwill impairment testing process. Step one of the goodwill impairment test indicated that the fair value of the Animal Health reporting unit was below its net book value. As a result, we performed the second step of the goodwill impairment test to measure the amount of impairment. We concluded that Animal Health goodwill was impaired by $24.5 million, which we recorded in Impairment charges on the Consolidated Statement of Operations within our CHCA segment.
During the three months ended December 31, 2016, we identified indicators of goodwill impairment in the Specialty Sciences reporting unit related to our decision to review strategic alternatives for the Tysabri® financial asset. As a result of the impairment indicators, we prepared a goodwill impairment test as of December 31, 2016. Step one of the goodwill impairment test indicated that the fair value of the Specialty Sciences reporting unit was below its net book value. As a result, we initiated the second step of the goodwill impairment test to measure the amount of impairment. We concluded that the goodwill was fully impaired and recorded an impairment of $199.6 million in Impairment charges on the Consolidated Statement of Operations within our Specialty Sciences segment.
No impairment charges were recorded as a result of the annual goodwill impairment testing during the six months ended December 31, 2015. During the year ended June 27, 2015, we performed our annual goodwill impairment testing, which indicated that our CHCA Mexico reporting unit's goodwill fair value was below its net book value as of March 28, 2015. As a result, we initiated the second step of the goodwill impairment test to measure the amount of impairment. We concluded that the goodwill was fully impaired and recorded an impairment of $6.8 million in the CHCA segment during the year ended June 27, 2015 in Impairment charges. No other segments were affected by this impairment charge.
Intangible Assets
Other intangibleIntangible assets and the related accumulated amortization consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended |
| | December 31, 2023 | | December 31, 2022 |
| | Gross | | Accumulated Amortization | | Gross | | Accumulated Amortization |
Indefinite-lived intangibles:(1) | | | | | | | |
| Trademarks, trade names, and brands | $ | 3.4 | | | $ | — | | | $ | 3.2 | | | $ | — | |
| In-process research and development | 1.9 | | | — | | | 55.4 | | | — | |
| Total indefinite-lived intangibles | $ | 5.3 | | | $ | — | | | $ | 58.6 | | | $ | — | |
| Definite-lived intangibles: | | | | | | | |
| Distribution and license agreements and supply agreements | $ | 90.8 | | | $ | 57.5 | | | $ | 94.9 | | | $ | 58.1 | |
| Developed product technology, formulations, and product rights | 534.0 | | | 238.4 | | | 484.8 | | | 211.8 | |
| Customer relationships and distribution networks | 1,868.1 | | | 1,108.9 | | | 1,825.1 | | | 965.9 | |
| Trademarks, trade names, and brands | 2,502.0 | | | 609.3 | | | 2,542.2 | | | 481.0 | |
| Non-compete agreements | 2.1 | | | 2.1 | | | 2.0 | | | 2.0 | |
| Total definite-lived intangibles | $ | 4,997.0 | | | $ | 2,016.2 | | | $ | 4,949.0 | | | $ | 1,718.8 | |
| Total intangible assets | $ | 5,002.3 | | | $ | 2,016.2 | | | $ | 5,007.6 | | | $ | 1,718.8 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| | Gross | | Accumulated Amortization | | Gross | | Accumulated Amortization | | Gross | | Accumulated Amortization |
Definite-lived intangibles: | | | | | | | | | | | |
| Distribution and license agreements, supply agreements | $ | 311.2 |
| | $ | 169.8 |
| | $ | 305.6 |
| | $ | 120.4 |
| | $ | 242.4 |
| | $ | 77.7 |
|
| Developed product technology, formulations, and product rights | 1,358.4 |
| | 598.7 |
| | 1,418.1 |
| | 526.0 |
| | 1,387.6 |
| | 426.0 |
|
| Customer relationships and distribution networks | 1,642.0 |
| | 460.6 |
| | 1,489.9 |
| | 307.5 |
| | 1,520.7 |
| | 193.0 |
|
| Trademarks, trade names, and brands | 1,335.4 |
| | 129.5 |
| | 1,189.3 |
| | 55.3 |
| | 539.4 |
| | 22.8 |
|
| Non-compete agreements | 14.7 |
| | 12.6 |
| | 14.3 |
| | 11.2 |
| | 15.2 |
| | 12.7 |
|
| Total definite-lived intangibles | $ | 4,661.7 |
| | $ | 1,371.2 |
| | $ | 4,417.2 |
| | $ | 1,020.4 |
| | $ | 3,705.3 |
| | $ | 732.2 |
|
Indefinite-lived intangibles: | | | | | | | | | | | |
| Trademarks, trade names, and brands | $ | 52.1 |
| | $ | — |
| | $ | 50.5 |
| | $ | — |
| | $ | 1,868.1 |
| | $ | — |
|
| In-process research and development | 38.2 |
| | — |
| | 64.0 |
| | — |
| | 48.2 |
| | — |
|
| Total indefinite-lived intangibles | $ | 90.3 |
| | $ | — |
| | $ | 114.5 |
| | $ | — |
| | $ | 1,916.3 |
| | $ | — |
|
| Total other intangible assets | $ | 4,752.0 |
| | $ | 1,371.2 |
| | $ | 4,531.7 |
| | $ | 1,020.4 |
| | $ | 5,621.6 |
| | $ | 732.2 |
|
(1) Certain intangible assets are denominated in currencies other than the U.S. dollars;dollar; therefore, their gross and net carrying values are subject to foreign currency movements.
On March 17, 2022, we announced that we received final approval from the U.S. Food and Drug Administration for the over-the-counter use of Nasonex®24HR Allergy (mometasone furoate monohydrate 50mcg). The increaseapproval triggered a $10.0 million milestone payment to the licensor, which was made in gross amortizablethe second quarter of 2022 and capitalized as a definite-lived intangible asset.
On July 13, 2023, we announced that we received final approval from the U.S. Food and Drug Administration for Opill®, a progestin-only daily oral contraceptive, for over-the-counter (OTC) use for all ages. As a result, the Opill® in-process research and development (“IPR&D”), acquired through the 2022 acquisition of HRA Pharma, has been reclassified from indefinite-lived to finite-lived intangible asset in the third quarter subsequent to a fair value analysis.
We recorded an impairment charge of $0.9 million on certain IPR&D assets during the year ended December 31, 2017 was due primarily to foreign currency translation. The decrease in gross amortizable intangible assets during the year ended
Perrigo Company plc - Item 8
Note 3
December 31, 2016 was due to the reclassification of Omega indefinite-lived assets to definite-lived assets as described below, offset by current year impairments taken as described below. The increase during the six months ended December 31, 2015 was due to the Entocort®, GSK, Naturwohl, and ScarAway® acquisitions, offset partially by purchase price adjustments to the Omega intangible assets (refer to Note 2).
Intangible asset impairments taken are as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | Six Months Ended |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| | Definite-Lived Intangible Assets | | IPR&D | | Indefinite-Lived Intangible Assets | | Definite-Lived Intangible Assets | | IPR&D | | Indefinite-Lived Intangible Assets |
| CHCA | $ | — |
| | $ | — |
| | $ | 0.4 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| CHCI | — |
| | 1.1 |
| | 849.1 |
| | 321.4 |
| | 3.5 |
| | 185.1 |
|
| RX | 19.7 |
| | 11.6 |
| | — |
| | 342.2 |
| | — |
| | — |
|
| Other | — |
| | — |
| | — |
| | 2.0 |
| | — |
| | — |
|
| | $ | 19.7 |
| | $ | 12.7 |
| | $ | 849.5 |
| | $ | 665.6 |
| | $ | 3.5 |
| | $ | 185.1 |
|
During the three months ended July 1, 2017, we identified impairment indicators for our Lumara Health, Inc. ("Lumara") product assets. The primary impairment indicators included the decline in our 2017 performance expectations and a reduction in our long-range revenue growth forecast. The assessment utilized the multi-period excess earnings method to determine fair value and resulted in an impairment charge of $18.5 million in Impairment charges on the Consolidated Statements of Operations within our RX segment, which represented the difference between the carrying amount of the intangible assets and their estimated fair value.
During the three months ended April 2, 2016, we identified indicators of impairment associated with certain indefinite-lived intangible assets acquired in conjunction with the Omega acquisition. The primary impairment indicators included the decline in our 2016 performance expectations and a reduction in our long-range revenue growth forecast. The assessment utilized the excess earnings method to determine fair value and resulted in an impairment charge of $273.4 million in Impairment charges on the Consolidated Statements of Operations within our CHCI segment, which represented the difference between the carrying amount of the intangible assets and their estimated fair value. The change in fair value from previous estimates was due primarily to the changes in the market and performance of the brands such that the evaluation of brand prioritization and product extensions or launches in new regions are being more focused to maximize the potential of all brands in the segment's portfolio. The main assumptions supporting the fair value of these assets and cash flow projections included revenue growth based on product line extensions, product life cycle strategies, geographical expansion within the markets in which the CHCI segment distributes products, gross margins consistent with historical trends, and advertising and promotion investments largely consistent with the segment's growth plans.
During the three months ended October 1, 2016, we identified additional indicators of impairment associated with certain indefinite-lived and definite-lived intangible brand category assets acquired in conjunction with the Omega acquisition. The primary impairment indicators are discussed above in goodwill. The assessment of the indefinite-lived assets utilized the excess earnings method to determine fair value and resulted in an impairment charge of $575.7 million. With regards to definite-lived assets, it was determined that the carrying value of one asset group was not recoverable based on an assessment of the undiscounted future cash flows expected to be generated by the asset group. Given this, the excess earnings method was utilized to determine fair value of the definite-lived asset and resulted in an impairment charge of $290.9 million. Both charges, which represented the difference between the carrying amount of the intangible assets and their estimated fair value, were recorded in Impairment charges on the Consolidated Statements of Operations within our CHCI segment. The main assumptions supporting the fair value of these assets and cash flow projections are included in the goodwill discussions above.
During the three months ended December 31, 2016, we identified impairment indicators in our Entocort® product assets which related to the entrance of new market competition and resulting negative impacts on sales volume and pricing. Utilizing a multi-period excess earnings method, we determined that the Entocort® product
Perrigo Company plc - Item 8
Note 3
assets were impaired by $342.2 million. We recorded this impairment in Impairment charges on the Consolidated Statement of Operations within our RX segment.
During the three months ended December 31, 2016, we identified impairment indicators in certain definite-lived intangible assets, including trademarks and trade names related to our Herron products that we originally acquired through the acquisition of Aspen. After determining the assets were impaired, we utilized the relief from royalty method to quantify the impairment, resulting in a $30.5 million impairment. We recorded these impairments in Impairment charges on the Consolidated Statement of Operations within our CHCI segment.
During our impairment testing for the six months ended December 31, 2015, we identified an impairment of certain indefinite-lived intangible assets based on management’s expectations of the prospects for future revenues, profits, and cash flows associated with these assets. The indefinite-lived intangible assets were purchased in conjunction with the Omega acquisition and are included in the CHCI segment. The assessment utilized the excess earnings method to determine fair value and resulted in an impairment charge of $185.1 million, which represents the difference between the carrying amount of the intangible assets and their estimated fair value. The amount was recorded in Impairment charges on the Consolidated Statements of Operations within the CHCI segment. The primary assumptions supporting the fair value of these assets and cash flow projections assume modest revenue growth based on product line extensions, product life cycle strategies, and geographical expansion within the markets in which the CHCI segment currently distributes products, and gross margins and advertising and promotion investments largely consistent with historical trends.
No material impairment charges were recorded as a result of the annual intangible asset impairment testing during the year endedJune 27, 2015.
We recorded an impairment charge of $12.7 million and $3.5 million on certain IPR&D assets during the years ended December 31, 2017 and December 31, 2016, respectively,2021 due to changes in the projected development and regulatory timelines for various projects, we also recorded a decreaseprojects. We did not record any impairment charges in the contingent consideration liability associated with certain IPR&D assets in Other operating income on the Consolidated Statements of Operations (refer to Note 6).2023 or 2022.
In addition, due to reprioritization of certain brands in the CHCI segment and change in performance expectations for the cough/cold/allergy, anti-parasite, personal care, lifestyle, and natural health brands, we reclassified $364.5 million and $674.4 million of indefinite-lived assets to definite-lived assets with useful lives of 20 years, which we began amortizing during the second and third quarters of 2016, respectively.
The remaining weighted-average useful life for our amortizable intangible assets by asset class at December 31, 20172023 was as follows:
| | | | | | | | |
| | |
| Amortizable Intangible Asset Category | | Remaining Weighted-Average Useful Life (Years) |
| Distribution and license agreements and supply agreements | | 714 |
| Developed product technology, formulations, and product rights | | 1211 |
| Customer relationships and distribution networks | | 1714 |
| Trademarks, trade names, and brands | | 2016 |
| Non-compete agreements | | 20 |
We recorded amortization expense of $349.6$265.8 million, $356.8$252.4 million, $128.6 million, $174.5and $210.0 million during the years ended December 31, 20172023, December 31, 2022, and December 31, 2016, the six months ended December 31, 2015, and the year ended June 27, 2015,2021, respectively. The amortization expense in the year ended December 31, 2017 remained relatively flat. The increase in amortization expense in the year ended December 31, 2016 was due primarily to the incremental amortization expense incurred on the definite-lived intangible assets acquired from the Omega, Entocort®,and Tretinoin Products acquisitions. In addition, we incurred additional amortization in 2016 due to the previously indefinite-lived Omega brands changing classification to definite-lived during the year. The increase in amortization expense in the six months ended December 31, 2015 was due primarily to definite-lived assets
Perrigo Company plc - Item 8
Note 39
acquired from Omega. The increase in amortization expense in the year ended June 27, 2015 was due primarily to the inclusion of one quarter of amortization expense related to the intangible assets acquired from Omega.
Estimated future amortization expense includes the additional amortization related to recently acquired intangible assets subject to amortization. Our estimated future amortization expense is as follows (in millions):
| | | | | | | | |
| Year | | Amount |
| 2024 | | $ | 239.8 | |
| 2025 | | 233.6 | |
| 2026 | | 226.0 | |
| 2027 | | 220.3 | |
| 2028 | | 214.4 | |
| Thereafter | | 1,846.7 | |
|
| | | | |
| Year | | Amount |
| 2018 | | $ | 341.0 |
|
| 2019 | | 316.4 |
|
| 2020 | | 280.8 |
|
| 2021 | | 251.8 |
|
| 2022 | | 222.0 |
|
| Thereafter | | 1,878.5 |
|
NOTE 4 - ACCOUNTS RECEIVABLE FACTORING
We have accounts receivable factoring arrangements with non-related third-party financial institutions (the “Factors”). Pursuant to the terms of the arrangements, we sell to the Factors certain of our accounts receivable balances on a non-recourse basis for credit approved accounts. An administrative fee per invoice is charged on the gross amount of accounts receivables assigned to the Factors, and interest is calculated at the applicable EUR LIBOR rate plus a spread. The total amount factored on a non-recourse basis and excluded from accounts receivable was $27.5 million, $50.7 million, and $64.5 million at December 31, 2017, December 31, 2016 and December 31, 2015, respectively.
NOTE 5 - INVENTORIES
Major components of inventory were as follows (in millions):
|
| | | | | | | | | | | |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Finished goods | $ | 454.3 |
| | $ | 431.1 |
| | $ | 537.2 |
|
| Work in process | 152.8 |
| | 165.7 |
| | 151.6 |
|
| Raw materials | 199.8 |
| | 198.2 |
| | 209.9 |
|
| Total inventories | $ | 806.9 |
| | $ | 795.0 |
| | $ | 898.7 |
|
NOTE 610 - FAIR VALUE MEASUREMENTS
Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable.
| |
Level 1: | Quoted prices for identical instruments in active markets. |
| |
Level 2: | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
| |
Level 3: | Valuations derived from valuation techniques in which one or more significant inputs are not observable. |
Perrigo Company plc - Item 8•Level 1: Quoted prices for identical instruments in active markets.
Note 6•Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
•Level 3: Valuations derived from techniques in which one or more significant inputs are not observable.
The following tables summarizetable below summarizes the valuation of our financial instruments carried at fair value by the aboveapplicable pricing categories (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2023 | | December 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| Measured at fair value on a recurring basis: | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| Investment securities | | $ | 0.1 | | | $ | — | | | $ | — | | | $ | 0.1 | | | $ | — | | | $ | — | |
| Foreign currency forward contracts | | — | | | 0.6 | | | — | | | — | | | 4.2 | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Interest rate swap agreements | | — | | | 30.5 | | | — | | | — | | | 50.5 | | | — | |
| Total assets | | $ | 0.1 | | | $ | 31.1 | | | $ | — | | | $ | 0.1 | | | $ | 54.7 | | | $ | — | |
| | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | |
| Foreign currency forward contracts | | $ | — | | | $ | 2.7 | | | $ | — | | | $ | — | | | $ | 5.2 | | | $ | — | |
| Cross-currency swap | | — | | | 172.0 | | | — | | | — | | | 96.1 | | | — | |
| Interest rate swap agreements | | — | | | 11.7 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | |
| Total liabilities | | $ | — | | | $ | 186.4 | | | $ | — | | | $ | — | | | $ | 101.3 | | | $ | — | |
| | | | | | | | | | | | |
| Measured at fair value on a non-recurring basis: | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
Goodwill(1) | | $ | — | | | $ | — | | | $ | 118.9 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total assets | | $ | — | | | $ | — | | | $ | 118.9 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | | | | Fair Value |
| | | Fair Value Hierarchy | | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Measured at fair value on a recurring basis: | | | | | | | | |
| Assets: | | | | | | | | |
| Investment securities | | Level 1 | | $ | 17.0 |
| | $ | 38.2 |
| | $ | 14.9 |
|
| | | | | | | | | |
| Foreign currency forward contracts | | Level 2 | | $ | 6.3 |
| | $ | 3.8 |
| | $ | 4.8 |
|
| Funds associated with Israeli severance liability | | Level 2 | | 16.3 |
| | 15.9 |
| | 17.2 |
|
| Total level 2 assets | | | | $ | 22.6 |
| | $ | 19.7 |
| | $ | 22.0 |
|
| | | | | | | | | |
| Royalty Pharma contingent milestone payments | | Level 3 | | $ | 134.5 |
| | $ | — |
| | $ | — |
|
| Financial assets | | Level 3 | | — |
| | 2,350.0 |
| | 5,310.0 |
|
| Total level 3 assets | | | | $ | 134.5 |
| | $ | 2,350.0 |
| | $ | 5,310.0 |
|
| | | | | | | | | |
| Liabilities: | | | | | | | | |
| Interest rate swap agreements | | Level 2 | | $ | — |
| | $ | — |
| | $ | 0.3 |
|
| Foreign currency forward contracts | | Level 2 | | 3.8 |
| | 5.0 |
| | 3.9 |
|
| Total level 2 liabilities | | | | $ | 3.8 |
| | $ | 5.0 |
| | $ | 4.2 |
|
| | | | | | | | | |
| Contingent consideration | | Level 3 | | $ | 22.0 |
| | $ | 69.9 |
| | $ | 17.9 |
|
| | | | | | | | | |
| Measured at fair value on a non-recurring basis: | | | | | | | | |
| Assets: | | | | | | | | |
Goodwill(1) | | Level 3 | | $ | — |
| | $ | 1,148.4 |
| | $ | — |
|
Indefinite-lived intangible assets(2) | | Level 3 | | — |
| | 0.3 |
| | 1,031.8 |
|
Definite-lived intangible assets(3) | | Level 3 | | 11.5 |
| | 758.0 |
| | — |
|
| Assets held for sale, net | | Level 3 | | — |
| | 18.2 |
| | 37.5 |
|
| Total level 3 assets | | | | $ | 11.5 |
| | $ | 1,924.9 |
| | $ | 1,069.3 |
|
| |
(1)
| As of December 31, 2016, goodwill with a carrying amount of $2.2 billion was written down to its implied fair value of $1.1 billion. |
| |
(2)
| As of December 31, 2016, indefinite-lived intangible assets with a carrying amount of $0.7 million were written down to a fair value of $0.3 million. As of December 31, 2015, indefinite-lived intangible assets with a carrying amount of $1.2 billion were written down to a fair value of $1.0 billion. |
| |
(3)
| As of December 31, 2017, definite-lived intangible assets with a carrying amount of $31.2 million were written down to a fair value of $11.5 million. As of December 31, 2016, definite-lived intangible assets with a carrying amount of $2.3 billion were written down to a fair value of $758.0 million. Included in this balance are indefinite-lived intangible assets with a fair value of $364.5 million and $674.2 million that were reclassified to definite-lived assets at April 3, 2016 and October 2, 2016, respectively. |
There were no transfers amongwithin Level 1, 2, and 3 fair value measurements during the years endedDecember 31, 2017, and2023 or December 31, 2016, or the six months ended December 31, 2015. Our policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period2022 (refer to Note 76 for information on our investment securities and Note 811 for a discussion of derivatives).
Perrigo Company plc - Item 8
Note 6
Foreign Currency Forward Contracts
The fairWe value ofthe foreign currency forward contracts is determined using abased on notional amounts, contractual rates, and observable market approach, which utilizes values for comparable derivative instruments.
Funds Associated with Israel Severance Liability
Israeli labor laws and agreements require us to pay benefits to employees dismissed or retiring under certain circumstances. Severance pay is calculated on the basis of the most recent employee salary levels and the length of employee service. Our Israeli subsidiaries also provide retirement bonuses to certain managerial employees. We make regular deposits to retirement funds and purchase insurance policies to partially fund these liabilities. The funds are determined using prices for recently traded financial instruments with similar underlying terms, as well as directly or indirectly observable inputs, such as interestcurrency exchange rates and yield curves, that are observable at commonly quoted intervals.credit risk.
Financial Assets
On December 18, 2013, we acquired Elan, which had a royalty agreement with Biogen Idec Inc. ("Biogen"), whereby Biogen conveyed the right to receive royalties that are typically payable on sales revenue generated by the sale, distribution or other use of the drug Tysabri®. Pursuant to the royalty agreement, we were entitled to royalty payments from Biogen based on its Tysabri® sales in all indications and geographies. We received royalties of 12% on worldwide Biogen sales of Tysabri® from December 18, 2013 through April 30, 2014. From May 1, 2014, we received royalties of 18% on annual worldwide Biogen sales of Tysabri® up to $2.0 billion and 25% on annual sales above $2.0 billion.
Prior to its divestiture on March 27, 2017, we accounted for the Tysabri® royalty stream as a financial asset and elected to use the fair value option model. We made the election to account for the Tysabri® financial asset using the fair value option as we believed this method was most appropriate for an asset that did not have a par value, a stated interest stream, or a termination date. The financial asset acquired represented a single unit of accounting. The fair value of the financial asset acquired was determined by using a discounted cash flow analysis related to the expected probability weighted future cash flows to be generated by the royalty stream. The financial asset was classified as a Level 3 asset within the fair value hierarchy, as our valuation utilized significant unobservable inputs, including industry analyst estimates for global Tysabri® sales, probability weighted as to the timing and amount of future cash flows along with certain discount rate assumptions. Cash flow forecasts included the estimated effect and timing of future competition, considering patents in effect for Tysabri® through 2024 and contractual rights to receive cash flows into perpetuity. The discounted cash flows were based upon the expected royalty stream forecasted into perpetuity using a 20-year discrete period with a declining rate terminal value. The pre-tax discount rate utilized was 7.72% and 7.83% at December 31, 2015, and June 27, 2015, respectively.
In the first quarter of 2016, a competitor's pipeline product, Ocrevus®, received breakthrough therapy designation from the U.S. Food and Drug Administration ("FDA"). Breakthrough therapy designation is granted when a drug is intended alone or in combination with one or more other drugs to treat a serious or life threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. In June 2016, the FDA granted priority review with a target action date in December 2016. A priority review is a designation when the FDA will direct overall attention and resources to the evaluation of applications for drugs that, if approved, would be significant improvements in the safety or effectiveness of the treatment, diagnosis, or prevention of serious conditions when compared to standard applications. The product was approved late in the first quarter of 2017. The product is expected to compete with Tysabri®, and we expected it to have a significant negative impact on the Tysabri® royalty stream. Industry analysts believe that, based on released clinical study information, Ocrevus® will compete favorably against Tysabri® in the relapsing, remitting multiple sclerosis market segment due to its high efficacy and convenient dosage form.
Perrigo Company plc - Item 8
Note 610
Cross-currency Swaps
Given
We value the new market information for Ocrevus®, we used industry analyst estimates to reduce our first ten year growth forecastscross-currency swaps using a method which discounts the expected cash flows resulting from an average growth of approximately 3.4% in the fourth calendar quarter of 2015 to an average decline of approximately minus 2.0% inderivative. We estimate the third and fourth calendar quarters of 2016. In November 2016, we announced we were evaluating strategic alternatives forcash flows using the Tysabri® financial asset. As of December 31, 2016, the financial asset was adjusted based on the strategic review and sale process. These effects, combined with the change in discount rate each quarter, led to a reduction in fair value of $204.4 million, $910.8 million, $377.4 million and $1.1 billion in the first, second, third and fourth quarters of 2016, respectively.
At December 31, 2015, and June 27, 2015, we performed an evaluation to assess the discount rate and general market conditions potentially affecting the fair value of our Tysabri® financial asset. As of December 31, 2015, had this discount rate increased or decreased by 0.5%, the fair valuecontractual term of the asset would have increased by $270.0 million or decreased by $260.0 million, respectively. As of June 27, 2015, had this discountderivative, including the period to maturity and we use observable market-based inputs, including interest rate increased or decreased by 0.5%, the fair value of the asset would have decreased by $260.0 million or increased by $290.0 million, respectively. The estimated fair value of the asset is subject to variation should those cash flows vary significantly from those estimates. Quarterly, we assess the expected future cash flowscurves, and to the extent such payments are greater or less than initial estimates, or the timing of such payments is materially different than the original estimates, we will adjust the estimated fair value of the asset. As of December 31, 2015, if the expected royalty cash flows used in the estimation process had increased or decreased by 5.0%, the fair value of the asset would have increased by $270.0 million or decreased by $280.0 million, respectively. As of June 27, 2015, if the expected royalty cash flows used in the estimation process had increased or decreased by 5.0%, the fair value of the asset would have increased by $280.0 million or decreased by $280.0 million, respectively. In November 2016, we announced we were evaluating strategic alternatives for the Tysabri® financial asset. As of December 31, 2016, the financial asset was adjusted based on this strategic review and sale process.foreign exchange rate.
On March 27, 2017, we announced the completed divestment of our Tysabri® financial asset to Royalty Pharma for up to $2.85 billion, consisting of $2.2 billion in cash and up to $250.0 million and $400.0 million in milestone payments if the royalties on global net sales of Tysabri® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we transferred the entire financial asset to Royalty Pharma and recorded a $17.1 million gain during the three months ended April 1, 2017. We elected to account for the contingent milestone payments using the fair value option method, and these were recorded at an estimated fair value of $134.5 million as of December 31, 2017. We chose the fair value option as we believe it will help investors understand the potential future cash flows we may receive associated with the two contingent milestones.Foreign Currency Option Contracts
The following table summarizes the change in our Consolidated Balance Sheet for the Tysabri® Financial Asset, which includes our fair value adjustment that is a Level 3 measurement under ASC 820 and is included in our Consolidated Statement of Operations for the years ended December 31, 2017 and December 31, 2016, six months ended December 31, 2015, and year ended June 27, 2015 (in millions):
|
| | | | | | | | | | | | | | | |
| | Year Ended | | Six Months Ended | | Year Ended |
| | December 31, 2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
Tysabri® financial asset | | | | | | | |
| Beginning balance | $ | 2,350.0 |
| | $ | 5,310.0 |
| | $ | 5,420.0 |
| | $ | 5,680.0 |
|
| Royalties earned | — |
| | (351.8 | ) | | (167.3 | ) | | (338.5 | ) |
| Change in fair value | — |
| | (2,608.2 | ) | | 57.3 |
| | 78.5 |
|
| Divestitures | (2,350.0 | ) | | — |
| | — |
| | — |
|
| Ending balance | $ | — |
| | $ | 2,350.0 |
| | $ | 5,310.0 |
| | $ | 5,420.0 |
|
Perrigo Company plc - Item 8
Note 6
Royalty Pharma Contingent Milestone Payments
We valued the contingent milestone paymentsforeign currency option contract derivatives using a modifiedan extension of the Black-Scholes Option Pricing Model ("BSOPM"). Key which uses the strike price and expiry as inputs inobtained from the BSOPM arecontractual agreement. Additionally, the estimatedmodel uses risk-free interest rates, forward currency quotes, and option volatility and rate of return of royalties on global net sales of Tysabri® that are received by Royalty Pharma over time until payment ofassumptions obtained from the contingent milestone payments is completed. Volatility and the estimated fair value of the milestones have a positive relationship such that higher volatility translates to a higher estimated fair value of the contingent milestone payments. In the valuation of contingent milestone payments performed, we assumed volatility of 30.0% and a rate of return of 8.07% as of December 31, 2017. We assess volatility and rate of return inputs quarterly by analyzing certain market volatility benchmarks and the risk associated with Royalty Pharma achieving the underlying projected royalties. During the year ended December 31, 2017, the fair value of the Royalty Pharma contingent milestone payments decreased $42.0 million, as a result of the decrease in the estimated projected Tysabri® revenues due to the launch of Ocrevus® late in the first quarter of 2017.observable market.
In addition, payment of the contingent milestone payments is dependent on global net sales of Tysabri®. Of the $134.5 million of estimated fair valued contingent milestone payments as of December 31, 2017, $79.7 million and $54.8 million relates to the 2018 and 2020 contingent milestone payments, respectively. If Tysabri® global net sales do not meet the prescribed threshold in 2018, we will write off the $79.7 million asset as an expense to Change in financial assets on the Consolidated Statement of Operations. If the prescribed threshold is exceeded, we will write up the asset to $250 million and recognize income of $170.3 million in Change in financial assets on the Consolidated Statement of Operations. If Tysabri® global net sales do not meet the prescribed threshold in 2020, we will write off the $54.8 million asset as an expense to Change in financial assets on the Consolidated Statement of Operations. If the prescribed threshold is exceeded, we will write up the asset to $400.0 million and recognize income of $345.2 million in Change in financial assets on the Consolidated Statement of Operations.
Global Tysabri® net sales need to exceed $1.9 billion and $2.0 billion in 2018 and 2020, respectively in order for Royalty Pharma to receive the level of royalties needed to trigger the milestone payments owed to us.
See Note 1 for amounts recorded in our accounts receivable related to our Tysabri® financial asset.
The table below presents a reconciliation for the Royalty Pharma contingent milestone payments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in millions). Change in fair value in the table was recorded in Change in financial assets on the Consolidated Statements of Operations.
|
| | | |
| | Year Ended |
| | December 31,
2017 |
| Royalty Pharma Contingent Milestone Payments | |
| Beginning balance | $ | — |
|
| Additions | 184.5 |
|
| Payments | (8.0 | ) |
| Change in fair value | (42.0 | ) |
| Ending balance | $ | 134.5 |
|
Interest Rate SwapsSwap Agreements
The fair values ofWe value the interest rate swaps are determined using a market approach,method which utilizes values for comparable swap instruments.
Perrigo Company plc - Item 8
Note 6
Guarantee Liability Related to The Israel API Sale
On November 21, 2017, we completeddiscounts the sale of our Israel API business to SK Capital (refer to Item 8. Note 2). As a resultexpected cash flows resulting from the derivative. We estimate the cash flows using the contractual term of the sale, we recognized a guarantee liability, which was classified as a level 3 liability. Per the agreement, we will be reimbursed for tax receivables for tax years prior to closing and will need to reimburse SK Capital for the settlement of any uncertain tax liability positions for tax years prior to closing. In addition, after closing and going forward, the Israel API business, will be assessed by and liable to the Israel Tax Authority ("ITA") for any audit findings. As of November 21, 2017, we are no longer the primary obligor on the liabilities transferred to SK Capital, however, we have provided a guarantee on certain obligations that were recorded at a fair value of $13.8 million, with a maximum possible payout of $34.9 million.
Contingent Consideration
Contingent consideration represents milestone payment obligations obtained through product acquisitions, which are valued using estimates based on probability-weighted outcomes, sensitivity analysis, and discount rates reflective of the risk involved. The estimates are updated quarterly and the liabilities are adjusted to fair value depending on a number of assumptions,derivative, including the competitive landscapeperiod to maturity and regulatory approvals that may impact the future sales of a product. We reduced a contingent consideration liability associated with certain IPR&D assets (refer to Note 3)we use observable market-based inputs, including interest rate curves, and recorded a corresponding gain of $17.4 million during the year ended December 31, 2017. The liability decrease relates to a reduction of the probability of achievement assumptions and anticipated cash flows (refer to Note 2). In addition, we sold a certain IPR&D asset and the corresponding contingent consideration of $12.5 million was reduced. Purchases or additions for the year ended December 31, 2016 included contingent consideration associated with five transactions.swap pricing.The table below presents a reconciliation for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in millions). Net realized losses in the table were recorded in Other expense (Income), net on the Consolidated Statements of Operations.
|
| | | | | | | | | | | |
| | Year Ended | | Six Months Ended |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Contingent Consideration | | | | | |
| Beginning balance | $ | 69.9 |
| | $ | 17.9 |
| | $ | — |
|
| Net realized losses | (19.5 | ) | | (2.1 | ) | | — |
|
| Purchases or additions | — |
| | 56.7 |
| | 17.9 |
|
| Divestiture | (12.5 | ) | | — |
| | — |
|
| Currency translation adjustments | 1.5 |
| | 0.1 |
| | — |
|
| Settlements | (17.4 | ) | | (2.7 | ) | | — |
|
| Ending balance | $ | 22.0 |
| | $ | 69.9 |
| | $ | 17.9 |
|
Non-recurring Fair Value Measurements
The non-recurring fair values represent only those assets whose carrying values were adjusted to fair value during the reporting period.
Goodwill, and Indefinite-Lived Intangible Assets, and Assets (liabilities) held for sale, net
We have six reporting units for which we assess the goodwill in each reporting unit for impairment. We conduct our goodwill and indefinite-lived intangible asset impairment test on the first day of the fourth quarter, unless indications of impairment exists during an interim period. We utilize a comparable company market approach, weighted equally with a discounted cash flow analysis, to determine the fair value of the reporting units. We utilize either a relief from royalty method or a multi-period excess earnings method to value our indefinite-lived intangible assets. We use a consistent set of projected financial information for the goodwill and indefinite-lived asset impairment tests. The discounted cash flow analysis that we prepared for goodwill impairment testing purposes forRare Disease Reporting Unit Goodwill
During the year ended December 31, 20172023, we prepared a goodwill impairment test utilizing a combination of comparable company and discounted cash flow techniques. In our comparable company market approach, we considered observable and unobservable market information (Level 2 and 3 inputs, respectively) which resulted in selected current and forward multiples averaging 11.5x of comparable adjusted earnings. Our cash flow projections included revenue assumptions, gross margin and operating expenses based on the reporting unit’s growth plans (Level 3 inputs). In our discounted cash flow analysis, we used a long-term growth rates ranging fromrate of 2.0% to 3.0%2.5%. We
Perrigo Company plc - Item 8
Note 6
also utilized used a discount rates ranging from 7.5% torate of 13.5%, in the analysis, which were deemed to be commensuratecorrelates with the required investment return and risk involved in realizingthat we believe market participants would apply to the projected free cash flows of each reporting unit.growth rate. Furthermore, the discount rate was influenced by other level 3 market information which was also utilized in the comparable market approach. In addition, we burdened projected free cash flows with the capital spending deemed necessary to support the cash flows of each reporting unit, and applied theblended jurisdictional tax rates ranging from 14.6% to 31.7%. We weighted indications of fair value resulting from the market approach and discounted cash flow techniques, considering the reasonableness of the range of measurements and the point within the range that were applicablewe determined was most representative of fair market conditions (refer to the jurisdictions represented within each reporting unit. We recorded Impairment charges on the Consolidated Statements of Operations related toNote 9).
Oral Care Reporting Unit Goodwill and indefinite lived intangible assets of $1.1 billion and $849.5 million, for
During the year ended December 31, 2016, respectively. We recorded Impairment charges2021, we prepared a goodwill impairment test utilizing a combination of comparable company and discounted cash flow techniques. In our comparable company market approach, we considered observable market information (Level 2 inputs). Our cash flow projections included revenue assumptions, gross margin and operating expenses based on the Consolidated Statementsreporting unit’s growth plans (Level 3 inputs). In our discounted cash flow analysis, we used a long-term growth rate of Operations related2.0%. We used a discount rate of 9.75% in the analysis, which correlates with the required investment return and risk that we believe market participants would apply to indefinite-lived intangible assetsthe projected growth rate. In addition, we burdened projected free cash flows with the capital spending deemed necessary to support the cash flows and applied blended jurisdictional tax rates ranging from 16.5% to 29.1%. We weighted indications of $185.1 million forfair value resulting from the six monthsmarket approach and present value techniques, considering the reasonableness of the range of measurements and the point within the range that we determined was most representative of fair market conditions (refer to Note 9).
Latin American businesses
During the year ended December 31, 2015. As2021, as a result of December 31, 2017,our definitive agreement to sell our Latin American
Perrigo Company plc - Item 8
Note 10
businesses, we prepared impairment tests on the remainingnet assets held for sale and goodwill and indefinite-lived asset balances were $4.2 billion and $90.3 million, respectively (referrelated to Note 3).
Definite-Lived Intangible Assets
When assessing our definite-lived assets for impairment, we utilize either a multi-period excess earnings method or a relief from royalty method to determinethis business. We determined the carrying value of this business exceeded the fair value of the asset and use the forecasts that are consistent with those usedrecorded impairments in the reporting unit analysis. We conduct our definite-lived intangible asset impairment test quarterly when indications of impairment exists. Below is a summary of the various metrics used in our valuations:
|
| |
| Year Ended |
| December 31, 2017 |
| Lumara |
5-year average growth rate | (4.1)% |
Discount rate | 13.5% |
Valuation method | MPEEM |
|
| | | | | | | | | |
| | Year Ended |
| | December 31, 2016 |
| | Omega - Lifestyle | | Omega -
XLS | | Entocort® - Branded Products | | Entocort® - AG Products | | Herron Trade Names and Trademarks |
| 5-year average growth rate | 2.5% | | 3.2% | | (31.7)% | | (30.4)% | | 4.6% |
| Long-term growth rates | 2.0% | | NA | | (10.0)% | | (4.7)% | | 2.5% |
| Discount rate | 9.3% | | 9.5% | | 13.0% | | 10.5% | | 10.8% |
| Royalty rate | NA | | 4.0% | | NA | | NA | | 11.0% |
| Valuation method | MPEEM | | Relief from Royalty | | MPEEM | | MPEEM | | Relief from Royalty |
We recorded Impairment charges on the Consolidated Statements of Operations related to definite-lived intangible assets of $665.6 million during the year endedDecember 31, 2016. These impairments were primarily recorded in our BCH and RX goodwill reporting unitsCSCA segment (refer to Note 39 for a additional detail on impaired definite-lived intangible assets)).Perrigo Company plc - Item 8
Note 6
Fixed Rate Long-term Debt
Our fixed rate long-term debt consisted of public bonds, a private placement note and retail bonds as followsthe following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 |
| Level 1 | | Level 2 | | Level 1 | | Level 2 |
| Public Bonds | | | | | | | |
| Carrying value (excluding discount) | $ | 2,244.4 | | | $ | — | | | $ | 2,544.4 | | | $ | — | |
| Fair Value | $ | 2,062.2 | | | $ | — | | | $ | 2,225.4 | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | |
| | | | Year Ended |
| | Fair Value Hierarchy | | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| | | | | | | | |
| Public bonds | Level 1 | | | | | | |
| Carrying value | | | $ | 2.6 |
| | $ | 4.6 |
| | $ | 3.9 |
|
| Fair value | | | $ | 2.7 |
| | $ | 4.6 |
| | $ | 3.8 |
|
| | | | | | | | |
| Retail bonds and private placement note | Level 2 | | | | | | |
| Carrying value (excluding premium) | | | $ | 306.0 |
| | $ | 773.1 |
| | $ | 798.3 |
|
| Fair value | | | $ | 342.1 |
| | $ | 825.0 |
| | $ | 859.8 |
|
| Premium | | | $ | 21.4 |
| | $ | 49.8 |
| | $ | 82.5 |
|
The fair values of our public bonds for all periods were based on quoted market prices. The fair values of our retail bonds and private placement note for all periods were based on interest rates offered for borrowings of a similar nature and remaining maturities.
The carrying amounts of our other financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, short-term debt, revolving credit agreements and variable rate long-term debt, approximate their fair value.
NOTE 7 - INVESTMENTS
Available for Sale Securities
Our available for sale securities are reported in Prepaid expenses and other current assets. Unrealized investment gains (losses) on available for sale securities were as follows (in millions):
|
| | | | | | | | | | | |
| | Year Ended | | Six Months Ended |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Equity securities, at cost less impairments | $ | 15.5 |
| | $ | 16.5 |
| | $ | 6.4 |
|
| Gross unrealized gains | 1.5 |
| | 21.7 |
| | 9.3 |
|
| Gross unrealized losses | — |
| | — |
| | (0.8 | ) |
| Estimated fair value of equity securities | $ | 17.0 |
| | $ | 38.2 |
| | $ | 14.9 |
|
The factors affecting the assessment of impairments include both general financial market conditions and factors specific to a particular company. We recorded impairment charges of $1.8 million and $10.7 million during the year ended December 31, 2016, and the six months ended December 31, 2015, respectively, related to other-than-temporary impairments of marketable equity securities due to prolonged losses incurred on each of the investments.
We have evaluated the near-term prospects of the equity securities in relation to the severity and duration of any impairments, and based on that evaluation, we have the ability and intent to hold these investments until a recovery of fair value.
We sold a number of our investment securities and recorded gains of $1.6 million and $1.0 million during the years ended December 31, 2017 and December 31, 2016, respectively. The gains were reclassified out of AOCI and into earnings.
Perrigo Company plc - Item 8
Note 7
Cost Method Investments
Our cost method investments totaled $6.3 million, $6.9 million, and $6.9 million at December 31, 2017, December 31, 2016, and December 31, 2015, respectively, and were included in Other non-current assets. During the year ended December 31, 2017, due to significant and prolonged losses incurred by one of our cost method investments, we recorded a $1.0 million impairment charge in Other (income) expense, neton theConsolidated Statements of Operations.
Equity Method Investments
Our equity method investments totaled $4.9 million, $4.6 million, and $45.5 million at December 31, 2017, December 31, 2016, and December 31, 2015, respectively, and were included in Other non-current assets. We recorded net gains of $0.3 million, and net losses of $4.1 million, $5.4 million, and $11.6 million during the years ended December 31, 2017 and December 31, 2016, the six months ended December 31, 2015, and the year endedJune 27, 2015, respectively, for our proportionate share of the equity method investment earnings or losses. The gains and losses were recorded in Other (income) expense, net on the Consolidated Statements of Operations.
During the year ended December 31, 2016, one of our equity method investments became publicly traded. As a result, we transferred the $15.5 million investment to available for sale and recorded an $8.7 million unrealized gain, net of tax in Other Comprehensive Income ("OCI"). In addition, due to significant and prolonged losses incurred on one of our equity method investments, we recorded a $22.3 million impairment charge in Other (income) expense, net on the Consolidated Statements of Operations.
NOTE 811 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Foreign Currency Option Contracts
We enter into certain derivative financial instruments, when available on a cost-effective basis, to mitigate our risk associated with changes in interest rates and foreign currency exchange rates as follows:
Interest rate risk management - We are exposed to the impact of interest rate changes through our cash investmentsoption contracts, both designated and borrowings. We utilize a variety of strategiesnon-designated, in order to manage the impact of changesfluctuations of foreign exchange on expected future purchases and related payables denominated in interest rates including using a mixforeign currency and to hedge the impact of debt maturities along with both fixed-ratefluctuations of foreign exchange on expected future sales and variable-rate debt. related receivables denominated in a foreign currency.
In addition, we may enter into treasury-lock agreements and interest rate swap agreements on certain investing and borrowing transactionsSeptember 2021, to manage oureconomically hedge the foreign currency exposure to interest rate changes and our overall cost of borrowing.
Foreign currency exchange risk management - We conduct business in several major currencies other than the U.S. dollar and are subject to risks associated with changing foreign exchange rates. Our objective isthe planned payment of the euro-denominated purchase price for HRA Pharma, we entered into two non-designated currency option contracts with a total notional amount of $1.1 billion that were scheduled to reduce cash flow volatilitymature in September 2022. In April 2022, due to market conditions, we unwound the two options and entered into two new undesignated options to economically hedge the purchase price for HRA Pharma for a total notional amount of $2.0 billion. All premiums associated with foreign exchange rate changes onthe HRA Pharma related currency options were settled in April 2022 for $37.1 million, and within Other (income) expense we recorded a consolidated basis to allow management to focus its attention on business operations. Accordingly, we enter into various contracts that change in value as foreign exchange rates change to protect$16.2 million and $20.9 million loss for the value of existing foreign currency assets and liabilities, commitments, and anticipated foreign currency sales and expenses.
All derivative instruments are managed on a consolidated basis to efficiently net exposures and thus take advantage of any natural offsets. Gains and losses related to the derivative instruments are expected to be offset largely by gains and losses on the original underlying asset or liability. We do not use derivative financial instruments for speculative purposes.
All of our designated derivatives were classified as cash flow hedges as ofyear ended December 31, 2017, December 31, 2016,2022 and December 31, 2015. Designated derivatives meet hedge accounting criteria, which means2021, respectively. There was no gain or loss recorded for the year ended December 31, 2023.
Cross Currency Swaps
In a cross-currency swap, interest payments and principal in one currency are exchanged for principal and interest payments in a different currency. Interest payments are exchanged at fixed intervals during the life of the agreement. Changes in the fair value of cross-currency swaps designated as net investment hedges are recognized as a component of OCI as a foreign currency translation adjustment and are recognized in earnings only upon the sale or substantial liquidation of the hedged net investment. In assessing the effectiveness of these hedges, we use a method based on changes in spot rates to measure the impact of the foreign currency exchange rate fluctuations on both our foreign subsidiary net investment and the related swap. Under this method, changes in the fair value of the hedge ishedging instrument, other than those due to changes in the spot rate, are initially recorded in shareholders’ equityOCI as a translation adjustment. The excluded component of OCI,is recognized on a systematic and rational basis by accruing the swap payments and receipts within Interest expense, net.
In April 2022, we entered into three fixed-for-fixed cross currency interest rate swaps designated as net of tax. The deferred gains and losses are recognized in income ininvestment hedges to hedge the period in which the hedged item affects earnings. Any ineffective portion of the change in fair value of the derivative is immediately recognized in earnings. AllEUR currency exposure of our designated derivatives are assessed for hedge effectiveness quarterly.investment in European operations.
We also have economic non-designated derivatives that do not meet hedge accounting criteria. These derivative instruments are adjusted to current market value at the end of each period through earnings. Gains or losses on these instruments are offset substantially by the remeasurement adjustment on the hedged item.
Perrigo Company plc - Item 8
Note 811
On October 25, 2022, we cash settled the swaps for $98.8 million in proceeds. On the same day, we replaced the terminated instruments with three new fixed-for-fixed cross currency interest rate swaps at market rates and designated the instruments as net investment hedges on our investment in European operations. The following are the terms and notional amounts outstanding:
•$700 million notional amount outstanding from October 25, 2022 through December 15, 2024;
•$700 million notional amount outstanding from October 25, 2022 through March 15, 2026; and
•$100 million notional amount outstanding from October 25, 2022 through June 15, 2030.
On November 21, 2023, we entered into fixed-for-fixed cross currency interest rate swaps designated as net investment hedges to hedge the EUR currency exposure of our investment in European operations. The following are the terms and notional amount outstanding:
•$300 million notional amount outstanding from November 21, 2023 through April 20, 2027.
Interest Rate Swaps and Treasury Locks
Interest rate swap agreements are contracts to exchange floating rate for fixed rate payments (or vice versa) over the life of the agreement without the exchange of the underlying notional amounts. The notional amounts of the interest rate swap agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the interest rate swap agreements is recognized as an adjustment to interest expense.
DuringIn April 2022, to economically hedge the three months ended July 1, 2017, we repaid $584.4 million of senior notes with an interest rate of 4.000% due 2023 and $309.5 million of senior notes with an interest rate of 5.300% due 2043 (refer to Note 10). As a resultrisk of the senior note repayments on June 15, 2017, the proportionate amount remainingSenior Secured Credit Facilities (as defined in OCI related to the pre-issuance hedge was reclassified to earnings. Accordingly, we recorded a loss of $5.9 million in Other expense, net, during the three months ended July 1, 2017 for the amount remaining in OCI.
During the six months ended December 31, 2015,Note 12), we entered into a forwardfive variable-to-fixed interest rate swap to hedge against changes in the benchmark interest rate between the dateagreements. Three of the interest rate swap was entered into and the date of expected future debt issuance. The interest rate swap was designated as a cash flow hedge and had a notional amount totaling $200.0 million. The interest rate swap was settled upon the issuance of an aggregate $1.2 billion principal amount of senior notes on March 7, 2016 for a cumulative after-tax loss of $7.0 million in OCI during the three months ended April 2, 2016.
During the year ended June 27, 2015, we repaid a $300.0 million term loan with floating interest rates priced off the LIBOR yield curve (refer to Note 10). As a result of the term loan repayment on June 24, 2015, the forward interest rate swap agreements with notional amounts totaling $240.0 million that were in place to hedge the change in the LIBOR rate were terminated as well. We recorded a loss of $3.6 million in Other expense, net, during the year ended June 27, 2015 for the amount remaining in AOCI when the hedges were terminated.
In connection with the Omega acquisition, we assumed a $20.0 million private placement note. We also assumed an interest rate swap agreement with a notional amount totaling $20.0 million that was in place to hedge the cross currency exchange differences between the U.S. dollar and the euro on the above-mentioned debt. On May 29, 2015, we repaid the loan and the interest rate swap. We also assumed €500.0 million ($544.5 million) of debt under Omega's revolving credit facility, as well as an interest rate swap agreement with a notional amount of €135.0 million ($147.0 million) that was in place to hedge the change in the floating rate on that credit facility. On April 8, 2015, we repaid the loan and terminated the interest rate swap. Because both interest rate swaps mentioned above were recorded at fair market value on the date of termination, no gain or loss was recorded. For more information on the acquired debt and termination (refer to Note 10).
During the year ended June 27, 2015, we entered into forward interest rate swaps and treasury locks (together "Rate Locks") to hedge against changes in the interest rates between the date the Rate Locks were entered into and the date of the issuance of our 2014 Bonds (refer to Note 10). These Rate Locks were designated as cash flow hedges to fix the interest rate on a substantial portion of expected future debt issuances withthe Term Loan B Facility (as defined inNote 12). The interest rate swaps cover an interest period ranging from June 1, 2022, through April 1, 2029, on notional balances that decline from $1.0 billion to $812.5 million over the term. The other two interest rate swaps were designated as cash flow hedges to fix the interest rate on a substantial portion of the Term Loan A Facility (as defined inNote 12). The interest rate swaps cover an interest period ranging from June 1, 2022, through April 1, 2027, on notional amount totaling $750.0 million.balances that decline from $487.5 million to $387.5 million over the term.
In December 2023, to economically hedge the interest rate risk of the Term B Loans (as defined in Note 12), we entered into four variable-to-fixed interest rate swap agreements. The Rate Locksinterest rate swaps were settled upondesignated as cash flow hedges to fix the issuanceinterest rate on a substantial portion of the Term B Loans (as defined in Note 12). The interest rate swaps cover an aggregate $1.6 billion principal amount of our 2014 Bondsinterest period from December 15, 2023, through April 20, 2029, on December 2, 2014 fornotional balances that decline from $300 million to $229 million over the term.
As a cumulative after-tax loss of $5.8 milliondesignated cash flow hedge, gains and losses will be deferred in OCI after recording $1.1 million of ineffectiveness to OtherAOCI and recognized within Interest expense, net duringwhen interest is paid on the year ended June 27, 2015.Senior Secured Credit Facilities.
Foreign Currency DerivativesForwards
In a foreign currency forward, a contract is written to exchange currencies at a fixed exchange rate at a future settlement date. We enter intodesignate foreign currency forwards primarily as cash flow hedges to protect against foreign currency fluctuations of probable forecasted purchases and sales. The settlement dates of foreign currency forwards range from 1 to 60 months.
Perrigo Company plc - Item 8
Note 11
Notional amounts of foreign currency forward contracts both designated and non-designated,were as follows (in millions):
| | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2023 | | December 31, 2022 |
| European Euro (EUR) | | $ | 79.9 | | | $ | 61.7 | |
| British Pound (GBP) | | 72.4 | | | 224.9 | |
| Swedish Krona (SEK) | | 36.5 | | | 56.9 | |
| United States Dollar (USD) | | 22.1 | | | 51.7 | |
| Chinese Yuan (CNH) | | 14.1 | | | 34.4 | |
| Canadian Dollar (CAD) | | 7.1 | | | 24.9 | |
| Danish Krone (DKK) | | 5.9 | | | 51.7 | |
| Norwegian Krone (NOK) | | 4.4 | | | 12.4 | |
| Hungarian Forint (HUF) | | 3.9 | | | 10.6 | |
| Polish Zloty (PLZ) | | 3.8 | | | 25.2 | |
| Mexican Peso (MXN) | | — | | | 13.3 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Other (1) | | 3.5 | | | 25.9 | |
| Total | | $ | 253.6 | | | $ | 593.6 | |
(1) Number consists of various currencies notional amounts, none of which individually exceed $10.0 million in order to manage the impact of foreign exchange fluctuations on expected future purchases and related payables denominated in a foreign currency, as well as to hedge the impact of foreign exchange fluctuations on expected future sales and related receivables, and expected future royalties denominated in a foreign currency. Both types of forward contracts have a maximum maturity date of 18 months. The total notional amount for these contracts was $592.3 million, $533.5 million, and $755.5 million, as of December 31, 2017, December 31, 2016, and December 31, 2015, respectively.
In June 2015, in order to economically hedge the foreign currency exposure associated with the planned payment of the euro-denominated GSK Products acquisition (refer to Note 2), we entered into a non-designatedPerrigo Company plc - Item 8
Note 8
option contract to protect against a strengthening of the euro relative to the U.S. dollar. We recorded losses of $1.9 million for the change in fair value of the option contract during theeither year ended June 27, 2015 in Other expense, net. Because these derivatives were economically hedging future acquisitions, the cash outflows associated with their settlement are shown as investing activity on the Consolidated Statements of Cash Flows.
In November 2014, in order to economically hedge the foreign currency exposure associated with the planned payment of the euro-denominated purchase price of Omega, we entered into non-designated option contracts with a total notional amount of €2.0 billion. The option contracts settled in December 2014, resulting in a loss of $26.4 million. The option contracts were replaced with non-designated forward contracts that matured during the three months ended March 28, 2015. We recorded losses of $298.1 million during the year ended June 27, 2015 related to the settlement of the forward contracts.Both losses were recorded primarily in Other expense, net. The losses on the derivatives due to changes in the euro to U.S. dollar exchange rates were economically offset at closing in the final settlement of the euro-denominated Omega purchase price.
presented.
Effects of Derivatives on the Financial Statements
The below tables indicate the effects of all derivative instruments on the Consolidated Financial Statements. All amounts exclude income tax effects and are presented in millions.
effects. The balance sheet location and gross fair value of our outstanding derivative instruments were as follows:follows (in millions): | | | | | | Year Ended | |
| | | | Year Ended | |
| | | | Year Ended | |
| Derivatives | | Derivatives | | Balance Sheet Location | | December 31, 2023 | | December 31, 2022 |
| | Designated derivative assets: | |
| Designated derivative assets: | |
| Designated derivative assets: | |
| Foreign currency forward contracts | |
| Foreign currency forward contracts | |
| Foreign currency forward contracts | |
| Interest rate swap agreements | |
| Interest rate swap agreements | |
| Foreign currency forward contracts | |
| | Total designated derivative assets | |
| Total designated derivative assets | |
| Total designated derivative assets | |
| Non-designated derivative assets: | |
| Foreign currency forward contracts | |
| Foreign currency forward contracts | |
| Foreign currency forward contracts | |
| | Total non-designated derivatives | |
| Total non-designated derivatives | |
| Total non-designated derivatives | |
| | | Asset Derivatives |
| | | Fair Value |
| Designated derivative liabilities: | |
| | Balance Sheet Location | | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Designated derivatives: | | | | | | |
| Designated derivative liabilities: | |
| | Designated derivative liabilities: | |
| Foreign currency forward contracts | Other current assets | | $ | 4.1 |
| | $ | 3.1 |
| | $ | 3.8 |
|
| Non-designated derivatives: | | | | | | |
| Foreign currency forward contracts | Other current assets | | $ | 2.2 |
| | $ | 0.7 |
| | $ | 1.0 |
|
| Foreign currency forward contracts | |
| Cross-currency swap | |
| Cross-currency swap | |
| Interest rate swap agreements | |
| Total designated derivative liabilities | |
| Non-designated derivative liabilities: | |
| Foreign currency forward contracts | |
| Foreign currency forward contracts | |
| Foreign currency forward contracts | |
|
| | | | | | | | | | | | | |
| | | | Liability Derivatives |
| | | | Fair Value |
| | Balance Sheet Location | | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Designated derivatives: | | | | | | | |
| Foreign currency forward contracts | Accrued liabilities | | $ | 1.4 |
| | $ | 3.0 |
| | $ | 2.0 |
|
| Interest rate swap agreements | Other non-current liabilities | | — |
| | — |
| | 0.3 |
|
| Total designated derivatives | | | $ | 1.4 |
| | $ | 3.0 |
| | $ | 2.3 |
|
| Non-designated derivatives: | | | | | | | |
| Foreign currency forward contracts | Accrued liabilities | | $ | 2.4 |
| | $ | 2.0 |
| | $ | 1.9 |
|
The gains (losses) recorded in OCI for the effective portion of our designated cash flow hedges were as follows:
|
| | | | | | | | | | | | | | | | |
| | | Amount of Gain/(Loss) Recorded in OCI
(Effective Portion) |
| | | Year Ended | | Six Months Ended | | Year Ended |
| Designated Cash Flow Hedges | | December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| Treasury locks | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2.7 | ) |
| Interest rate swap agreements | | — |
| | (9.0 | ) | | (0.3 | ) | | (10.1 | ) |
| Foreign currency forward contracts | | 9.4 |
| | 2.1 |
| | 1.7 |
| | (7.7 | ) |
| | | $ | 9.4 |
| | $ | (6.9 | ) | | $ | 1.4 |
| | $ | (20.5 | ) |
Perrigo Company plc - Item 8
Note 811
The gains (losses) reclassified from AOCI intoamounts of (income)/expense recognized in earnings for the effective portion of our designated cash flow hedges were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | | | Amount of Gain/(Loss) Reclassified from AOCI into Earnings
(Effective Portion) |
| | | | | Year Ended | | Six Months Ended | | Year Ended |
| Designated Cash Flow Hedges | | Income Statement Location | | December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| Treasury locks | | Interest expense, net | | $ | (0.1 | ) | | $ | (0.1 | ) | | $ | — |
| | $ | (0.1 | ) |
| Interest rate swap agreements | | Interest expense, net | | (2.1 | ) | | (2.3 | ) | | (0.8 | ) | | (16.4 | ) |
| | | Other expense (Income), net | | (6.0 | ) | | — |
| | — |
| | — |
|
| Foreign currency forward contracts | | Net sales | | 1.5 |
| | 1.3 |
| | (1.8 | ) | | 1.9 |
|
| | | Cost of sales | | 5.6 |
| | 3.0 |
| | 0.8 |
| | (4.2 | ) |
| | | Interest expense, net | | (2.6 | ) | | (1.6 | ) | | (0.4 | ) | | — |
|
| | | Other expense (Income), net | | (1.5 | ) | | 0.4 |
| | 1.1 |
| | (4.4 | ) |
| | | | | $ | (5.2 | ) | | $ | 0.7 |
| | $ | (1.1 | ) | | $ | (23.2 | ) |
The net of tax amount expectedrelated to be reclassified out of AOCI into earnings during the next 12 months is a $5.5 million gain.
The gains (losses) recognized against earnings for the ineffective portion of our designated cash flow hedges were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | | | Amount of Gain/(Loss) Recognized against Earnings
(Ineffective Portion) |
| | | | | Year Ended | | Six Months Ended | | Year Ended |
| Designated Cash Flow Hedges | | Income Statement Location | | December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| Treasury locks | | Other expense (Income), net | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.4 | ) |
| Interest rate swap agreements | | Other expense (Income), net | | — |
| | (0.1 | ) | | — |
| | (0.7 | ) |
| Foreign currency forward contracts | | Net sales | | 0.2 |
| | (0.1 | ) | | (0.1 | ) | | (0.1 | ) |
| | | Cost of sales | | 0.1 |
| | (0.1 | ) | | 0.2 |
| | 0.2 |
|
| | | Other expense, net | | 1.0 |
| | $ | 0.6 |
| | — |
| | — |
|
| Total | | | | $ | 1.3 |
| | $ | 0.3 |
| | $ | 0.1 |
| | $ | (1.0 | ) |
The effects of our non-designated derivatives on the Consolidated Statements of Operations were as follows:follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended |
| Non-Designated Derivatives: | | Income Statement Location | | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Foreign currency forward contracts | | Other (income) expense, net | | $ | (4.0) | | | $ | 8.2 | | | $ | (5.1) | |
| | Interest expense, net | | (1.5) | | | (2.0) | | | 1.3 | |
| | | | $ | (5.5) | | | 6.2 | | | $ | (3.8) | |
| | | | | | | | |
| Foreign currency options | | Other (income) expense, net | | $ | — | | | $ | 16.2 | | | $ | 20.9 | |
Perrigo Company plc - Item 8
Note 11
|
| | | | | | | | | | | | | | | | | | |
| | | | | Amount of Gain/(Loss) Recognized in Income |
| | | | | Year Ended | | Six Months Ended | | Year Ended |
| Non-Designated Derivatives | | Income Statement Location | | December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| Foreign currency forward contracts | | Other expense (Income), net | | $ | 12.6 |
| | $ | (2.4 | ) | | $ | (8.0 | ) | | $ | (295.4 | ) |
| | | Interest expense, net | | (5.3 | ) | | (2.2 | ) | | (0.7 | ) | | (3.4 | ) |
| Foreign exchange option contracts | | Other expense (Income), net | | — |
| | — |
| | — |
| | (26.4 | ) |
| Total | | | | $ | 7.3 |
| | $ | (4.6 | ) | | $ | (8.7 | ) | | $ | (325.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gain/(Loss) |
| | | | Reclassified from AOCI into Earnings | | Related to Amounts Excluded from
Effectiveness Testing |
| | Amount Recorded in OCI(1) | | Classification | | Amount(2) | | Classification | | Amount Recognized in Earnings on Derivatives |
| Year Ended December 31, 2023 | | | | | | | | | | |
| Cash flow hedges | | | | | | | | | | |
| Treasury locks | | $ | — | | | Interest expense, net | | $ | (0.1) | | | Interest expense, net | | $ | — | |
| Interest rate swap agreements | | (31.7) | | | Interest expense, net | | 23.5 | | | Interest expense, net | | — | |
| Foreign currency forward contracts | | (0.5) | | | Net sales | | (0.1) | | | Net sales | | 0.6 | |
| | | | Cost of Sales | | 0.3 | | | Cost of Sales | | 0.3 | |
| | | | | | | | Other (income) expense, net | | (0.3) | |
| Total Cash flow hedges | | $ | (32.2) | | | | | $ | 23.6 | | | | | $ | 0.6 | |
| Net investment hedges | | | | | | | | | | |
| Cross-currency swap | | $ | (75.9) | | | | | | | Interest expense, net | | $ | 26.0 | |
| | | | | | | | | | |
| Year Ended December 31, 2022 | | | | | | | | | | |
| Cash flow hedges | | | | | | | | | | |
| Treasury locks | | $ | — | | | Interest expense, net | | $ | (0.1) | | | Interest expense, net | | $ | — | |
| Interest rate swap agreements | | 50.5 | | | Interest expense, net | | 4.6 | | | Interest expense, net | | — | |
| Foreign currency forward contracts | | 4.1 | | | Net sales | | 1.6 | | | Net sales | | (0.5) | |
| | | | Cost of Sales | | (4.8) | | | Cost of sales | | (0.2) | |
| | | | | | | | Other (income) expense, net | | (1.4) | |
| Total Cash flow hedges | | $ | 54.6 | | | | | $ | 1.3 | | | | | $ | (2.1) | |
| Net investment hedges | | | | | | | | | | |
| Cross-currency swap | | $ | 5.3 | | | | | | | Interest expense, net | | $ | (17.2) | |
| | | | | | | | | | |
| Year Ended December 31, 2021 | | | | | | | | | | |
| Cash flow hedges | | | | | | | | | | |
| Treasury locks | | $ | — | | | Interest expense, net | | $ | (0.1) | | | Interest expense, net | | $ | — | |
| Interest rate swap agreements | | — | | | Interest expense, net | | (1.8) | | | Interest expense, net | | — | |
| Foreign currency forward contracts | | 5.7 | | | Net sales | | (2.5) | | | Net sales | | — | |
| | | | Cost of sales | | 0.8 | | | Cost of sales | | 0.5 | |
| | | | | | | | Other (income) expense, net | | 0.7 | |
| Total Cash flow hedges | | $ | 5.7 | | | | | $ | (3.6) | | | | | $ | 1.2 | |
| Net investment hedges | | | | | | | | | | |
| Cross-currency swap | | $ | (20.1) | | | | | | | Interest expense, net | | $ | (3.9) | |
| | | | | | | | | | |
| | | | | | | | | | |
NOTE 9 (1) Net gain of $1.4 million is expected to be reclassified out of AOCI into earnings during 2024.
Perrigo Company plc - ASSETS HELD FOR SALEItem 8
Note 11
Our India API business was classified
The classification and amount of gain/(loss) recognized in earnings on fair value and hedging relationships were as held-for-sale beginning as of December 31, 2015. We recorded impairment charges totaling $6.3follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Sales | | Cost of Sales | | Interest Expense, net | | Other (Income) Expense, net |
| Year Ended December 31, 2023 | | | | | | | | |
| Total amounts of income and expense line items presented on the Consolidated Statements of Operations in which the effects of fair value or cash flow hedges are recorded | | $ | 4,655.6 | | | $ | 2,975.2 | | | $ | 173.8 | | | $ | (10.4) | |
| | | | | | | | |
| Gain (loss) on cash flow hedging relationships | | | | | | | | |
| Foreign currency forward contracts | | | | | | | | |
| Amount of gain or (loss) reclassified from AOCI into earnings | | $ | (0.1) | | | $ | 0.3 | | | $ | — | | | $ | — | |
| Amount excluded from effectiveness testing recognized using a systematic and rational amortization approach | | $ | 0.6 | | | $ | 0.3 | | | $ | — | | | $ | (0.3) | |
| Treasury locks | | | | | | | | |
| Amount of gain or (loss) reclassified from AOCI into earnings | | $ | — | | | $ | — | | | $ | (0.1) | | | $ | — | |
| Interest rate swap agreements | | | | | | | | |
| Amount of gain or (loss) reclassified from AOCI into earnings | | $ | — | | | $ | — | | | $ | 23.5 | | | $ | — | |
| | | | | | | | |
| Year Ended December 31, 2022 | | | | | | | | |
| Total amounts of income and expense line items presented on the Consolidated Statements of Operations in which the effects of fair value or cash flow hedges are recorded | | $ | 4,451.6 | | | $ | 2,996.2 | | | $ | 156.0 | | | $ | 53.1 | |
| | | | | | | | |
| Gain (loss) on cash flow hedging relationships | | | | | | | | |
| Foreign currency forward contracts | | | | | | | | |
| Amount of gain or (loss) reclassified from AOCI into earnings | | $ | 1.6 | | | $ | (4.8) | | | $ | — | | | $ | — | |
| Amount excluded from effectiveness testing recognized using a systematic and rational amortization approach | | $ | (0.5) | | | $ | (0.2) | | | $ | — | | | $ | (1.4) | |
| Treasury locks | | | | | | | | |
| Amount of gain or (loss) reclassified from AOCI into earnings | | $ | — | | | $ | — | | | $ | (0.1) | | | $ | — | |
| Interest rate swap agreements | | | | | | | | |
| Amount of gain or (loss) reclassified from AOCI into earnings | | $ | — | | | $ | — | | | $ | 4.6 | | | $ | — | |
| | | | | | | | |
| Year Ended December 31, 2021 | | | | | | | | |
| Total amounts of income and expense line items presented on the Consolidated Statements of Operations in which the effects of fair value or cash flow hedges are recorded | | $ | 4,138.7 | | | $ | 2,722.5 | | | $ | 125.0 | | | $ | 26.7 | |
| | | | | | | | |
| The effects of cash flow hedging: | | | | | | | | |
| Gain (loss) on cash flow hedging relationships | | | | | | | | |
| Foreign currency forward contracts | | | | | | | | |
| Amount of gain or (loss) reclassified from AOCI into earnings | | $ | (2.5) | | | $ | 0.8 | | | $ | — | | | $ | — | |
| Amount excluded from effectiveness testing recognized using a systematic and rational amortization approach | | $ | — | | | $ | 0.5 | | | $ | — | | | $ | 0.7 | |
| Treasury locks | | | | | | | | |
| Amount of gain or (loss) reclassified from AOCI into earnings | | $ | — | | | $ | — | | | $ | (0.1) | | | $ | — | |
| Interest rate swap agreements | | | | | | | | |
| Amount of gain or (loss) reclassified from AOCI into earnings | | $ | — | | | $ | — | | | $ | (1.8) | | | $ | — | |
Perrigo Company plc - Item 8
Note 11
Net foreign exchange losses totaled $1.0 million, $59.9 million, and $29.0$26.8 million duringfor the years ended December 31, 20162023, December 31, 2022, and December 31, 2015,2021, respectively. Therein, 2022 and 2021 included $16.2 million and $20.9 million of loss, respectively, after determiningfor the carryingchange in fair value of the India API business exceeded its fair
Perrigo Company plc - Item 8
Note 9
value lessoption contracts to hedge the cost to sell. On April 6, 2017, we completed the sale of our India API business (refer to Note 2). The India API business was reported in our Other segment.
During the three months ended October 1, 2016, management committed to a plan to sell certain fixed assets associated with our animal health pet treats plant. Such assets were classified as held-for-sale beginning at October 1, 2016. On February 1, 2017, we completed the sale of our animal health pet treats plant fixed assets (refer to Note 2). We determined that the carrying valueforeign currency exposure of the fixed assets associated with our animal health pet treats plant exceeded the fair value less the cost to sell. We recorded impairment charges totaling $3.7 million during the year ended December 31, 2016. The assets associated with our animal health pet treats plant were reported in our CHCA segment.euro-denominated purchase price for HRA Pharma.
The assets held-for-sale were reported within Prepaid expenses and other current assets and liabilities held-for-sale were reported in Accrued liabilities. The amounts consisted of the following (in millions):
|
| | | | | | | |
| | December 31,
2016 |
| | CHCA | | Other |
| Assets held for sale | | | |
| Current assets | $ | — |
| | $ | 5.1 |
|
| Goodwill | — |
| | 5.5 |
|
| Property, plant and equipment | 13.5 |
| | 33.2 |
|
| Other assets | — |
| | 3.8 |
|
| Less: impairment reserves | (3.7 | ) | | (35.3 | ) |
| Total assets held for sale | $ | 9.8 |
| | $ | 12.3 |
|
| Liabilities held for sale | | | |
| Current liabilities | $ | 0.1 |
| | $ | 1.9 |
|
| Other liabilities | — |
| | 1.9 |
|
| Total liabilities held for sale | $ | 0.1 |
| | $ | 3.8 |
|
Perrigo Company plc - Item 8
Note 10
NOTE 1012 - INDEBTEDNESS
Total borrowings outstanding are summarized as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended |
| | | | December 31, 2023 | | December 31, 2022 |
| | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Term loan | | | |
| | | | |
| Term A Loans due April 1, 2027 (1) | $ | 471.9 | | | $ | 493.8 | |
| Term B Loans due April 1, 2029 (1) | 1,386.2 | | | 1,094.5 | |
| Total term loans | $ | 1,858.1 | | | $ | 1,588.3 | |
| | | | | | |
| Notes and bonds | | | |
| Coupon | | Due | | | |
| 3.900% | | December 15, 2024(2) | 400.0 | | | 700.0 | |
| 4.375% | | March 15, 2026(3) | 700.0 | | | 700.0 | |
| 4.650% | | June 15, 2030(4) | 750.0 | | | 750.0 | |
| 5.300% | | November 15, 2043(5) | 90.5 | | | 90.5 | |
| 4.900% | | December 15, 2044(2) | 303.9 | | | 303.9 | |
| Total notes and bonds | 2,244.4 | | | 2,544.4 | |
| Other financing | 14.8 | | | 20.6 | |
| Unamortized premium (discount), net | (17.8) | | | (15.9) | |
| Deferred financing fees | (26.1) | | | (30.8) | |
| Total borrowings outstanding | 4,073.4 | | | 4,106.6 | |
| Current indebtedness | (440.6) | | | (36.2) | |
| Total long-term debt less current portion | $ | 3,632.8 | | | $ | 4,070.4 | |
|
| | | | | | | | | | | | | | | |
| | | | | | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Revolving credit agreements | | | | | | | |
| | 2015 Revolver | $ | — |
| | $ | — |
| | $ | 380.0 |
|
| | 2014 Revolver | — |
| | — |
| | 300.0 |
|
| | Total revolving credit agreements | — |
| | — |
| | 680.0 |
|
| Term loans | | | | | | | |
| * | 2014 term loan due December 5, 2019 | 420.0 |
| | 420.7 |
| | 488.8 |
|
| Notes and bonds | | | | | | | |
| | Coupon | Due | | | | | | | |
| | 1.300% | November 8, 2016 | (2) | | — |
| | — |
| | 500.0 |
|
| * | 4.500% | May 23, 2017 | (3) | | — |
| | 189.3 |
| | 195.5 |
|
| * | 5.125% | December 12, 2017 | (3) | | — |
| | 315.6 |
| | 325.8 |
|
| | 2.300% | November 8, 2018 | (2) | | — |
| | 600.0 |
| | 600.0 |
|
| * | 5.000% | May 23, 2019 | (3) | | 144.0 |
| | 126.2 |
| | 130.3 |
|
| | 3.500% | March 15, 2021 | (4) | | 280.4 |
| | 500.0 |
| | — |
|
| | 3.500% | December 15, 2021 | (1) | | 309.6 |
| | 500.0 |
| | 500.0 |
|
| * | 5.105% | July 19, 2023 | (3) | | 162.0 |
| | 142.0 |
| | 146.7 |
|
| | 4.000% | November 15, 2023 | (2) | | 215.6 |
| | 800.0 |
| | 800.0 |
|
| | 3.900% | December 15, 2024 | (1) | | 700.0 |
| | 700.0 |
| | 700.0 |
|
| | 4.375% | March 15, 2026 | (4) | | 700.0 |
| | 700.0 |
| | — |
|
| | 5.300% | November 15, 2043 | (2) | | 90.5 |
| | 400.0 |
| | 400.0 |
|
| | 4.900% | December 15, 2044 | (1) | | 303.9 |
| | 400.0 |
| | 400.0 |
|
| | Total notes and bonds | | | 2,906.0 |
| | 5,373.1 |
| | 4,698.3 |
|
| Other financing | 11.7 |
| | 3.6 |
| | 128.2 |
|
| Unamortized premium (discount), net | 21.4 |
| | 33.0 |
| | 73.4 |
|
| Deferred financing fees | (17.9 | ) | | (33.1 | ) | | (36.6 | ) |
| Total borrowings outstanding | 3,341.2 |
| | 5,797.3 |
| | 6,032.1 |
|
| | Current indebtedness | (70.4 | ) | | (572.8 | ) | | (1,060.5 | ) |
| Total long-term debt less current portion | $ | 3,270.8 |
| | $ | 5,224.5 |
| | $ | 4,971.6 |
|
| |
(1) | (1) Discussed below collectively as the "2014 Notes." |
| |
(2) | Discussed below collectively as the "2013 Notes." |
| |
(3) | Debt assumed from Omega. |
| |
(4) | Discussed below collectively as the "2016 Notes." |
| |
* | Debt denominated in euros subject to fluctuations in the euro-to-U.S. dollar exchange rate. |
We entered into amendments on March 16, 2017 related to the 2014 Revolver and the 2014 Term Loan, providing for additional time to deliver certain financial statements, as well as the modification of certain financial and other covenants. We also entered into additional amendments to"Senior Secured Credit Facilities"
(2) Discussed below collectively as the 2014 Revolver and the 2014 Term Loan on April 25, 2017 to modify provisions of such agreements necessary"2014 Notes"
(3) Discussed below as a resultpart of the correction"2016 Notes"
(4) Discussed below as part of the "2020 Notes". The coupon rate noted above increased from 4.400% to 4.650% on payments starting after June 15, 2023, following a credit rating downgrade by Moody's in accounting relatedthe first quarter of 2023. Future interest rate adjustments are subject to a 2.0% total cap above the Tysabri® financial asset,original 3.150% interest rate based on certain rating events as well as waivers of any default or event of default that may arise from any restatement of or deficiencies in our financial statements for the periods specified in such amendmentsthe Note’s Supplemental Indenture No. 3, dated as of June 19, 2020, among Perrigo Finance Unlimited Company, Perrigo Company plc, the guarantors party thereto and waivers. No default or event of default existed prior to entering into these amendments and waivers. We are in compliance with all covenantsWells Fargo Bank, National Association, as trustee.
(5) Discussed below collectively as the "2013 Notes"
Revolving Credit Agreements
There were no borrowings outstanding under our debt agreementsthe $1.0 billion revolving credit agreement (the “Revolver”) as of December 31, 2017.2023 or December 31, 2022.
Term Loans
Term Loan A Facility and Term Loan B Facility
On April 20, 2022, we and our indirect wholly owned subsidiary, Perrigo Investments, LLC, (the "Borrower") entered into the senior secured credit facilities, which consisted of (i) the Revolver, (ii) a $500.0 million five-year Term Loan A facility (the “Term Loan A Facility” and the Term A Loans thereunder, the "Term A Loans"), and (iii) a $1.1 billion seven-year Term Loan B facility (the “Term Loan B Facility” and the Term B loans thereunder borrowed on April 20, 2022, the "2022 Term B Loans") and, together with the Revolver and Term Loan A Facility, the “Senior Secured Credit Facilities”), all pursuant to a Term Loan and Revolving Credit Agreement (the "Credit Agreement").
Perrigo Company plc - Item 8
Note 1012
Revolving Credit Agreements
On December 9, 2015, our 100% owned finance subsidiary,15, 2023, we and the Borrower, entered into Amendment No. 1, an Incremental Assumption Agreement (the "Amendment") to the Credit Agreement. The Amendment provides for a fungible add on to the 2022 Term B Loans in an aggregate principal amount of $300.0 million (the "Incremental Term B Loans" and together with the 2022 Term B Loans, the “Term B Loans”). The terms of the Incremental Term B Loans, including pricing and maturity, are identical to the 2022 Term B Loans. The Term B Loans will mature on April 20, 2029. The net proceeds from the Incremental Term B Loans were used to settle the cash tender offer by Perrigo Finance Unlimited Company ("Perrigo Finance"), entered into a $750.0 million revolving credit agreement (the "2015 Revolver"). On March 15, 2016, we used the proceeds of the long-term debt issuance described below under "2016 Notes" to repay the $750.0 million then outstanding under the 2015 Revolver and terminated the facility.
On March 30, 2015, we assumed a revolving credit facility with €500.0 million ($544.5 million) outstanding from Omega. On April 8, 2015, we repaid the €500.0 million ($539.1 million) outstanding under the assumed revolving credit facility and terminated the facility.
On December 5, 2014, Perrigo Finance entered into a $600.0 million revolving credit agreement, which increased to $1.0 billion on March 30, 2015 (the "2014 Revolver"). On March 15, 2016, we used the proceeds of the long-term debt issuance described below under "2016 Notes" to repay the $435.0 million then outstanding under the 2014 Revolver. There were no borrowings outstanding under the 2014 Revolver as of December 31, 2017 or December 31, 2016.
Term Loans
On December 5, 2014, Perrigo Finance entered into a term loan agreement consisting of a €500.0 million ($614.3 million) tranche, with the ability to draw an additional €300.0 million ($368.6 million) tranche, maturing December 5, 2019; we also entered into a for $300.0 million term loan tranche maturing December 18, 2015, which we repaid in full on June 25, 2015.
On September 6, 2013, Perrigo Company entered into a $1.0 billion term loan agreement (the "2013 Term Loan") (together with the 2013 Revolver, the "2013 Credit Agreements"). The 2013 Term Loan consisted of a $300.0 million tranche maturing December 18, 2015 and a $700.0 million tranche maturing December 18, 2018. Both tranches were drawn in full on December 18, 2013. Amounts outstanding under the 2013 Credit Agreements bore interest at our option (a) at the alternative base rate or (b) the eurodollar rate plus, in either case, applicable margins as set forth in the 2013 Credit Agreements. Perrigo Company obligations under the 2013 Credit Agreements were guaranteed by Perrigo Company plc, certain U.S. subsidiaries of Perrigo Company plc, Elan, and certain Irish subsidiaries of Elan until November 21, 2014, at which time the terms of the 2013 Credit Agreements were amended to remove all guarantors. On December 5, 2014, we repaid the remaining $895.0 million outstanding under our 2013 Term Loan, then terminated it. We recorded a $10.5 million loss on extinguishment of debt during the year ended June 27, 2015, which consisted of the Bridge Loan Facility interest expense and deferred financing fees related to the 2013 Credit Agreements, and 2013 Term Loan.
Notes and Bonds
2016 Notes
On March 7, 2016, Perrigo Finance issued $500.0 million in aggregate principal amount of 3.500% senior notes3.900% Senior Notes due 20212024 ("2024 Notes"). The tender offer was settled on December 15, 2023, and $700.0Perrigo Finance accepted for purchase $300.0 million of the 2024 Notes and paid approximately $295.1 million in aggregate principal amount of 4.375% senior notes due 2026 (together, the "2016 Notes") and received net proceeds of $1.2 billion after fees and market discount. Interest on the 2016 Notes is payable semiannually in arrears in March and September of each year, beginning in September 2016. The 2016 Notes are governed by a base indenture and a second supplemental indenture (collectively, the "2016 Indenture"). The 2016 Notes are fully and unconditionally guaranteed on a senior basis by Perrigo, and no other subsidiary of Perrigo guarantees the 2016 Notes. The proceeds were used to repay amounts borrowed under the 2015 Revolver and the 2014 Revolver, as mentioned above. There are no restrictions under the 2016 Notes on our ability to obtain funds from our subsidiaries. Perrigo Finance may redeem the 2016 Notes in whole or in part at any time for cash at the make-whole redemption prices described in the 2016 Indenture.consideration (excluding accrued interest).
Notes and Bonds Assumed from Omega
In connection withrelation to the Omega acquisition, on March 30, 2015,Senior Secured Credit Facilities, we assumed:
Perrigo Company plc - Item 8
Note 10
$20.0deferred $32.5 million in aggregate principal amount of 6.190% senior notes due 2016,financing fees, which was repaid on May 29, 2015 in full;
€135.0 million ($147.0 million) in aggregate principal amount of 5.105% senior notes due 2023 (the "2023 Notes");
€300.0 million ($326.7 million) in aggregate principal amount of 5.125% retail bonds due 2017;
€180.0 million ($196.0 million) in aggregate principal amount of 4.500% retail bonds due 2017; and
€120.0 million ($130.7 million) in aggregate principal amount of 5.000% retail bonds due 2019 (collectively, the "Retail Bonds").
The fair value of the 2023 Notes and Retail Bondsexceeded par value by €93.6 million($101.9 million) on the date of the Omega acquisition. As a result, a fair value adjustment was recorded as part of the carrying value of the underlying debt and will be amortized as a reduction ofto interest expense over the remaining termsterm of the respective debt instruments. facilities. During the year ended December 31, 2023, principal repayments of $22.0 million and $8.4 million were made on the Term Loan B Facility and Term Loan A Facility, respectively.
Guarantees and Debt Covenants
The adjustment doesBorrower and certain of our direct and indirect wholly-owned subsidiaries organized in the United States, Ireland, Belgium and England and Wales (subject to certain exceptions) (the "Guarantor Subsidiaries") 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 Guarantor Subsidiaries, the Company and the Borrower 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 by Perrigo 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.
We are subject to financial covenants in the Senior Secured Credit Facilities. The new agreements contain financial covenants that require the Borrower and its restricted subsidiaries to (a) not affect cashexceed 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 payments.coverage ratio of 3.00 to 1.00 at the end of each fiscal quarter, provided that such covenants apply only to the Revolver and the Term Loan A Facility. 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.
Notes and Bonds
2014 Notes due December 15, 2024 & December 15, 2044
On December 2, 2014, Perrigo Finance issued $500.0 million in aggregate principal amount of 3.500% senior notes due 2021 (the "2021 Notes”), $700.0 million in aggregate principal amount of 3.900% senior notes due 2024 (the “2024 Notes”), and $400.0 million in aggregate principal amount of 4.900% senior notes due 2044 (the “2044 Notes” and, together with the 2021 Notes and the 2024 Notes, the “2014 Notes”) and received net proceeds of $1.6 billion after fees and market discount. Interest on the 2014 Notes is payable semiannuallysemi-annually in arrears in June and December of each year, beginning in June 2015. The 2014 Notes are governed by a base indenture and a first supplemental indenture (collectively, the "2014 Indenture"). The 2014 Notes are fully and unconditionally guaranteed on a senior unsecured basis by Perrigo, and no other subsidiary of Perrigo guarantees the 2014 Notes. There are no restrictions under the 2014 Notes on our ability to obtain funds from our subsidiaries. Perrigo Finance may redeem the 2014 Notes in whole or in part at any time for cash at the make-whole redemption prices described in the 2014 Indenture. During the year ended December 31, 2017, we repaid $96.1 million of the 4.900% senior notes due 2044 and $190.4 million of the 3.500% senior notes due 2021. On July 6, 2020, we repaid the remaining $309.6 million of the 3.500% notes due 2021, as discussed above under the heading 2020 Notes and Notes Redemption. On December 15, 2023 Perrigo Finance accepted for purchase $300.0 million of 2024 Notes and paid approximately $295.2 million in aggregate cash consideration (excluding accrued interest) for a portion of the 2024 Notes. We recorded a total gain of $3.2 million on the extinguishment of debt on the Consolidated Statements of Operations.
Perrigo Company plc - Item 8
Note 12
2016 Notes due March 15, 2026
On March 7, 2016, Perrigo Finance issued $500.0 million in aggregate principal amount of 3.500% senior notes due 2021 and $700.0 million in aggregate principal amount of 4.375% senior notes due 2026 (together, the "2016 Notes") and received net proceeds of $1.2 billion after fees and market discount. Interest on the 2016 Notes is payable semi-annually in arrears in March and September of each year, beginning in September 2016. The 2016 Notes are governed by a base indenture and a second supplemental indenture (collectively, the "2016 Indenture"). During the year ended December 31, 2017, we repaid $219.6 million of the 3.500% senior notes due 2021. On July 6, 2020, we repaid the remaining $280.4 million of 3.500% senior notes due 2021.
2020 Notes due June 15, 2030
On June 19, 2020, Perrigo Finance Unlimited Company issued $750.0 million in aggregate principal amount of 3.150% Senior Notes due 2030 and received net proceeds of $737.1 million after the underwriting discount and offering expenses. Interest on the 2020 Notes is payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. Due to credit ratings downgrades by S&P and Moody's in the third quarter of 2021, the first quarter of 2022 and the second quarter of 2023, respectively, the interest of the 2020 Notes stepped up from 3.150% to 3.900%, starting after December 15, 2021, from 3.900% to 4.400% starting after June 15, 2022 and from 4.400% to 4.650% starting after June 15, 2023. The 2020 Notes will mature on June 15, 2030 and are governed by a base indenture and a third supplemental indenture (collectively, the "2020 Indenture"). Perrigo Finance may redeem the 2020 Notes in whole or in part at any time for cash at the make-whole redemption prices described in the 2020 Indenture.
2013 Notes due November 15, 2043
On November 8, 2013, Perrigo Company issued $500.0 million aggregate principal amount of its 1.300% senior notes due 2016 (the "1.300% 2016 Notes"), $600.0 million aggregate principal amount of its 2.300% senior notes due 2018 (the "2018 Notes"), $800.0 million aggregate principal amount of its 4.000% senior notes due 2023 (the "4.000% 2023 Notes") and $400.0 million aggregate principal amount of its 5.300% senior notes due 2043 (the "2043 Notes" and, together with the 1.300% 2016 Notes, the 2018 Notes and the 4.000% 2023 Notes, the "2013 Notes") in a private placement with registration rights. We received net proceeds of $2.3 billion from. During the issuanceyear ended December 31, 2017, we repaid $309.5 million of the 2013 Notes after fees and market discount. On September 29, 2016, we repaid all $500.0 million of the 1.300% 2016 Notes outstanding.
Notes. Interest on the 2013 Notes is payable semiannuallysemi-annually in arrears in May and November of each year, beginning in May 2014. The 2013 Notes are governed by a base indenture and a first supplemental indenture (collectively, the "2013 Indenture"). The 2013 Notes are our unsecured and unsubordinated obligations, ranking equally in right of payment to all of our existing and future unsecured and unsubordinated indebtedness. The 2013 Notes are not entitled to mandatory redemption or sinking fund payments. We may redeem the 2013 Notes in whole or in part at any time for cash at the make-whole redemption prices described in the 2013 Indenture. The 2013 Notes were guaranteed on an unsubordinated, unsecured basis by the same entities that guaranteed our then-outstanding credit agreement until November 21, 2014, at which time the 2013 Indenture was amended to remove all guarantors.
On September 2, 2014, we offered to exchange our private placement senior notes for public bonds (the "Exchange Offer"). The Exchange Offer expired on October 1, 2014, at which time substantially all of the private placement notes had been exchanged for bonds registered with the Securities and Exchange Commission. As a result of the changes in the guarantor structure noted above, we are no longer required to present guarantor financial statements.
Perrigo Company plc - Item 8
Note 10
Other Financing
Overdraft Facilities
We have overdraft facilities available that we use to support our cash management operations. We report any balances outstanding in the above table under "Other financing". The balanceThere were no borrowings outstanding under the overdraft facilities was $6.9 million and $82.9 million atas of December 31, 20172023 and December 31, 2015 respectively, and there were no balances outstanding2022.
We have financing leases that are reported in the above table under the facilities at December 31, 2016."Other financing" (refer to Note 8).
On March 30, 2015, we assumed and repaid certain overdraft facilities totaling €51.4 million ($56.0 million) with the Omega acquisition.
Debt Repayments and Related Extinguishment During the Year Ended December 31, 2017
During the year endedDecember 31, 2017, we reduced our outstanding debt through a variety of transactions (in millions):
|
| | | | | | | | |
| Date | | Series | | Transaction Type | | Principal Retired |
| April 1, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | $ | 13.3 |
|
| May 8, 2017 | | $600.0 2.300% senior notes due 2018 | | Early redemption | | 600.0 |
|
| May 23, 2017 | | €180.0 4.500% retail bonds due 2017 | | Scheduled maturity | | 201.3 |
|
| June 15, 2017 | | $500.0 3.500% senior notes due 2021 | | Tender offer | | 190.4 |
|
| June 15, 2017 | | $500.0 3.500% senior notes due 2021 | | Tender offer | | 219.6 |
|
| June 15, 2017 | | $800.0 4.000% senior notes due 2023 | | Tender offer | | 584.4 |
|
| June 15, 2017 | | $400.0 5.300% senior notes due 2043 | | Tender offer | | 309.5 |
|
| June 15, 2017 | | $400.0 4.900% senior notes due 2044 | | Tender offer | | 96.1 |
|
| July 1, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | 14.3 |
|
| September 30, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | 14.8 |
|
| December 12, 2017 | | €300.0 5.125% senior notes due 2017 | | Scheduled maturity | | 352.3 |
|
| December 31, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | 15.0 |
|
| | | | | | | $ | 2,611.0 |
|
As a result of the early redemption and tender offer transactions, we recorded a loss of $135.2 million during the three months ended July 1, 2017 in Loss on extinguishment of debt (in millions):
|
| | | | |
| Premium on debt repayment | | $ | 116.1 |
|
| Transaction costs | | 3.8 |
|
| Write-off of deferred financing fees | | 10.6 |
|
| Write-off of remaining discount on bond | | 4.7 |
|
| Total loss on extinguishment of debt | | $ | 135.2 |
|
Perrigo Company plc - Item 8
Note 10
Future Maturities
The annual future maturities of our short-term and long-term debt, including capitalized leases and excluding deferred financing fees, are as follows (in millions):
| | | | | | | | |
| Payment Due | | Amount |
| 2024 | | $ | 440.9 | |
| 2025 | | 41.6 | |
| 2026 | | 741.6 | |
| 2027 | | 413.5 | |
| 2028 | | 16.6 | |
| Thereafter | | 2,463.0 | |
|
| | | | |
| Payment Due | | Amount |
| 2018 | | $ | 70.4 |
|
| 2019 | | 504.7 |
|
| 2020 | | 0.7 |
|
| 2021 | | 590.0 |
|
| 2022 | | — |
|
| Thereafter | | 2,171.9 |
|
Perrigo Company plc - Item 8
Note 13
NOTE 1113 - EARNINGS PER SHARE AND SHAREHOLDERS' EQUITYPOST-EMPLOYMENT PLANS
Earnings per ShareDefined Contribution Plans
A reconciliationWe have a qualified profit-sharing and investment plan under Section 401(k) of the numeratorsIRS, which covers substantially all U.S. employees. Our contributions to the plan include an annual nondiscretionary contribution of 3% of an employee's eligible compensation and denominators used ina discretionary contribution at the option of the Board of Directors. Additionally, we match a portion of employees' contributions.
We also have a defined contribution plan that covers our basicIreland employees. We contribute up to 18% of each participating employee’s annual eligible salary on a monthly basis.
We assumed a number of defined contribution plans associated with the Omega acquisition and diluted EPS calculation iswe pay contributions to the pension insurance plans.
Our contributions to all of the plans were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| | | $ | 30.2 | | | $ | 29.8 | | | $ | 28.0 | |
|
| | | | | | | | | | | | | | | |
| | Year Ended | | Six Months Ended | | Year Ended |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| Numerator: | | | | | | | |
| Net income (loss) | $ | 119.6 |
| | $ | (4,012.8 | ) | | $ | 42.5 |
| | $ | 136.1 |
|
| | | | | | | | |
| Denominator: | | | | | | | |
| Weighted average shares outstanding for basic EPS | 142.3 |
| | 143.3 |
| | 145.6 |
| | 139.3 |
|
| Dilutive effect of share-based awards* | 0.3 |
| | — |
| | 0.5 |
| | 0.5 |
|
| Weighted average shares outstanding for diluted EPS | 142.6 |
| | 143.3 |
| | 146.1 |
| | 139.8 |
|
| | | | | | | | |
| Anti-dilutive share-based awards excluded from computation of diluted EPS* | 0.8 |
| | — |
| | 0.1 |
| | 0.1 |
|
Pension and Post-Retirement Healthcare Benefit Plans
* In
We have a number of defined benefit plans for employees based in Europe. These plans are managed externally and the periodrelated pension costs and liabilities are assessed at least annually in accordance with the advice of a net loss, diluted shares equal basic shares.qualified professional actuary. We used a December 31, 2023 measurement date and all plan assets and liabilities are reported as of that date.
Shareholders' EquityWe provide certain healthcare benefits to eligible U.S. employees and their dependents who meet certain age and service requirements when they retire. Generally, benefits are provided to eligible retirees after age 65 and to their dependents. Increases in our contribution for benefits are limited to increases in the Consumer Price Index. Additional healthcare cost increases are paid through participant contributions. We accrue the expected costs of such benefits during a portion of the employees’ years of service. The plan is not funded. Under current plan provisions, the plan is not eligible for any U.S. federal subsidy related to the Medicare Modernization Act of 2003 Part D Subsidy.
Our common stock consists of ordinary shares of
Perrigo Company plc - Item 8
Note 13
The change in the projected benefit obligation and plan assets consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Year Ended | | Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2023 | | December 31, 2022 |
| Projected benefit obligation at beginning of period | $ | 127.5 | | | $ | 202.6 | | | $ | 2.0 | | | $ | 3.0 | |
| Net acquisitions/(disposals) | — | | | (1.3) | | | — | | | — | |
| | | | | | | |
| Service costs | 2.9 | | | 3.3 | | | — | | | — | |
| Interest cost | 5.2 | | | 2.7 | | | 0.1 | | | 0.1 | |
| Actuarial loss (gain) | 14.4 | | | (64.7) | | | (0.2) | | | (1.0) | |
| Curtailment | (0.6) | | | — | | | — | | | — | |
| Contributions paid | 0.3 | | | 0.3 | | | — | | | — | |
| Benefits paid | (2.7) | | | (1.5) | | | (0.1) | | | (0.1) | |
| Settlements | (0.7) | | | (1.7) | | | — | | | — | |
| Foreign currency translation | 4.9 | | | (12.2) | | | — | | | — | |
| Projected benefit obligation at end of period | $ | 151.2 | | | $ | 127.5 | | | $ | 1.8 | | | $ | 2.0 | |
| | | | | | | |
| Fair value of plan assets at beginning of period | 134.6 | | | 181.7 | | | — | | | — | |
| Net acquisitions/(disposals) | — | | | (1.1) | | | — | | | — | |
| Actual return on plan assets | 11.7 | | | (34.2) | | | — | | | — | |
| Benefits paid | (2.7) | | | (1.5) | | | (0.1) | | | (0.1) | |
| Settlements | (0.7) | | | (1.7) | | | — | | | — | |
| Employer contributions | 2.5 | | | 2.3 | | | 0.1 | | | 0.1 | |
| Contributions paid | 0.3 | | | 0.3 | | | — | | | — | |
| Foreign currency translation | 4.7 | | | (11.2) | | | — | | | — | |
| Fair value of plan assets at end of period | $ | 150.4 | | | $ | 134.6 | | | $ | — | | | $ | — | |
| Funded/(unfunded) status | $ | (0.8) | | | $ | 7.1 | | | $ | (1.8) | | | $ | (2.0) | |
| | | | | | | |
| Presented as: | | | | | | | |
| Other non-current assets | $ | 27.7 | | | $ | 32.4 | | | $ | — | | | $ | — | |
| | | | | | | |
| Other non-current liabilities | $ | (28.5) | | | $ | (25.3) | | | $ | (1.8) | | | $ | (2.0) | |
| | | | | | | |
| | | | | | | |
The total accumulated benefit obligation for the defined benefit pension plans was $145.6 million and $121.7 million at December 31, 2023 and December 31, 2022 respectively.
The following information relates to pension plans with an accumulated benefit obligation in excess of plan assets (in millions):
| | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 |
| Accumulated benefit obligation | $ | 75.6 | | | $ | 62.4 | |
| Fair value of plan assets | $ | 52.6 | | | $ | 42.9 | |
Perrigo Company plc - Item 8
Note 13
The following information relates to pension plans with a public limited company incorporated underprojected benefit obligation in excess of plan assets (in millions):
| | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 |
| Projected benefit obligation | $ | 81.1 | | | $ | 68.2 | |
| Fair value of plan assets | $ | 52.6 | | | $ | 42.9 | |
The following unrecognized actual gain for the lawsother benefits liability was included in OCI, net of Ireland.tax (in millions):
| | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| $ | 0.2 | | | $ | 0.9 | | | $ | 0.6 | |
We trade our ordinary shares
The unamortized net actuarial loss (gain) in AOCI net of tax for defined benefit pension and other benefits was as follows (in millions):
| | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| $ | 2.4 | | | $ | (7.1) | | | $ | 9.9 | |
The estimated amount to be recognized from AOCI into net periodic cost during the next year is $0.4 million.
At December 31, 2023, the total estimated future benefit payments to be paid by the plans for the next five years is approximately $17.3 million for pension benefits and $0.8 million for other benefits as follows (in millions):
| | | | | | | | | | | | | | |
| Payment Due | | Pension Benefits | | Other Benefits |
| 2024 | | $ | 2.9 | | | $ | 0.1 | |
| 2025 | | 3.1 | | | 0.2 | |
| 2026 | | 3.0 | | | 0.1 | |
| 2027 | | 3.9 | | | 0.2 | |
| 2028 | | 4.4 | | | 0.2 | |
| Thereafter | | 29.3 | | | 0.7 | |
The expected benefits to be paid are based on the New York Stock Exchange undersame assumptions used to measure our benefit obligation at December 31, 2023, including the symbol PRGO. Our ordinaryexpected future employee service. We expect to contribute $2.1 million to the defined benefit plans within the next year.
Net periodic pension cost consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Year Ended | | Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 | | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Service cost | $ | 2.9 | | | $ | 3.3 | | | $ | 3.9 | | | $ | — | | | $ | — | | | $ | — | |
| Interest cost | 5.2 | | | 2.7 | | | 2.6 | | | 0.1 | | | 0.1 | | | 0.1 | |
| Expected return on assets | (5.8) | | | (4.9) | | | (5.5) | | | — | | | — | | | — | |
| Settlement | (0.1) | | | 0.1 | | | 1.1 | | | — | | | — | | | — | |
| Curtailment | (0.3) | | | — | | | — | | | — | | | — | | | — | |
| Net actuarial loss/(gain) | (0.5) | | | 0.1 | | | 0.1 | | | (1.2) | | | (0.6) | | | (1.4) | |
| Net periodic pension cost/(gain) | $ | 1.4 | | | $ | 1.3 | | | $ | 2.2 | | | $ | (1.1) | | | $ | (0.5) | | | $ | (1.3) | |
The components of the net periodic pension cost, other than the service cost component, are included in the line item Other (income) expense, net in the Consolidated Statement of Operations.
Perrigo Company plc - Item 8
Note 13
The decrease in the discount rate from 3.92% to 3.61% has increased the liability. This decrease of 0.31% versus the discount rate used at December 31, 2022 is primarily attributable to the decrease in bond yields due to falling levels of inflation in the Euro zone.
The weighted-average assumptions used to determine net periodic pension cost and benefit obligation were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Year Ended | | Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 | | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Discount rate | 3.61 | % | | 3.92 | % | | 1.18 | % | | 4.92 | % | | 5.19 | % | | 2.14 | % |
| Inflation | 2.27 | % | | 2.31 | % | | 2.10 | % | | | | | | |
| Expected return on assets | 3.38 | % | | 2.84 | % | | 1.55 | % | | | | | | |
| Interest crediting rates | 0.93 | % | | 0.74 | % | | 0.34 | % | | | | | | |
The discount rate is based on market yields at the valuation date and chosen with reference to the yields available on high quality corporate bonds, with regards to the duration of the plan's liabilities.
As of December 31, 2023, the expected weighted-average long-term rate of return on assets of 3.4%was calculated based on the assumptions of the following returns for each asset class:
| | | | | |
| Equities | 6.2 | % |
| Bonds | 4.2 | % |
| Absolute return fund | 4.9 | % |
| Insurance contracts | 2.2 | % |
| Other | 4.5 | % |
The investment mix of the pension plans' assets is a blended asset allocation, with a diversified portfolio of shares are alsolisted and traded on the Tel Aviv Stock Exchange.recognized exchanges.
Dividends
In January 2003, the BoardCertain of Directors adopted a policyour plans have target asset allocation ranges. As of paying quarterly dividends. We paid dividendsDecember 31, 2023, these ranges were as follows:
| | | | | |
| Equities | 20% - 30% |
| Bonds | 50% - 60% |
| |
| Absolute return | 10% - 20% |
|
| | | | | | | | | | | | | | | |
| | Year Ended | | Six Months Ended | | Year Ended |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| Dividends paid (in millions) | $ | 91.1 |
| | $ | 83.2 |
| | $ | 36.3 |
| | $ | 64.8 |
|
| Dividends paid (per share) | $ | 0.64 |
| | $ | 0.58 |
| | $ | 0.25 |
| | $ | 0.46 |
|
Other plans do not have target asset allocation ranges, for such plans, the strategy is to invest mainly in Insurance Contracts.
The purpose of the pension funds is to provide a flow of income for members in retirement. A flow of income delivered through fixed interest bonds provides a costly but close match to this objective. Equities are held within the portfolio as a means of reducing this cost, but holding equities creates a strategic risk because they give a very different pattern of return. Property investments are held to help diversify the portfolio. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and investment portfolio reviews.
Perrigo Company plc - Item 8
Note 1113
The following table sets forth the fair value of the pension plan assets (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Equities | $ | — | | | $ | 21.5 | | | $ | — | | | $ | 21.5 | | | $ | — | | | $ | 35.6 | | | $ | — | | | $ | 35.6 | |
| Bonds | — | | | 54.1 | | | — | | | 54.1 | | | — | | | 22.7 | | | — | | | 22.7 | |
| Insurance contracts | — | | | — | | | 54.3 | | | 54.3 | | | — | | | — | | | 46.2 | | | 46.2 | |
| Absolute return fund | — | | | 12.1 | | | — | | | 12.1 | | | — | | | 23.3 | | | — | | | 23.3 | |
| Other | — | | | 8.4 | | | — | | 8.4 | | | — | | | 6.8 | | | — | | | 6.8 | |
| Total | $ | — | | | $ | 96.1 | | | $ | 54.3 | | | $ | 150.4 | | | $ | — | | | $ | 88.4 | | | $ | 46.2 | | | $ | 134.6 | |
The declaration and paymentfollowing table sets forth a summary of dividends andthe changes in the fair value of the Level 3 pension plan assets, which were measured at fair value on a recurring basis (in millions):
| | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 |
| Assets at beginning of year | $ | 46.2 | | | $ | 63.3 | |
| Actual return on plan assets | 6.2 | | | (15.8) | |
| Purchases, sales and settlements, net | 0.5 | | | 1.5 | |
| Foreign exchange | 1.4 | | | (2.8) | |
| Assets at end of year | $ | 54.3 | | | $ | 46.2 | |
The fair value of the insurance contracts is an estimate of the amount paid,that would be received in an orderly sale to a market participant at the measurement date. The amount the plan would receive from the contract holder if any,the contracts were terminated is the primary input and is unobservable. The insurance contracts are therefore classified as Level 3 investments.
Deferred Compensation Plans
We have non-qualified plans related to deferred compensation and executive retention that allow certain employees and directors to defer compensation subject to specific requirements. Although the discretionplans are not formally funded, we own insurance policies that had a cash surrender value of the Board of Directors$37.1 million and depend on our earnings, financial condition, capital and surplus requirements and other factors the Board of Directors may consider relevant.
Share Repurchases
In October 2015, the Board of Directors approved a share repurchase plan of up to $2.0 billion (the "2015 Authorization"). We did not repurchase any shares under the share repurchase plan during the three months ended $35.4 million at December 31, 2017. During the year ended 2023 and December 31, 2017, we repurchased 2.72022, respectively, that are intended as a long-term funding source for these plans. The assets, which are recorded in Other non-current assets, are not a committed funding source and may, under certain circumstances, be subject to claims from creditors. The deferred compensation liability of $29.9 million ordinary sharesand $29.2 million at an average repurchase price of $71.72 per share, for a total of $191.5 million. We did not repurchase any shares under the share repurchase plan during the year ended December 31, 2016. During the six months ended2023 and December 31, 2015, we repurchased 3.3 million ordinary shares at an average repurchase price of $151.59 per share, for a total of $500.0 million.2022, respectively, was recorded in Other non-current liabilities.
Perrigo Company plc - Item 8
Note 14
NOTE 1214 - EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY
Earnings per Share
A reconciliation of the numerators and denominators used in our basic and diluted earnings per share ("EPS") calculation is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Numerator: | | | | | |
| Income (loss) from continuing operations | $ | (4.4) | | | $ | (130.9) | | | $ | (130.9) | |
| Income (loss) from discontinued operations, net of tax | (8.3) | | | (9.7) | | | 62.0 | |
| Net Income (loss) | $ | (12.7) | | | $ | (140.6) | | | $ | (68.9) | |
| | | | | |
| Denominator: | | | | | |
| Weighted average shares outstanding for basic EPS | 135.3 | | | 134.5 | | | 133.6 | |
| Dilutive effect of share-based awards* | — | | | — | | | — | |
| Weighted average shares outstanding for diluted EPS | 135.3 | | | 134.5 | | | 133.6 | |
*In the period of a loss from continuing operations, diluted shares equal basic shares
Shareholders' Equity
Our common stock consists of ordinary shares of Perrigo Company plc, a public limited company incorporated under the laws of Ireland.
Our common equity has traded on the New York Stock Exchange under the symbol PRGO since June 6, 2013. Prior to that, our common equity traded on the Nasdaq Global Select Market under the same symbol. Our common equity was also traded on the Tel Aviv Stock Exchange (“TASE”) under the same symbol between March 16, 2005 and February 23, 2022, when we voluntarily delisted from trading in connection with the Rx business divestiture.
Dividends
We paid dividends as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Dividends paid (in millions) | $ | 149.7 | | | $ | 142.4 | | | $ | 129.6 | |
| Dividends paid (per share) | $ | 1.09 | | | $ | 1.04 | | | $ | 0.96 | |
The declaration and payment of dividends and the amount paid, if any, are subject to the discretion of the Board of Directors and depend on our earnings, financial condition, availability of distributable reserves, capital and surplus requirements and other factors the Board of Directors may consider relevant.
Share Repurchases
In October 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 (the "2018 Authorization"). We did not purchase any shares during the years ended December 31, 2023 and December 31, 2022. 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. As of December 31, 2023 the approximate value of shares available for purchase under the 2018 Authorization was $835.8 million.
Perrigo Company plc - Item 8
Note 15
NOTE 15 - SHARE-BASED COMPENSATION PLANS
All share-based compensation for employees and directors is granted under the 20132019 Long-Term Incentive Plan, as amended (the "Plan"). The Plan, which has been approved by our shareholders and provides for the granting of awards to our employees and directors. As of December 31, 2017, there were 3.8 million shares available to be granted.shareholders. The purpose of the Plan is to attract and retain individuals of exceptional talent and encourage these individuals to acquire a vested interest in our success and prosperity. The awards that may be granted under this program include non-qualified stock options, stock appreciation rights, restricted shares,stock and restricted share units, and RTSR units. Restricted shares are generally service-based, requiring a certain length of service before vesting occurs, while restricted share units can be either service-based or performance-based. Performance-based restricted share units also require a certain length of service until vesting; however, theyvesting, but contain an additional performance feature, which can vary the amount of shares ultimately paid out based on certain performance criteria specified in the Plan. RTSR performancePlan or award Performance share units that are based on relative total shareholder return are subject to a market condition. Awards granted under the Plan vest and may be exercised and/or sold from one year to ten years after the date of grant based on a vesting schedule. As of December 31, 2023, there were 5.0 million shares available to be granted.
Share-based compensation expense was as follows (in millions):
| | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| $ | 68.8 | | | $ | 54.9 | | | $ | 57.0 | |
|
| | | | | | | | | | | | | | |
| Year Ended | | Six Months Ended | | Year Ended |
December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| $ | 43.8 |
| | $ | 23.0 |
| | $ | 22.8 |
| | $ | 31.6 |
|
As of December 31, 2017,2023, unrecognized share-based compensation expense was $51.2$54.4 million, and the weighted-average period over which the expense is expected to be recognized was approximately 2.01.3 years. Proceeds from the exercise of stock options are credited to ordinary shares.
Perrigo Company plc - Item 8
Note 12
Stock Options
A summary of activity related to stock options is presented below (options in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Options | | Weighted-Average
Exercise
Price Per Share | | Weighted-
Average
Remaining
Term in
Years | | Aggregate
Intrinsic
Value |
| Options outstanding at December 31, 2021 | 1,248 | | | $ | 93.80 | | | 4.4 | | $ | — | |
| | | | | | | |
| | | | | | | |
| Forfeited or expired | (117) | | | $ | 102.86 | | | | | |
| Options outstanding at December 31, 2022 | 1,131 | | | $ | 92.87 | | | 3.7 | | $ | — | |
| | | | | | | |
| | | | | | | |
| Forfeited or expired | (180) | | | $ | 100.85 | | | | | |
| Options outstanding December 31, 2023 | 951 | | | $ | 91.36 | | | 3.2 | | $ | — | |
| Options exercisable | 951 | | | $ | 91.36 | | | 3.2 | | $ | — | |
| Options expected to vest | — | | | $ | — | | | 0.0 | | $ | — | |
|
| | | | | | | | | | | | |
| | Number of
Options | | Weighted-Average
Exercise
Price Per Share | | Weighted-
Average
Remaining
Term in
Years | | Aggregate
Intrinsic
Value |
| Options outstanding at December 31, 2015 | 783 |
| | $ | 99.93 |
| | | | |
| Granted | 344 |
| | $ | 126.67 |
| | | | |
| Exercised | (122 | ) | | $ | 67.68 |
| | | | |
| Forfeited or expired | (256 | ) | | $ | 126.54 |
| | | | |
| Options outstanding at December 31, 2016 | 749 |
| | $ | 108.40 |
| | 6.6 | | $ | 5.5 |
|
| Granted | 439 |
| | $ | 70.34 |
| | | | |
| Exercised | (31 | ) | | $ | 24.75 |
| | | | |
| Forfeited or expired | (85 | ) | | $ | 118.47 |
| | | | |
| Options outstanding December 31, 2017 | 1,072 |
| | $ | 94.90 |
| | 6.9 | | $ | 10.9 |
|
| Options exercisable | 519 |
| | $ | 107.14 |
| | 5.0 | | $ | 3.8 |
|
| Options expected to vest | 533 |
| | $ | 83.63 |
| | 8.7 | | $ | 6.8 |
|
The aggregate intrinsic value for options exercised was as follows (in millions):
|
| | | | | | | | | | | | | | |
| Year Ended | | Six Months Ended | | Year Ended |
December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| $ | 1.7 |
| | $ | 5.2 |
| | $ | 6.7 |
| | $ | 20.7 |
|
Theand the weighted-average fair valuesvalue per share at the grant date for options granted were $19.50, $33.53, and $39.96was zero for the years ended December 31, 2017, 2023, December 31, 2016,2022, and June 27, 2015, respectively. There were no options granted during the six months ended December 31, 2015. The fair values were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:2021.
|
| | | | | | | | |
| | Year Ended |
| | December 31,
2017 | | December 31,
2016 | | June 27,
2015 |
| Dividend yield | 0.9 | % | | 0.5 | % | | 0.3 | % |
| Volatility, as a percent | 30.0 | % | | 27.6 | % | | 27.1 | % |
| Risk-free interest rate | 1.8 | % | | 1.3 | % | | 1.7 | % |
| Expected life in years | 5.41 |
| | 5.5 |
| | 5.3 |
|
The valuation model utilizes historical volatility. The risk-free interest rate is based on the yield of U.S. government securities with a maturity date that coincides with the expected term of the option. The expected life in years is estimated based on past exercise behavior of employees.
Non-Vested Restricted Shares
There were no restricted shares granted, vested or outstanding for the years ended December 31, 2017 or December 31, 2016, the six months ended December 31, 2015, or the year ended June 27, 2015. The total fair value of restricted shares that vested was $0.9 million for the year ended June 27, 2015.
Perrigo Company plc - Item 8
Note 1215
Non-Vested Service-Based Restricted Share Units
A summary of activity related to non-vested service-based restricted share units is presented below (units in thousands):
| | | | | | | | | | | Number of
Non-vested
Service-
Based
Share Units | | Weighted-
Average
Grant Date
Fair Value Per Share | | Weighted-
Average
Remaining
Term in
Years | | Aggregate
Intrinsic
Value |
| | Number of
Non-vested
Service-
Based
Share Units | | Weighted-
Average
Grant Date
Fair Value Per Share | | Weighted-
Average
Remaining
Term in
Years | | Aggregate
Intrinsic
Value |
| Non-vested service-based share units outstanding at December 31, 2015 | 382 |
| | $ | 154.07 |
| | | | |
| Non-vested service-based share units outstanding at December 31, 2021 | |
| Granted | 298 |
| | $ | 113.26 |
| | |
| Vested | (92 | ) | | $ | 137.15 |
| | |
| Vested | |
| Vested | |
| Forfeited | (120 | ) | | $ | 151.64 |
| | |
| Non-vested service-based share units outstanding at December 31, 2016 | 468 |
| | $ | 137.53 |
| | 1.7 | | $ | 39.0 |
|
| Forfeited | |
| Forfeited | |
| Non-vested service-based share units outstanding at December 31, 2022 | |
| Non-vested service-based share units outstanding at December 31, 2022 | |
| Non-vested service-based share units outstanding at December 31, 2022 | |
| Granted | 298 |
| | $ | 70.55 |
| | |
| Vested | (112 | ) | | $ | 128.86 |
| | |
| Vested | |
| Vested | |
| Forfeited | (55 | ) | | $ | 120.97 |
| | |
| Non-vested service-based share units outstanding at December 31, 2017 | 599 |
| | $ | 107.26 |
| | 1.5 | | $ | 52.2 |
|
| Forfeited | |
| Forfeited | |
| Non-vested service-based share units outstanding at December 31, 2023 | |
| Non-vested service-based share units outstanding at December 31, 2023 | |
| Non-vested service-based share units outstanding at December 31, 2023 | |
The weighted-average fair value per share at the date of grant for service-based restricted share units granted was as follows (in millions):follows:
| | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| $ | 36.44 | | | $ | 36.53 | | | $ | 41.36 | |
|
| | | | | | | | | | | | | | |
| Year Ended | | Six Months Ended | | Year Ended |
December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| $ | 70.55 |
| | $ | 113.26 |
| | $ | 165.64 |
| | $ | 153.99 |
|
The total fair value of service-based restricted share units that vested was as follows (in millions):
| | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| $ | 45.9 | | | $ | 49.4 | | | $ | 47.2 | |
|
| | | | | | | | | | | | | | |
| Year Ended | | Six Months Ended | | Year Ended |
December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| $ | 14.5 |
| | $ | 12.6 |
| | $ | 11.7 |
| | $ | 9.1 |
|
Perrigo Company plc - Item 8
Note 12
Non-Vested Performance-Based Restricted Share Units
A summary of activity related to non-vested performance-based restricted share units is presented below (units in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Non-vested
Performance-
Based
Share Units | | Weighted-
Average
Grant
Date Fair
Value Per Share | | Weighted-
Average
Remaining
Term in
Years | | Aggregate
Intrinsic
Value |
| Non-vested performance-based share units outstanding at December 31, 2021 | 918 | | | $ | 47.10 | | | 1.2 | | $ | 35.7 | |
| Granted | 473 | | | $ | 36.48 | | | | | |
| Vested | (300) | | | $ | 47.59 | | | | | |
| Forfeited | (22) | | | $ | 43.93 | | | | | |
| Non-vested performance-based share units outstanding at December 31, 2022 | 1,069 | | | $ | 42.28 | | | 1.4 | | $ | 36.4 | |
| Granted | 487 | | | $ | 36.44 | | | | | |
| Vested | (252) | | | $ | 55.11 | | | | | |
| Forfeited | (33) | | | $ | 41.18 | | | | | |
| Non-vested performance-based share units outstanding at December 31, 2023 | 1,271 | | | $ | 37.65 | | | 1.3 | | $ | 40.9 | |
|
| | | | | | | | | | | | |
| | Number of
Non-vested
Performance-
Based
Share Units | | Weighted-
Average
Grant
Date Fair
Value Per Share | | Weighted-
Average
Remaining
Term in
Years* | | Aggregate
Intrinsic
Value |
| Non-vested performance-based share units outstanding at December 31, 2015 | 223 |
| | $ | 146.31 |
| | | | |
| Granted | 159 |
| | $ | 126.37 |
| | | | |
| Vested | (81 | ) | | $ | 128.74 |
| | | | |
| Forfeited | (124 | ) | | $ | 143.64 |
| | | | |
| Non-vested performance-based share units outstanding at December 31, 2016 | 177 |
| | $ | 138.29 |
| | 1.7 | | $ | 14.8 |
|
| Granted | 191 |
| | $ | 70.34 |
| | | | |
| Vested | (27 | ) | | $ | 142.18 |
| | | | |
| Forfeited | (38 | ) | | $ | 130.34 |
| | | | |
| Non-vested performance-based share units outstanding at December 31, 2017 | 303 |
| | $ | 93.65 |
| | 2.0 | | $ | 26.5 |
|
Perrigo Company plc - Item 8
Note 15
The weighted-average fair value of performance-based restricted share units can fluctuate depending upon the success or failure of the achievement of performance criteria as set forth in the Plan. The weighted-average fair value per share at the date of grant for performance-based restricted share units granted was as follows:
| | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| $ | 36.44 | | | $ | 36.48 | | | $ | 41.04 | |
|
| | | | | | | | | | | | | | |
| Year Ended | | Six Months Ended | | Year Ended |
December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| $ | 70.34 |
| | $ | 126.37 |
| | $ | 184.49 |
| | $ | 150.14 |
|
The total fair value of performance-based restricted share units that vested was as follows (in millions):
| | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| $ | 13.9 | | | $ | 14.3 | | | $ | 14.2 | |
|
| | | | | | | | | | | | | | |
| Year Ended | | Six Months Ended | | Year Ended |
December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| $ | 3.8 |
| | $ | 10.4 |
| | $ | 6.4 |
| | $ | 5.1 |
|
Non-vested Relative Total Shareholder Return Performance Share Units
The fair value of the RTSR performance share units is determined using the Monte Carlo pricing model as the number of shares to be awarded is subject to a market condition. The valuation model considers a range of possible outcomes, and compensation cost is recognized regardless of whether the market condition is actually satisfied.
The assumptions used in estimating the fair value of the RTSR performance share units granted during each year were as follows:
Perrigo Company plc - Item 8 | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Dividend yield | 3.0 | % | | 2.9 | % | | 2.3 | % |
| Volatility, as a percent | 32.0 | % | | 37.3 | % | | 44.0 | % |
| Risk-free interest rate | 4.6 | % | | 1.7 | % | | 0.3 | % |
| Expected life in years | 2.8 | | 2.8 | | 2.8 |
Note 12
|
| | |
| Year Ended |
| December 31,
2017 |
Dividend yield | 0.9 | % |
Volatility, as a percent | 36.1 | % |
Risk-free interest rate | 1.4 | % |
Expected life in years | 2.57 |
|
A summary of activity related to non-vested RTSR performance share units is presented below (units in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Non-vested
RTSR Performance Share Units | | Weighted-
Average
Grant
Date Fair
Value Per Share | | Weighted-
Average
Remaining
Term in
Years* | | Aggregate
Intrinsic
Value |
| Non-vested RTSR performance share units outstanding at December 31, 2021 | 236 | | | $ | 53.85 | | | 1.2 | | $ | 9.2 | |
| Granted | 54 | | | $ | 40.80 | | | | | |
| | | | | | | |
| | | | | | | |
| Non-vested RTSR performance share units outstanding at December 31, 2022 | 290 | | | $ | 47.36 | | | 1.4 | | $ | 9.2 | |
| Granted | 39 | | | $ | 42.09 | | | | | |
| | | | | | | |
| | | | | | | |
| Non-vested RTSR performance share units outstanding at December 31, 2023 | 329 | | | $ | 41.33 | | | 1.2 | | $ | 10.6 | |
|
| | | | | | | | | | | | |
| | Number of
Non-vested
RTSR Performance Share Units | | Weighted-
Average
Grant
Date Fair
Value Per Share | | Weighted-
Average
Remaining
Term in
Years* | | Aggregate
Intrinsic
Value |
| Non-vested RTSR performance share units outstanding at December 31, 2016 | — |
| | $ | — |
| | 0 | | $ | — |
|
| Granted | 39 |
| | $ | 64.82 |
| | | | |
| Non-vested RTSR performance share units outstanding at December 31, 2017 | 39 |
| | $ | 64.82 |
| | 2.0 | | $ | 3.4 |
|
* Midpoint used in calculation.
The weighted-average fair value per share at the date of grant for RTSR performance share units granted was $64.82.as follows:
| | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| $ | 42.09 | | | $ | 40.80 | | | $ | 41.20 | |
The total fair value of RTSR performance share units that vested was as follows (in millions):
| | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| $ | — | | | $ | — | | | $ | 0.5 | |
Perrigo Company plc - Item 8
Note 17
NOTE 1316 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in our AOCI balances, net of tax, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value of Derivative Financial Instruments, net of tax | | Foreign Currency Translation Adjustments(1) | | | | Post-Employment Plan Adjustments, net of tax(1) | | Total AOCI |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Balance at December 31, 2021 | $ | (22.0) | | | $ | 67.4 | | | | | $ | (9.9) | | | $ | 35.5 | |
| OCI before reclassifications | 47.8 | | | (82.4) | | | | | 22.3 | | | (12.3) | |
| Amounts reclassified from AOCI | (1.3) | | | (43.6) | | | | | (5.3) | | | (50.2) | |
| Other comprehensive income (loss) | 46.5 | | | (126.0) | | | | | 17.0 | | | (62.5) | |
| Balance at December 31, 2022 | 24.5 | | | (58.6) | | | | | 7.1 | | | (27.0) | |
| OCI before reclassifications | 16.2 | | | 54.6 | | | | | (1.6) | | | 69.2 | |
| Amounts reclassified from AOCI | (23.6) | | | — | | | | | (7.9) | | | (31.5) | |
| Other comprehensive income (loss) | (7.4) | | | 54.6 | | | | | (9.5) | | | 37.7 | |
| Balance at December 31, 2023 | $ | 17.1 | | | $ | (4.0) | | | | | $ | (2.4) | | | $ | 10.7 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Fair value of derivative financial instruments, net of tax | | Foreign currency translation adjustments | | Fair value of investment securities, net of tax | | Post-retirement and pension liability adjustments, net of tax | | Total AOCI |
| Balance at June 27, 2015 | $ | (16.3 | ) | | $ | 130.9 |
| | $ | (2.9 | ) | | $ | (8.2 | ) | | $ | 103.5 |
|
| OCI before reclassifications | 1.1 |
| | (135.5 | ) | | (1.4 | ) | | 6.7 |
| | (129.1 | ) |
| Amounts reclassified from AOCI | 1.0 |
| | — |
| | 10.7 |
| | (1.4 | ) | | 10.3 |
|
| Other comprehensive income (loss) | 2.1 |
| | (135.5 | ) | | 9.3 |
| | 5.3 |
| | (118.8 | ) |
| Balance at December 31, 2015 | (14.2 | ) | | (4.6 | ) | | 6.4 |
| | (2.9 | ) | | (15.3 | ) |
| OCI before reclassifications | (5.4 | ) | | (63.3 | ) | | 7.4 |
| | (3.2 | ) | | (64.5 | ) |
| Amounts reclassified from AOCI | 0.1 |
| | — |
| | 1.3 |
| | (3.4 | ) | | (2.0 | ) |
| Other comprehensive income (loss) | (5.3 | ) | | (63.3 | ) | | 8.7 |
| | (6.6 | ) | | (66.5 | ) |
| Balance at December 31, 2016 | (19.5 | ) | | (67.9 | ) | | 15.1 |
| | (9.5 | ) | | (81.8 | ) |
| OCI before reclassifications | 7.1 |
| | 328.5 |
| | (12.5 | ) | | 15.0 |
| | 338.1 |
|
| Amounts reclassified from AOCI | 2.6 |
| | — |
| | (1.6 | ) | | (4.2 | ) | | (3.2 | ) |
| Other comprehensive income (loss) | 9.7 |
| | 328.5 |
| | (14.1 | ) | | 10.8 |
| | 334.9 |
|
| Balance at December 31, 2017 | $ | (9.8 | ) | | $ | 260.6 |
| | $ | 1.0 |
| | $ | 1.3 |
| | $ | 253.1 |
|
NOTE 14 - INCOME TAXES
Pre-tax income (loss) and(1) Amounts reclassified from AOCI relate to the (benefit) provision for income taxes from continuing operations are summarized as follows (in millions):
|
| | | | | | | | | | | | | | | |
| | Year Ended | | Six Months Ended | | Year Ended |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| Pre-tax income (loss): | | | | | | | |
| Ireland | $ | (454.0 | ) | | $ | (3,624.1 | ) | | $ | (310.2 | ) | | $ | (792.8 | ) |
| Other | 734.1 |
| | (1,224.2 | ) | | 319.1 |
| | 1,053.1 |
|
| Total pre-tax income (loss) | 280.1 |
| | (4,848.3 | ) | | 8.9 |
| | 260.3 |
|
| (Benefit) provision for income taxes: | | | | | | | |
| Current: | | | | | | | |
| Ireland | (8.1 | ) | | 0.3 |
| | 1.6 |
| | (2.2 | ) |
| United States - federal | 96.4 |
| | 93.0 |
| | 58.9 |
| | 77.2 |
|
| United States - state | 4.0 |
| | 0.7 |
| | 3.0 |
| | 6.8 |
|
| Other foreign | 46.1 |
| | 26.7 |
| | 53.0 |
| | 67.4 |
|
| Subtotal | 138.4 |
| | 120.7 |
| | 116.5 |
| | 149.2 |
|
| Deferred (credit): | | | | | | | |
| Ireland | 13.1 |
| | (549.4 | ) | | (23.1 | ) | | 11.1 |
|
| United States - federal | 6.8 |
| | (7.6 | ) | | (34.4 | ) | | (19.9 | ) |
| United States - state | 1.0 |
| | (5.1 | ) | | (3.3 | ) | | (0.8 | ) |
| Other foreign | 1.2 |
| | (394.1 | ) | | (89.3 | ) | | (15.4 | ) |
| Subtotal | 22.1 |
| | (956.2 | ) | | (150.1 | ) | | (25.0 | ) |
| Total (benefit) provision for income taxes | $ | 160.5 |
| | $ | (835.5 | ) | | $ | (33.6 | ) | | $ | 124.2 |
|
Perrigo Company plc - Item 8
Note 14
A reconciliationdivestiture of the
provision based on the Federal statutory income tax rateLatin American businesses. Refer to
our effective income tax rate is as follows:Note 3 for more information. |
| | | | | | | | | | | |
| | Year Ended | | Six Months Ended | | Year Ended |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | June 27,
2015 |
| | | | | | | | |
| Provision at statutory rate | 12.5 | % | | 12.5 | % | | 12.5 | % | | 12.5 | % |
| Ireland tax on non-trading differences | (47.7 | ) | | (0.4 | ) | | (207.4 | ) | | (9.9 | ) |
| Expenses not deductible for tax purposes/deductions not expensed for book, net | 63.4 |
| | (0.7 | ) | | 394.0 |
| | 14.7 |
|
| Goodwill impairment not deductible for tax purposes | — |
| | (2.8 | ) | | — |
| | — |
|
| U.S. Operations: | | | | | | | |
| State income taxes, net of federal benefit | (1.4 | ) | | 0.1 |
| | 38.4 |
| | (1.0 | ) |
| Research and development credit | (0.6 | ) | | — |
| | (13.2 | ) | | (0.7 | ) |
| Other | (5.8 | ) | | 0.4 |
| | 112.3 |
| | 4.8 |
|
| Tax Law Change - US | 5.4 |
| | — |
| | — |
| | — |
|
| Tax Law Change - Belgium | (3.2 | ) | | — |
| | — |
| | — |
|
| Other foreign differences (earnings taxed at other than applicable statutory rate) | (22.7 | ) | | 3.3 |
| | (647.2 | ) | | (16.1 | ) |
| Intangible impairment differences | (3.0 | ) | | 4.8 |
| | (397.6 | ) | | — |
|
| Worldwide operations: | | | | | | | |
| Valuation allowance changes | 17.8 |
| | 0.8 |
| | 249.3 |
| | 25.7 |
|
| Change in unrecognized taxes | 25.3 |
| | (0.8 | ) | | 82.7 |
| | 17.7 |
|
| Withholding taxes | 17.3 |
| | — |
| | — |
| | — |
|
| Effective income tax rate | 57.3 | % | | 17.2 | % | | (376.2 | )% | | 47.7 | % |
We have provided for income taxes for certain earnings of certain foreign subsidiaries that have not been deemed to be permanently reinvested. No further provision has been made for income taxes on remaining undistributed earnings of foreign subsidiaries of approximately $6.3 billion at December 31, 2017, since it is our intention to indefinitely reinvest undistributed earnings of our foreign subsidiaries. Due to the complexity of the legal entity structure and the complexity of the tax laws in various jurisdictions, we believe it is not practicable to estimate, within any reasonable range, the additional income taxes that may be payable on the remittance of such undistributed earnings.
Perrigo Company plc - Item 8
Note 14
Deferred income taxes arise from temporary differences between the financial reporting and the tax reporting basis of assets and liabilities and operating loss and tax credit carryforwards for tax purposes. The components of our net deferred income tax asset (liability) were as follows:
|
| | | | | | | | | | | |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Deferred income tax asset (liability): | | | | | |
| Depreciation and amortization | $ | (457.8 | ) | | $ | (765.2 | ) | | $ | (1,550.6 | ) |
| Inventory basis differences | 21.3 |
| | 27.4 |
| | 22.8 |
|
| Accrued liabilities | 87.9 |
| | 68.5 |
| | 50.8 |
|
| Allowance for doubtful accounts | 1.5 |
| | 1.7 |
| | 1.3 |
|
| Research and development | 58.9 |
| | 61.7 |
| | 63.7 |
|
| Loss and credit carryforwards | 292.5 |
| | 292.4 |
| | 244.2 |
|
| Share-based compensation | 16.2 |
| | 18.1 |
| | 20.6 |
|
| Foreign tax credit | — |
| | 10.6 |
| | 10.6 |
|
| Federal benefit of unrecognized tax positions | 17.0 |
| | 24.3 |
| | 22.8 |
|
| Interest carryforwards | 30.5 |
| | 435.3 |
| | 334.6 |
|
| Other, net | 28.2 |
| | 3.0 |
| | 14.7 |
|
| Subtotal | $ | 96.2 |
| | $ | 177.8 |
| | $ | (764.5 | ) |
| Valuation allowance | (407.7 | ) | | (495.6 | ) | | (536.8 | ) |
| Net deferred income tax asset (liability): | $ | (311.5 | ) | | $ | (317.8 | ) | | $ | (1,301.3 | ) |
The above amounts are classified on the Consolidated Balance Sheets as follows (in millions):
|
| | | | | | | | | | | |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Assets | $ | 10.4 |
| | $ | 72.1 |
| | $ | 71.4 |
|
| Liabilities | (321.9 | ) | | (389.9 | ) | | (1,372.7 | ) |
| Net deferred income tax (liability) asset | $ | (311.5 | ) | | $ | (317.8 | ) | | $ | (1,301.3 | ) |
At December 31, 2017, we had gross carryforwards as follows:
|
| | | | | | | |
| | December 31, 2017 |
| | Gross
Carryforwards(1) | | Gross Valuation Allowances |
| U.S. state net operating losses | $ | 248.5 |
| | $ | 203.6 |
|
| Worldwide federal net operating losses excluding U.S. states | $ | 1,389.0 |
| | $ | 861.6 |
|
| Worldwide federal capital losses | $ | 22.0 |
| | $ | 22.0 |
|
| U.S. federal credits | $ | 82.6 |
| | $ | 82.6 |
|
| U.S. state credits | $ | 71.9 |
| | $ | 71.9 |
|
| Interest carryforwards | $ | 478.8 |
| | $ | 127.0 |
|
(1)Utilization of such carryforwards within the applicable statutory periods is uncertain.
In 2017, we recorded income tax expense related to valuation allowances of $10.3 million in Ireland. In addition, we released valuation allowances of $42.4 million and $55.8 million for Omega and the U.S. and other jurisdictions, respectively, resulting in a tax benefit.
Perrigo Company plc - Item 8
Note 14
U.S. federal credit carryforwards of $28.2 million, $37.2 millionand $167.8 million expire through 2022, 2025 and 2027, respectively, with the remaining U.S. credits having no expiration. U.S. state net operating loss carryforwards expire through 2037, and U.S. state credit carryforwards expire through 2032. Of the non-U.S. net operating loss carryforwards, $1.8 million, $20.3 million, $0.9 million, and $0.1 million expire through 2019, 2022, 2024 and 2025, respectively, while the remaining amounts of non U.S. net operating loss carryforwards and non-U.S. capital loss carryforwards have no expiration. The valuation allowances for these net operating loss carryforwards are adjusted annually, as necessary. After application of the valuation allowances, as described above, we anticipate no significant limitations will apply with respect to the realization of our net deferred income tax assets.
The following table summarizes the activity related to amounts recorded for uncertain tax positions, excluding interest and penalties (in millions):
|
| | | |
| | Unrecognized Tax Benefits |
| Balance at June 27, 2015 | $ | 324.0 |
|
| Additions: | |
| Positions related to the current year | 22.9 |
|
| Reductions: | |
| Positions related to prior years | (43.5 | ) |
| Settlements with taxing authorities | (15.3 | ) |
| Balance at December 31, 2015 | 288.1 |
|
| Additions: | |
| Positions related to the current year | 45.5 |
|
| Positions related to prior years | 8.6 |
|
| Reductions: | |
| Settlements with taxing authorities | (2.4 | ) |
| Lapse of statutes of limitation | (5.3 | ) |
| Balance at December 31, 2016 | 334.5 |
|
| Additions: | |
| Positions related to the current year | 55.0 |
|
| Positions related to prior years | 76.6 |
|
| Reductions: | |
| Settlements with taxing authorities | (11.1 | ) |
| Lapse of statutes of limitation | (0.1 | ) |
| Decrease in prior year positions | (35.2 | ) |
| Balance at December 31, 2017 | $ | 419.7 |
|
We recognize interest and penalties related to uncertain tax positions as a component of income tax expense. The total amount accrued for interest and penalties in the liability for uncertain tax positions was $82.0 million, $63.5 million, and $52.1 million as of December 31, 2017, December 31, 2016, and December 31, 2015, respectively.
The total liability for uncertain tax positions was $501.7 million, $398.0 million, and $340.3 million as of December 31, 2017, December 31, 2016, and December 31, 2015, respectively, before considering the federal tax benefit of certain state and local items, of which $204.0 million, $248.7 million, and $198.5 million, respectively, would impact the effective tax rate in future periods, if recognized.
We file income tax returns in numerous jurisdictions and are therefore subject to audits by tax authorities. Our primary income tax jurisdictions are Ireland, U.S., Israel, Belgium, France, and the United Kingdom.
Although we believe that our tax estimates are reasonable and that we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audit and any related litigation could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an
Perrigo Company plc - Item 8
Note 14
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.
On August 15, 2017, we filed a complaint in the U.S. District Court for the Western District of Michigan to recover $163.6 million of Federal income tax, penalties, and interest assessed and collected by the Internal Revenue Service (“IRS”), plus statutory interest thereon from the dates of payment, for the fiscal years ended June 27, 2009, June 26, 2010, June 25, 2011, and June 30, 2012 (the “2009 tax year,” “2010 tax year,” “2011 tax year,” and “2012 tax year,” respectively). The IRS audits of those years culminated in the issuances of two statutory notices of deficiency: (1) on August 27, 2014 for the 2009 and 2010 tax years and (2) on April 20, 2017 for the 2011 and 2012 tax years. The statutory notices of deficiency both included un-agreed income adjustments related principally to transfer pricing adjustments regarding the purchase, distribution, and sale of store-brand OTC pharmaceutical products in the United States. In addition, the statutory notice of deficiency for the 2011 and 2012 tax years included the capitalization of certain expenses that were deducted when paid or incurred in defending against certain patent infringement lawsuits. We fully paid the assessed amounts of tax, interest, and penalties set forth in the statutory notices and filed timely claims for refund on June 11, 2015 and June 7, 2017 for the 2009-2010 tax years and 2011-2012 tax years, respectively. Our claims for refund were disallowed by certified letters dated August 18, 2015 and July 11, 2017, for the 2009-2010 tax years and 2011-2012 tax years, respectively. The complaint was timely, based upon the refund claim denials, and seeks refunds of tax, interest, and penalties of $37.2 million for the 2009 tax year, $61.5 million for the 2010 tax year, $40.2 million for the 2011 tax year, and $24.7 million for the 2012 tax year. The amounts sought in the complaint for the 2009 and 2010 tax years were recorded as deferred charges on our balance sheet during the three months ended March 28, 2015, and the amounts sought in the complaint for the 2011 and 2012 tax years were recorded as deferred charges on our balance sheet during the three months ended July 1, 2017.
On December 22, 2016, we received a notice of proposed adjustment for the IRS audit of Athena Neurosciences, Inc. (“Athena”), a subsidiary of Elan acquired in 1996, for the years ended December 31, 2011, December 31, 2012, and December 31, 2013. Perrigo acquired Elan in December 2013. This proposed adjustment relates to the deductibility of litigation costs. We disagree with the IRS’s position asserted in the notice of proposed adjustment and intend to contest it.
On July 11, 2017, we received a draft notice of proposed adjustment associated with transfer pricing positions for the IRS audit of Athena for the years ended December 31, 2011, December 31, 2012, and December 31, 2013. Athena was the originator of the patents associated with Tysabri® prior to the acquisition of Athena by Elan in 1996. In response to the draft notice of proposed adjustment, we provided the IRS with substantial additional documentation supporting our position. The amount of adjustments that may be asserted by the IRS in the final notice of proposed adjustment cannot be quantified at this time; however, based on the draft notice received, the amount to be assessed may be material. We disagree with the IRS’s position as asserted in the draft notice of proposed adjustment and intend to contest it.
We have ongoing audits in multiple other jurisdictions the resolution of which remains uncertain. These jurisdictions include, but are not limited to, the U.S., Israel, Ireland and other jurisdictions in Europe. In addition to the matters discussed above, the IRS is currently auditing our fiscal years ended June 29, 2013, June 28, 2014, and June 27, 2015. The Israel Tax Authority is currently auditing our fiscal years ended June 29, 2013 and June 28, 2014 (which covers the period of the Elan transaction). The Ireland Tax Authority is currently auditing our years ended December 31, 2012 and December 31, 2013.
Based on the final resolution of tax examinations, judicial or administrative proceedings, changes in facts or law, expirations of statute of limitations in specific jurisdictions or other resolutions of, or changes in, tax positions, it is reasonably possible that unrecognized tax benefits for certain tax positions taken on previously filed tax returns may change materially from those represented on the financial statements as of December 31, 2017. During the next 12 months, it is reasonably possible that such circumstances may occur that would have a material effect on previously unrecognized tax benefits. As a result, the total net amount of unrecognized tax benefits may decrease, which would reduce the provision for taxes on earnings by a range estimated at $1.0 million to $17.9 million.
Perrigo Company plc - Item 8
Note 14
Tax Law Changes
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“U.S. Tax Act”). The U.S. Tax Act includes a number of significant changes to existing U.S. tax laws that impact the Company. These changes include a corporate income tax rate reduction from 35% to 21% and the elimination or reduction of certain U.S. deductions and credits including limitations on the U.S. deductibility of interest expense and executive compensation. The U.S. Tax Act also transitions the U.S. taxation of international earnings from a worldwide system to a modified territorial system. These changes are effective beginning in 2018. The U.S. Tax Act also includes a one-time mandatory deemed repatriation tax on accumulated U.S. owned foreign corporations’ previously untaxed foreign earnings (“Transition Toll Tax”). The Transition Toll Tax may be paid over an eight-year period, starting in 2018, and will not accrue interest.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of the U.S. GAAP ASC 740 income tax accounting for tax law changes enacted during 2017, in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Act. In accordance with SAB 118, we have recorded an income tax benefit of $2.4 million in connection with the remeasurement of certain deferred tax assets and liabilities. We also recorded a $17.5 million increase of current tax expense in connection with the Transition Toll Tax on cumulative U.S. owned foreign earnings of $1.2 billion. The tax impacts represent provisional amounts and are a reasonable estimate at December 31, 2017. Additional work is necessary to perform additional analysis of historical foreign earnings and U.S. cumulative temporary differences, as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in 2018 when the analysis is complete.
The U.S. Tax Act subjects a U.S. shareholder to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At December 31, 2017, because we are still evaluating the GILTI provisions and our analysis of future taxable income that is subject to GILTI, we are unable to make a reasonable estimate and have not reflected any adjustments related to GILTI in our financial statements.
On December 22, 2017, the Belgian Parliament approved Belgian tax reform legislation (“Belgium Tax Act”), which was signed by the Belgian King and enacted on December 25, 2017. The Belgium Tax Act provides for a reduction to the corporate income tax rate from 34% to 30%, for 2018 and 2019, as well as a reduced corporate income tax rate of 25% for 2020 and beyond. The Belgium Tax Act also increased the participation exemption on dividend distributions to Belgium entities from 95% to 100%. The Belgium Tax Act also introduces Belgium tax consolidation and other anti-tax avoidance directives. We recorded an additional income tax expense of $24.1 million for the remeasurement of certain deferred tax assets and additional income tax benefit of $33.2 million for the remeasurement of certain deferred tax liabilities as a result of the Belgium Tax Act.
For the years ended December 31, 2016 and December 31, 2015, statutory rate changes, primarily in Europe, favorably impacted the effective tax rate in the amount of $4.0 million and $27.9 million, respectively.
NOTE 15 - POST EMPLOYMENT PLANS
Defined Contribution Plans
We have a qualified profit-sharing and investment plan under Section 401(k) of the IRS, which covers substantially all U.S. employees. Our contributions to the plan include an annual nondiscretionary contribution of 3% of an employee's eligible compensation and a discretionary contribution at the option of the Board of Directors. Additionally, we match a portion of employees' contributions.
We also have a defined contribution plan that covers our Ireland employees. We contribute up to 18% of each participating employee’s annual eligible salary on a monthly basis.
Perrigo Company plc - Item 8
Note 15
We assumed a number of defined contribution plans associated with the Omega acquisition and we pay contributions to the pension insurance plans.
Our contributions to all of the plans were as follows (in millions):
|
| | | | | | | | | | | | | | |
| Year Ended | | Six Months Ended | | Year Ended |
December 31,
2017 | | December 31, 2016 | | December 31,
2015 | | June 27, 2015* |
| $ | 25.5 |
| | $ | 26.1 |
| | $ | 18.9 |
| | $ | 25.9 |
|
* Includes Omega activity from March 30, 2015 to June 27, 2015
Pension and Post-Retirement Healthcare Benefit Plans
We assumed the liability of two defined benefit plans (staff and executive plan) for employees based in Ireland with the Elan acquisition in 2013. These plans were subsequently merged and all plan assets and liabilities were transferred from the executive scheme to the staff scheme as a result of a plan combination.
In connection with the Omega acquisition, we assumed the liability of a number of defined benefit plans. The defined benefit plans cover employees based primarily in the Netherlands, Belgium, Germany, Switzerland, Greece, France, and Norway. Omega companies operate various pension plans across each country.
Our defined benefit pension plans are managed externally and the related pension costs and liabilities are assessed at least annually in accordance with the advice of a qualified professional actuary. We used a December 31, 2017 measurement date and all plan assets and liabilities are reported as of that date.
We provide certain healthcare benefits to eligible U.S. employees and their dependents who meet certain age and service requirements when they retire. Generally, benefits are provided to eligible retirees after age 65 and to their dependents. Increases in our contribution for benefits are limited to increases in the Consumer Price Index. Additional healthcare cost increases are paid through participant contributions. We accrue the expected costs of such benefits during a portion of the employees’ years of service. The plan is not funded. Under current plan provisions, the plan is not eligible for any U.S. federal subsidy related to the Medicare Modernization Act of 2003 Part D Subsidy.
Perrigo Company plc - Item 8
Note 15
The change in the projected benefit obligation and plan assets consisted of the following (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | Year Ended | | Six Months Ended | | Year Ended | | Six Months Ended |
| | December 31,
2017 | | December 31, 2016 | | December 31,
2015 | | December 31,
2017 | | December 31, 2016 | | December 31,
2015 |
| Projected benefit obligation at beginning of period | $ | 158.9 |
| | $ | 135.0 |
| | $ | 140.3 |
| | $ | 5.8 |
| | $ | 7.0 |
| | $ | 6.0 |
|
| Acquisitions | — |
| | — |
| | 5.6 |
| | — |
| | — |
| | — |
|
| Curtailment | (1.0 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Service costs | 4.5 |
| | 4.1 |
| | 2.2 |
| | 0.6 |
| | 0.6 |
| | 0.3 |
|
| Interest cost | 3.3 |
| | 3.6 |
| | 1.7 |
| | 0.2 |
| | 0.2 |
| | 0.1 |
|
| Actuarial (gain) loss | (10.3 | ) | | 22.6 |
| | (10.1 | ) | | (0.3 | ) | | (1.9 | ) | | 0.5 |
|
| Contributions paid | 0.1 |
| | 0.3 |
| | — |
| | — |
| | — |
| | — |
|
| Benefits paid | (2.5 | ) | | (1.7 | ) | | (0.6 | ) | | (0.1 | ) | | (0.1 | ) | | (0.1 | ) |
| Foreign currency translation | 21.0 |
| | (5.0 | ) | | (4.1 | ) | | — |
| | — |
| | 0.1 |
|
| Projected benefit obligation at end of period | $ | 174.0 |
| | $ | 158.9 |
| | $ | 135.0 |
| | $ | 6.2 |
| | $ | 5.8 |
| | $ | 7.0 |
|
| Fair value of plan assets at beginning of period | 138.2 |
| | 126.7 |
| | 128.1 |
| | — |
| | — |
| | — |
|
| Acquisitions | — |
| | — |
| | 3.2 |
| | — |
| | — |
| | — |
|
| Actual return on plan assets | 5.5 |
| | 9.4 |
| | (1.7 | ) | | — |
| | — |
| | — |
|
| Benefits paid | (2.5 | ) | | (1.7 | ) | | (0.6 | ) | | — |
| | — |
| | — |
|
| Employer contributions | 2.2 |
| | 8.2 |
| | 1.4 |
| | — |
| | — |
| | — |
|
| Contributions paid | 0.1 |
| | 0.3 |
| | — |
| | — |
| | — |
| | — |
|
| Foreign currency translation | 19.0 |
| | (4.7 | ) | | (3.7 | ) | | — |
| | — |
| | — |
|
| Fair value of plan assets at end of period | $ | 162.5 |
| | $ | 138.2 |
| | $ | 126.7 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Unfunded status | $ | (11.5 | ) | | $ | (20.7 | ) | | $ | (8.3 | ) | | $ | (6.2 | ) | | $ | (5.8 | ) | | $ | (7.0 | ) |
| Presented as: | | | | | | | | | | | |
| Other non-current assets | $ | 22.0 |
| | $ | 10.4 |
| | $ | 16.5 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Other non-current liabilities | $ | (33.5 | ) | | $ | (31.1 | ) | | $ | (24.8 | ) | | $ | — |
| | $ | (5.8 | ) | | $ | (7.0 | ) |
The total accumulated benefit obligation for the defined benefit pension plans was as follows (in millions):
|
| | | | | | | | | | |
| Year Ended | | Six Months Ended |
December 31,
2017 | | December 31, 2016 | | December 31,
2015 |
| $ | 167.6 |
| | $ | 136.3 |
| | $ | 109.4 |
|
The following unrecognized actual gains (losses) for the other benefits liability was included in OCI, net of tax (in millions):
|
| | | | | | | | | | | | | | |
| Year Ended | | Six Months Ended | | Year Ended |
December 31,
2017 | | December 31, 2016 | | December 31,
2015 | | June 27,
2015 |
| $ | 0.3 |
| | $ | (0.7 | ) | | $ | (0.4 | ) | | $ | 0.1 |
|
Perrigo Company plc - Item 8
Note 15
The unamortized net actuarial loss in AOCI net of tax for defined benefit pension and other benefits was as follows (in millions):
|
| | | | | | | | | | | | | | |
| Year Ended | | Six Months Ended | | Year Ended |
December 31,
2017 | | December 31, 2016 | | December 31,
2015 | | June 27, 2015* |
| $ | (1.3 | ) | | $ | 9.5 |
| | $ | 2.9 |
| | $ | 8.2 |
|
* Includes Omega activity from March 30, 2015 to June 27, 2015
The total estimated credit amount to be recognized from AOCI into net periodic cost during the next year is $0.7 million.
At December 31, 2017, the total estimated future benefit payments to be paid by the plans for the next five years is approximately $9.9 million for pension benefits and $1.0 million for other benefits as follows (in millions):
|
| | | | | | | | |
| Payment Due | | Pension Benefits | | Other Benefits |
| 2018 | | $ | 1.4 |
| | $ | 0.1 |
|
| 2019 | | 1.5 |
| | 0.2 |
|
| 2020 | | 2.3 |
| | 0.2 |
|
| 2021 | | 2.1 |
| | 0.2 |
|
| 2022 | | 2.6 |
| | 0.3 |
|
| Thereafter | | 20.1 |
| | 1.9 |
|
The expected benefits to be paid are based on the same assumptions used to measure our benefit obligation at December 31, 2017, including the expected future employee service. We expect to contribute $2.2 million to the defined benefit plans within the next year.
Net periodic pension cost consisted of the following (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | Year Ended | | Six Months Ended | | Year Ended | | Year Ended | | Six Months Ended | | Year Ended |
| | December 31,
2017 | | December 31, 2016 | | December 31,
2015 | | June 27, 2015* | | December 31,
2017 | | December 31, 2016 | | December 31,
2015 | | June 27, 2015* |
| Service cost | $ | 4.5 |
| | $ | 4.1 |
| | $ | 2.2 |
| | $ | 0.9 |
| | $ | 0.6 |
| | $ | 0.6 |
| | $ | 0.3 |
| | $ | 0.3 |
|
| Interest cost | 3.3 |
| | 3.6 |
| | 1.7 |
| | 2.4 |
| | 0.2 |
| | 0.2 |
| | 0.1 |
| | 0.2 |
|
| Expected return on assets | (4.3 | ) | | (3.9 | ) | | (1.8 | ) | | (2.7 | ) | | — |
| | — |
| | — |
| | — |
|
| Curtailment | (0.7 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net actuarial loss | 0.8 |
| | 0.5 |
| | 0.4 |
| | 1.0 |
| | (0.1 | ) | | — |
| | — |
| | 0.1 |
|
| Net periodic pension cost | $ | 3.6 |
| | $ | 4.3 |
| | $ | 2.5 |
| | $ | 1.6 |
| | $ | 0.7 |
| | $ | 0.8 |
| | $ | 0.4 |
| | $ | 0.6 |
|
* Includes Omega activity from March 30, 2015 to June 27, 2015
Perrigo Company plc - Item 8
Note 15
The weighted-average assumptions used to determine net periodic pension cost and benefit obligation were:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | Year Ended | | Six Months Ended | | Year Ended | | Year Ended | | Six Months Ended | | Year Ended |
| | December 31,
2017 | | December 31, 2016 | | December 31,
2015 | | June 27, 2015* | | December 31,
2017 | | December 31, 2016 | | December 31,
2015 | | June 27, 2015* |
| Discount rate | 1.91 | % | | 1.76 | % | | 2.22 | % | | 2.11 | % | | 3.59 | % | | 4.00 | % | | 4.25 | % | | 4.25 | % |
| Inflation | 1.45 | % | | 1.43 | % | | 2.25 | % | | 1.93 | % | | | | | | | | |
| Expected return on assets | 2.90 | % | | 2.89 | % | | 2.93 | % | | 2.85 | % | | | | | | | | |
* Includes Omega activity from March 30, 2015 to June 27, 2015
The discount rate is based on market yields at the valuation date and chosen with reference to the yields available on high quality corporate bonds, having regard to the duration of the plan's liabilities.
As of December 31, 2017, the expected weighted-average long-term rate of return on assets of 2.9%was calculated based on the assumptions of the following returns for each asset class:
|
| | |
Equities | 6.0 | % |
Bonds | 1.9 | % |
Absolute return fund | 4.0 | % |
Insurance contracts | 2.8 | % |
Other | 2.5 | % |
The investment mix of the pension plans' assets is a blended asset allocation, with a diversified portfolio of shares listed and traded on recognized exchanges.
Certain of our plans have target asset allocation ranges, as of December 31, 2017 these ranges are as follows:
|
| |
Equities | 10% - 20% |
Bonds | 20% - 30% |
Absolute return | 50% - 60% |
Other plans do not have target asset allocation ranges, for such plans the strategy is to invest primarily 100% in Insurance Contracts.
The purpose of the pension funds is to provide a flow of income for members in retirement. A flow of income delivered through fixed interest bonds provides a costly but close match to this objective. Equities are held within the portfolio as a means of reducing this cost, but holding equities creates a strategic risk because they give a very different pattern of return. Property investments are held to help diversify the portfolio. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and investment portfolio reviews.
Perrigo Company plc - Item 8
Note 15
The following table sets forth the fair value of the pension plan assets, as of December 31, 2017 (in millions):
|
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets | | Other Observable Inputs | | Unobservable Inputs | | |
| | (Level 1) | | (Level 2) | | (Level 3) | | Total |
| Equities | $ | 0.1 |
| | $ | 19.1 |
| | $ | — |
| | $ | 19.2 |
|
| Bonds | 1.8 |
| | 30.2 |
| | — |
| | 32.0 |
|
| Insurance contracts | — |
| | — |
| | 50.8 |
| | 50.8 |
|
| Absolute return fund | — |
| | 54.5 |
| | — |
| | 54.5 |
|
| Other | — |
| | 6.0 |
| | — |
| | 6.0 |
|
| Total | $ | 1.9 |
| | $ | 109.8 |
| | $ | 50.8 |
| | $ | 162.5 |
|
The following table sets forth the fair value of the pension plan assets, as of December 31, 2016 (in millions):
|
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets | | Other Observable Inputs | | Unobservable Inputs | | |
| | (Level 1) | | (Level 2) | | (Level 3) | | Total |
| Equities | $ | 0.1 |
| | $ | 13.6 |
| | $ | — |
| | $ | 13.7 |
|
| Bonds | 1.6 |
| | 22.8 |
| | — |
| | 24.4 |
|
| Insurance contracts | — |
| | — |
| | 43.4 |
| | 43.4 |
|
| Absolute return fund | — |
| | 51.5 |
| | — |
| | 51.5 |
|
| Other | — |
| | 5.2 |
| | — |
| | 5.2 |
|
| Total | $ | 1.7 |
| | $ | 93.1 |
| | $ | 43.4 |
| | $ | 138.2 |
|
The following table sets forth the fair value of the pension plan assets, as of December 31, 2015 (in millions):
|
| | | | | | | | | | | |
| | Other Observable Inputs | | Unobservable Inputs | | |
| | (Level 2) | | (Level 3) | | Total |
| Equities | $ | 14.5 |
| | $ | — |
| | $ | 14.5 |
|
| Bonds | 38.1 |
| | — |
| | 38.1 |
|
| Property | — |
| | 0.3 |
| | 0.3 |
|
| Insurance contracts | — |
| | 34.9 |
| | 34.9 |
|
| Absolute return fund | 33.7 |
| | — |
| | 33.7 |
|
| Other | 5.2 |
| | — |
| | 5.2 |
|
| Total | $ | 91.5 |
| | $ | 35.2 |
| | $ | 126.7 |
|
For a discussion of the fair value levels and the valuation methodologies used to measure equities, bonds, and the absolute return fund (refer to Note 6).
Perrigo Company plc - Item 8
Note 15
The following table sets forth a summary of the changes in the fair value of the Level 3 pension plan assets, which were measured at fair value on a recurring basis (in millions):
|
| | | | | | | | | | | |
| | Year Ended | | Six Months Ended |
| | December 31,
2017 | | December 31, 2016 | | December 31,
2015 |
| Assets at beginning of year | $ | 43.4 |
| | $ | 35.2 |
| | $ | 34.3 |
|
| Actual return on plan assets | 1.0 |
| | 6.7 |
| | 0.1 |
|
| Purchases, sales and settlements, net | 0.9 |
| | (4.2 | ) | | 2.1 |
|
| Net transfers | — |
| | 7.6 |
| | — |
|
| Foreign exchange | 5.5 |
| | (1.9 | ) | | (1.3 | ) |
| Assets at end of year | $ | 50.8 |
| | $ | 43.4 |
| | $ | 35.2 |
|
All properties in the fund are valued by independent valuation experts by forecasting the returns of the market at regular intervals. The inputs to the forecasts include gross national product growth, interest rates and inflation.
The fair value of the insurance contracts is an estimate of the amount that would be received in an orderly sale to a market participant at the measurement date. The amount the plan would receive from the contract holder if the contracts were terminated is the primary input and is unobservable. The insurance contracts are therefore classified as Level 3 investments.
Deferred Compensation Plans
We have non-qualified plans related to deferred compensation and executive retention that allow certain employees and directors to defer compensation subject to specific requirements. Although the plans are not formally funded, we own insurance policies that had a cash surrender value of $34.6 million, $32.7 million and $34.6 million at December 31, 2017, December 31, 2016, andDecember 31, 2015, respectively, that are intended as a long-term funding source for these plans. The assets, which are recorded in Other non-current assets, are not a committed funding source and may, under certain circumstances, be subject to claims from creditors. The deferred compensation liability of $31.6 million, $29.3 million, and $34.5 million at December 31, 2017, December 31, 2016, andDecember 31, 2015, respectively, was recorded in Other non-current liabilities.
NOTE 1617 - COMMITMENTS AND CONTINGENCIESRESTRUCTURING CHARGES
We lease certainperiodically take action to reduce redundant expenses and improve operating efficiencies. Restructuring activity includes severance, fixed assets principally warehouse facilitiesimpairments, and computer equipment, under agreements thatrelated consulting fees. The following reflects our restructuring activity (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2023 |
| Supply Chain Reinvention | | HRA Pharma
Integration | | Project Energize | | Other Initiatives | | Total |
| Beginning balance | $ | 2.2 | | | $ | 13.3 | | | $ | — | | | $ | 4.3 | | | $ | 19.8 | |
| Additional charges | 28.0 | | | 4.2 | | | 7.4 | | | 2.6 | | | 42.2 | |
| Payments | (13.4) | | | (10.9) | | | (4.5) | | | (4.6) | | | (33.4) | |
| Non-cash adjustments | (16.1) | | | 0.2 | | | — | | | (0.5) | | | (16.4) | |
| Ending balance | $ | 0.7 | | | $ | 6.8 | | | $ | 2.9 | | | $ | 1.8 | | | $ | 12.2 | |
| | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 |
| Supply Chain Reinvention | | | Other Initiatives | | Total |
| Beginning balance | $ | — | | | | $ | 6.9 | | | $ | 6.9 | |
| Additional charges | 24.3 | | | | 18.2 | | | 42.5 | |
| Payments | (22.1) | | | | (7.7) | | | (29.8) | |
| Non-cash adjustments | — | | | | 0.2 | | | 0.2 | |
| Ending balance | $ | 2.2 | | | | $ | 17.6 | | | $ | 19.8 | |
| | | | | | |
| | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2021 |
| | Other Initiatives | | Total |
| Beginning balance | | $ | 9.1 | | | $ | 9.1 | |
| Additional charges | | 16.9 | | | 16.9 | |
| Payments | | (19.0) | | | (19.0) | |
| Non-cash adjustments | | (0.1) | | | (0.1) | |
| Ending balance | | $ | 6.9 | | | $ | 6.9 | |
Perrigo Company plc - Item 8
Note 17
The charges incurred during the year ended December 31, 2023 were primarily associated with actions taken on supply chain restructuring, Project Energize and HRA integration activities. Charges related to supply chain restructuring included an asset impairment of $16.1 million. The charges incurred during the year ended December 31, 2022 were primarily associated with actions taken on supply chain restructuring and HRA integration activities. The charges incurred during the year ended December 31, 2021 were primarily associated with actions takes to streamline the organization.
Of the amount recorded during the year ended December 31, 2023, $21.4 million was related to our CSCI segment, due primarily to supply chain restructuring and HRA Pharma integration initiatives and $13.0 million was related to our CSCA segment, due primarily to supply chain restructuring. Of the amount recorded during the year ended December 31, 2022, $29.4 million was related to our CSCI segment, due primarily to supply chain restructuring and HRA integration initiatives, and $2.5 million was allocated to our CSCA segment, due primarily to actions taken to streamline the organization. For year ended December 31, 2021, $6.1 million related to our CSCI segment also due primarily to various integration initiatives and $7.9 million was allocated to our CSCA segment, due primarily to actions taken to streamline the organization. The remaining charges for all years were reported in our Unallocated segment. There were no other material restructuring programs in any of the periods presented.
All charges are recorded in restructuring expense on the Consolidated Financial Statements. The remaining $12.2 million liability for employee severance benefits is expected to be paid mostly within the next year.
NOTE 18 - INCOME TAXES
Pre-tax income (loss) and the (benefit) provision for income taxes from continuing operations are summarized as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Pre-tax income (loss): | | | | | |
| Ireland | $ | 72.3 | | | $ | (212.8) | | | $ | 341.9 | |
| United States | (23.8) | | | (38.2) | | | (35.3) | |
| Other foreign | (56.9) | | | 111.9 | | | (47.9) | |
| Total pre-tax income (loss) | (8.4) | | | (139.1) | | | 258.7 | |
| | | | | |
| Current provision (benefit) for income taxes: | | | | | |
| Ireland | 2.0 | | | 2.8 | | | 303.6 | |
| United States | 18.2 | | | (7.8) | | | 14.9 | |
| Other foreign | 56.6 | | | 30.8 | | | 81.3 | |
| Subtotal | 76.8 | | | 25.8 | | | 399.8 | |
| Deferred provision (benefit) for income taxes: | | | | | |
| Ireland | 0.2 | | | 0.7 | | | 0.4 | |
| United States | (12.9) | | | (8.6) | | | 3.3 | |
| Other foreign | (68.0) | | | (26.1) | | | (13.9) | |
| Subtotal | (80.7) | | | (34.0) | | | (10.2) | |
| Total provision for income taxes | $ | (3.9) | | | $ | (8.2) | | | $ | 389.6 | |
Perrigo Company plc - Item 8
Note 18
A reconciliation of the provision based on the Irish statutory income tax rate to our effective income tax rate is as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Provision at statutory rate | 12.5 | % | | 12.5 | % | | 12.5 | % |
| Foreign rate differential | 286.8 | | | 25.9 | | | 1.5 | |
| State income taxes, net of federal benefit | 3.6 | | | (0.3) | | | 0.2 | |
| Provision to return | (67.6) | | | (0.5) | | | 0.4 | |
| Tax credits | 293.3 | | | 18.6 | | | (19.6) | |
| Change in tax law | (25.5) | | | 0.7 | | | 1.5 | |
| Change in valuation allowance | (383.9) | | | (7.6) | | | 17.1 | |
| Change in unrecognized taxes | 654.7 | | | 4.4 | | | 116.5 | |
| Permanent differences | (723.3) | | | (42.3) | | | 1.6 | |
| Legal entity restructuring | — | | | (4.6) | | | 18.6 | |
| Taxes on unremitted earnings | 4.7 | | | (0.8) | | | 0.2 | |
| Other | (8.1) | | | (0.1) | | | 0.1 | |
| Effective income tax rate | 47.2 | % | | 5.9 | % | | 150.6 | % |
Deferred income taxes arise from temporary differences between the financial reporting and the tax reporting basis of assets and liabilities and operating loss and tax credit carryforwards for tax purposes. The components of our net deferred income tax asset (liability) are presented on a total company basis as follows (in millions):
| | | | | | | | | | | |
| Year Ended |
| Deferred income tax asset (liability): | December 31, 2023 | | December 31, 2022 |
| Depreciation and amortization | $ | (475.9) | | | $ | (511.5) | |
| Right of use assets | (44.4) | | | (52.6) | |
| Unremitted earnings | (3.1) | | | (3.8) | |
| Inventory basis differences | 30.8 | | | 28.7 | |
| Accrued liabilities | 26.3 | | | 26.5 | |
| Lease obligations | 45.3 | | | 52.3 | |
| Share-based compensation | 17.9 | | | 21.4 | |
| Federal benefit of unrecognized tax positions | 18.7 | | | 18.7 | |
| Loss and credit carryforwards | 438.3 | | | 360.8 | |
| R&D credit carryforwards | 23.8 | | | 32.2 | |
| Capitalized R&D costs | 31.2 | | | 17.5 | |
| Interest carryforwards | 50.8 | | | 13.5 | |
| Other, net | 44.7 | | | 29.7 | |
| Subtotal | $ | 204.4 | | | $ | 33.4 | |
Valuation allowance (1) | (440.9) | | | (394.5) | |
| Net deferred income tax liability | $ | (236.5) | | | $ | (361.1) | |
(1) The movement in the valuation allowance balance differs from the amount in the effective tax rate reconciliation due to adjustments affecting balance sheet only items and foreign currency.
The above amounts are classified on the Consolidated Balance Sheets as follows (in millions):
| | | | | | | | | | | |
| Year Ended |
| December 31, 2023 | | December 31, 2022 |
| Assets | $ | 25.8 | | | 7.1 | |
| Liabilities | (262.3) | | | (368.2) | |
| Net deferred income tax liability | $ | (236.5) | | | (361.1) | |
The change in valuation allowance reducing deferred taxes was (in millions):
Perrigo Company plc - Item 8
Note 18
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| Balance at beginning of period | | $ | 394.5 | | | $ | 450.7 | | | $ | 414.8 | |
Change in assessment (1) | | 48.3 | | | (14.8) | | | 39.1 | |
| Current year operations, foreign currency and other | | (1.9) | | | (41.4) | | | (3.2) | |
| Balance at end of period | | $ | 440.9 | | | $ | 394.5 | | | $ | 450.7 | |
(1) Includes increases in 2023 of $45 million related primarily to pre-acquisition net operating losses in our Elan US entity, reductions of $16.0 million in 2022 related primarily to projected utilization of capital losses and additions of $40.0 million in 2021 related primarily to our Latin American businesses.
We have credit carryforwards of $27.2 million and net operating loss carryforwards of $615.2 million which will expire at various datestimes through 2043. The remaining credit carryforwards of $6.7 million, loss carryforwards of $1.4 billion, and interest carryforwards of $218.0 million have no expiration.
For the year ended December 31, 2023 we recorded a net increase in valuation allowances of $46.4 million comprised primarily of an increase of valuation allowance on certain operating losses being carried forward which are no longer realizable. For the year ended December 31, 2022 we recorded a net decrease in valuation allowances of $56.2 million, comprised primarily of a decrease in valuation allowance on deferred tax assets related to the divestiture of the Latin American businesses in 2022. For the year ended December 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. Valuation allowances are determined based on management's assessment of its deferred tax assets that are more likely than not to be realized.
The ending deferred tax liability with respect to undistributed earnings of certain foreign subsidiaries is $3.1 million as of December 31, 2023.
As of December 31, 2023, the Company considered approximately $3.5 million of unremitted earnings of our foreign subsidiaries as indefinitely reinvested. The unrecognized deferred tax liability related to these earnings is estimated at approximately $0.4 million. However, this estimate could change based on the manner in which the outside basis differences associated with these earnings reverse.
The Company operates in multiple jurisdictions with complex tax policy and regulatory environments and establishes reserves for uncertain tax positions in accordance with the accounting guidance governing uncertainty in income taxes. Uncertainty in a tax position may arise because tax laws are subject to interpretation. The following table is presented on a total company basis and summarizes the activity related to the liability recorded for uncertain tax positions, excluding interest and penalties (in millions):
| | | | | | | | |
| Year Ended |
| December 31, 2023 | December 31, 2022 |
| Balance at beginning of period | $ | 331.6 | | $ | 347.2 | |
| Additions: | | |
| Positions related to the current year | 9.8 | | 9.2 | |
| Positions related to prior years | 57.7 | | 13.4 | |
| Reductions: | | |
| Settlements with taxing authorities | (50.4) | | (20.2) | |
| Lapse of statutes of limitation | (4.9) | | — | |
| Decrease in prior year positions | (104.9) | | (17.1) | |
| Cumulative translation adjustment | 0.4 | | (0.9) | |
| Balance at end of period | $ | 239.3 | | $ | 331.6 | |
We recognize interest and penalties related to uncertain tax positions as a component of income tax expense. The total amount accrued for interest and penalties in the liability for uncertain tax positions was $74.9 million, $85.8 million, and $105.1 million as of December 31, 2023, December 31, 2022, and December 31, 2021, respectively.
If recognized, of the total liability for uncertain tax positions, including interest and penalties, $185.2 million, $217.0 million, and $240.1 million as of December 31, 2023, December 31, 2022, and December 31, 2021, respectively, would impact the effective tax rate in future periods.
Perrigo Company plc - Item 8
Note 18
Our major income tax jurisdictions are Ireland, the U.S., Belgium, France, Germany and the United Kingdom. We are routinely audited by the tax authorities in our major jurisdictions. We have substantially concluded all Ireland income tax matters through the year ended December 31, 2024. Certain leases contain provisions2018 and all U.S. federal income tax matters through the year ended June 28, 2008. All significant matters in our remaining major tax jurisdictions have been concluded for renewaltax years through 2018.
Based on the final resolution of tax examinations, judicial or administrative proceedings, changes in facts or law, expirations of statute of limitations in specific jurisdictions or other resolutions of, or changes in, tax positions - one or more of which may occur within the next twelve months - it is reasonably possible that unrecognized tax benefits for certain tax positions taken on previously filed tax returns may change materially from those recorded as of December 31, 2023. However, we are not able to estimate a reasonably possible range of how these events may impact our unrecognized tax benefits in the next twelve months.
Internal Revenue Service Audits of Perrigo Company, a U.S. Subsidiary
Perrigo Company, our U.S. subsidiary ("Perrigo U.S."), is engaged in a series of tax disputes in the U.S. relating primarily to transfer pricing adjustments including income in connection with the purchase, distribution, and purchase optionssale of store-brand OTC pharmaceutical products in the United States, including the heartburn medication omeprazole. On August 27, 2014, we received a statutory notice of deficiency from the IRS relating to our fiscal tax years ended June 27, 2009, and require usJune 26, 2010 (the “2009 tax year” and “2010 tax year”, respectively). On April 20, 2017, we received a statutory notice of deficiency from the IRS for the years ended June 25, 2011 and June 30, 2012 (the “2011 tax year” and “2012 tax year”, respectively). Specifically, both statutory notices proposed adjustments related to pay variousthe offshore reporting of profits on sales of omeprazole in the United States resulting from the assignment of an omeprazole distribution contract to an Israeli affiliate. In addition to the transfer pricing adjustments, which applied to all four tax years, the statutory notice of deficiency for the 2011 and 2012 tax years included adjustments requiring the capitalization and amortization of certain legal expenses that were deducted when paid or incurred in defending against certain patent infringement lawsuits related expenses. Future non-cancelable minimum operating lease commitmentsto Abbreviated New Drug Applications (“ANDAs”) filed with a Paragraph IV Certification.
We do not agree with the audit adjustments proposed by the IRS in either of the notices of deficiency. We paid the assessed amounts of tax, interest, and penalties set forth in the statutory notices and timely filed claims for refund on June 11, 2015 for the 2009 and 2010 tax years, and on June 7, 2017, for the 2011 and 2012 tax years. On August 15, 2017, following disallowance of such refund claims, we timely filed a complaint in the United States District Court for the Western District of Michigan seeking refunds of tax, interest, and penalties of $27.5 million for the 2009 tax year, $41.8 million for the 2010 tax year, $40.1 million for the 2011 tax year, and $24.7 million for the 2012 tax year, for a total of $134.1 million, plus statutory overpayment interest thereon from the dates of payment. The amounts sought in the complaint for the 2009 and 2010 tax years were recorded as deferred charges in Other non-current assets on our balance sheet during the three months ended March 28, 2015, and the amounts sought in the complaint for the 2011 and 2012 tax years were recorded as deferred charges in Other non-current assets on our balance sheet during the three months ended July 1, 2017.
A bench trial was held during the period May 25, 2021 to June 7, 2021 for the refund case in the United States District Court for the Western District of Michigan. The total amount of cumulative deferred charge that we are seeking to receive in this litigation is approximately $113.3 million, which reflects the impact of conceding that Perrigo U.S. should have received a 5.24% royalty on all omeprazole sales. That concession was previously paid and is the subject of the above refund claims. The issues outlined in the statutory notices of deficiency described above are continuing in nature, and the IRS will likely carry forward the adjustments set forth therein as follows (in millions):long as the OTC medication is sold, in the case of the omeprazole issue, and for all post-2012 Paragraph IV filings that trigger patent infringement suits, in the case of the ANDA issue. Post-trial briefings were completed on September 24, 2021 and the case is now fully submitted for the court’s decision. On April 30, 2021, we filed a Notice of New Authority in our refund case in the Western District of Michigan alerting the court to a United States Tax Court decision in Mylan v. Comm'r that ruled in favor of the taxpayer on nearly identical ANDA issues as we have before the court. On January 28, 2022, the IRS filed a Notice of Appeal with the United States Court of Appeals of the Third Circuit to appeal the United States Tax Court's decision in Mylan v. Comm'r. Briefing to the appellate court was completed during 2022, oral argument was held before the Third Circuit on January 12, 2023, and on July 27, 2023, the Third Circuit Court affirmed the decision of the Tax Court. On August 1, 2023, we filed a Notice of new Authority in our refund case in the Western District of Michigan alerting the court to the Third Circuit Court decision in Mylan v. Comm’r that ruled in favor of the taxpayer on nearly identical ANDA issues that we have before the court. On August
Perrigo Company plc - Item 8
Note 18
|
| | | | |
| Due | | Amount |
| 2018 | | $ | 38.1 |
|
| 2019 | | 31.9 |
|
| 2020 | | 24.3 |
|
| 2021 | | 18.6 |
|
| 2022 | | 13.7 |
|
| Thereafter | | 16.6 |
|
RentOn January 13, 2021, the IRS issued a 30-day letter and Revenue Agent's Report ("RAR") with respect to its audit of our fiscal tax years ended June 29, 2013, June 28, 2014, and June 27, 2015. The 30-day letter proposed, among other modifications, transfer pricing adjustments in connection with the distribution of omeprazole in the aggregate amount of $141.6 million and ANDA-related adjustments in the aggregate amount of $21.9 million. The 30-day letter also set forth adjustments described in the next two paragraphs. We timely filed a protest to the 30-day letter for those additional adjustments but noting that due to the pending refund litigation described above, IRS Appeals would not consider the merits of the omeprazole or ANDA matters. We believe that we should prevail on the merits on both carryforward issues and have reserved for taxes and interest payable on the 5.24% deemed royalty on omeprazole through the tax year ended December 31, 2018. Beginning with the tax year ended December 31, 2019, we began reporting income commensurate with the 5.24% deemed royalty. We have not reserved for the ANDA-related issue described above. While we believe we should prevail on the merits of this case, the outcome remains uncertain. If our litigation position on the omeprazole issue is not sustained, the outcome for the 2009–2012 tax years could range from a reduction in the refund amount to denial of any refund. In addition, we expect that the outcome of the refund litigation could effectively bind future tax years. In that event, an adverse ruling on the omeprazole issue could have a material impact on subsequent periods, with additional tax liability in the range of $25.0 million to $124.0 million, not including interest and any applicable penalties.
The 30-day letter for the 2013-2015 tax years also proposed to reduce Perrigo U.S.'s deductible interest expense for the 2014 tax year and the 2015 tax year on $7.5 billion in certain intercompany debts owed by it to Perrigo Company plc. The debts were incurred in connection with the 2013 Elan merger transaction in 2013. On May 7, 2020, the IRS issued a NOPA capping the interest rate on the debts for U.S. federal tax purposes at 130.0% of the Applicable Federal Rate ("AFR") (a blended rate reduction of 4.0% per annum) on the stated ground that the loans were not negotiated on an arms-length basis. The May 7, 2020 NOPA proposed a reduction in gross interest expense of approximately $414.7 million for tax years 2014 and 2015. On January 13, 2021, we received a RAR, together with the 30-day letter, requiring our filing of a written protest to request IRS Appeals consideration. The protest was timely filed with the IRS on February 26, 2021. On January 20, 2022, the IRS responded to our protest with its rebuttal in which it revised its position on this interest rate issue by reasserting that implicit parental support considerations are necessary to determine the arm's length interest rates 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 the IRS rebuttal was 4.36%, an increase from the blended interest rate in the RAR of 2.57% but lower than the stated blended interest rate of the loans of 6.8%. An IRS Appeals conference for the interest rate issue was held during March 7, 2023 through March 9, 2023. On May 5, 2023, we finalized an agreement with IRS Appeals resulting in settlement of the May 7, 2020 NOPA of $153.4 million of gross interest expense reduction for the 2014-2015 tax years. This implies a blended interest rate of 5.44%. In addition, based on the above agreement with IRS Appeals, we will apply similar adjustments for all leasesremaining tax years through 2018. On December 20, 2023, the IRS Examination Team confirmed that the interest rates agreed with IRS Appeals for the 2014-2015 tax years will be applied to the future tax years through 2018. The tax payments relating to the settlement with IRS appeals is expected to be made during 2024, after receipt of a Notice of Assessment. In the second and fourth quarters of fiscal year 2023 we adjusted our previously established reserves related to this matter to account for the agreed reduction of the interest rates.
Perrigo Company plc - Item 8
Note 18
In addition, the 30-day letter for the 2013-2015 tax years expanded on a NOPA issued on December 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 on February 26, 2021 to request IRS Appeals consideration. On January 20, 2022, the IRS 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. On December 28, 2022, we finalized an agreement with IRS Appeals providing for settlement of the NOPA not only for the 2013-2015 tax years but all of the remaining tax years through 2021, the last tax year with chargebacks due to the sale of the RX business in July 2021. We made a settlement payment of $8.3 million which was $50.9 million, $53.0 million, $26.2 million, and $39.2 millionfully covered by reserves for this issue.
On December 2, 2021, the IRS commenced an audit of our federal income tax returns for the tax years ended December 31, 2015, through December 31, 2019.
Internal Revenue Service Audit of Athena Neurosciences, LLC, a U.S. Subsidiary
On April 26, 2019, we received a revised NOPA from the IRS regarding transfer pricing positions related to the IRS audit of Athena Neurosciences, LLC ("Athena") for the years ended December 31, 20172011, December 31, 2012, and December 31, 2013. The April 26, 2019, NOPA carried forward the IRS's theory from its 2017 draft NOPA that when Elan took over the future funding of Athena's in-process research and development after acquiring Athena in 1996, Elan should have paid a substantially higher royalty rate for the right to exploit Athena’s intellectual property in various developmental products, including the Multiple Sclerosis drug Tysabri, rather than rates based on transfer pricing documentation prepared by Elan's external tax advisors. The April 26, 2019, NOPA proposed a payment of $843.0 million, which represented additional tax based on imputing royalty income to Athena using a 24.7% royalty rate derived by the IRS and a 40.0% accuracy-related penalty. This amount excluded consideration of offsetting tax attributes and any potential interest that may be imposed. We strongly disagreed with the IRS' position. On December 22, 2016, we also received a NOPA for these years denying the six monthsdeductibility of settlement costs incurred in 2011 by Athena's parent company Elan Pharmaceuticals, Inc. ("EPI") related to illegal marketing of Zonegran by EPI's employees in the United States raised in a Qui Tam action under the U.S. False Claims Act. We strongly disagreed with the IRS' position on this issue as well. Because we believed that any concession on these issues in Appeals would be contrary to our evaluation of the issues and to avoid double taxation of the same income in the United States and Ireland, we pursued our remedies under the Mutual Agreement Procedure ("MAP") of the U.S. - Ireland Income Tax Treaty to alleviate double taxation. On April 21 and 23, 2020, we filed requests for Competent Authority assistance with the IRS and Irish Revenue on the Tysabri royalty issue, and those MAP applications were accepted. On October 20, 2020, we amended our requests for Competent Authority assistance to include the Zonegran issue and these supplemental requests were also accepted.
On April 24, 2023, we received a letter from the IRS informing us that the U.S. Competent Authority had agreed to fully withdraw the income and penalty adjustments related to the Tysabri royalty issue and considered that case to be closed. The April 24, 2023 letter concluded the competent authority process for the Tysabri royalty issue without the need for negotiations between the Competent Authorities and constitutes a full and final resolution of all adjustments proposed by the IRS in the April 26, 2019 NOPA. In the second quarter of fiscal year 2023 we adjusted previously established reserves related to this and other matters in the same audit period. The Zonegran deduction issue remains pending in the MAP case and is being considered by the U.S. and Irish Competent Authorities.
Irish Revenue Audit of Fiscal Years Ended December 31, 2012 and December 31, 2013
On November 29, 2018, Irish Revenue issued a Notice of Amended Assessment (“NoA”) for the tax year ended December 31, 2013, related to the tax treatment of 2013 sale of the Tysabri® intellectual property and related assets toBiogen Idec by Elan Pharma. On September 29, 2021, Elan reached an agreement with Irish Revenue providing for full and final settlement of the NoA on the following terms: (i) on a 'without prejudice basis' and, for purposes of the settlement, an 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 research and
Perrigo Company plc - Item 8
Note 18
development ("R&D") credits against the €297.0 million charged settlement amount, the total cash payment of €266.1 million, $307.5 million as of the date of payment, was made on October 5, 2021. We recorded the payment as a component of income tax expense on the Consolidated Statements of Operations in the third quarter of 2021.
Israel Tax Authority Audit of Fiscal Year Ended June 27, 2015 and Calendar Years Ended December 31, 2015 through December 31, 2019
On December 29, 2020, we received a Stage A assessment from the Israeli Tax Authority ("ITA") for the tax years ended December 31, 2015 through December 31, 2017 relating to attribution of intangible income to Israel, income qualifying for a lower preferential rate of tax, exemption from capital gains tax, and deduction of certain settlement payments. Through negotiations with the ITA, we resolved the audit in 2021 by agreeing to add tax years ended December 31, 2018 and December 31, 2019 to the audit. Further, 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 ended December 31, 2017 relating to Perrigo API Ltd, which we disposed of in December 2017. As a result of the settlement with the ITA, we reduced our liability recorded for uncertain tax positions by $38.3 million including interest in 2021.
Recent Tax Law Changes
On December 28, 2021, the U.S. Treasury and the IRS released final foreign tax credit regulations addressing various aspects of the foreign tax credit regime. The regulations were, generally, effective on March 7, 2022. We evaluated the regulations and concluded that they do not result in any material changes to our income tax reporting for the year endedJune 27, 2015, respectively. December 31, 2022 or for any prior periods. We will continue to evaluate the effects of these final foreign tax credit regulations on future accounting periods.
In the United States, the Inflation Reduction Act of 2022 ("IR Act") created the corporate alternative minimum tax ("CAMT"), which imposes the 15% minimum tax on adjusted financial statement income of large corporations with average annual financial statement income exceeding $1 billion and effective for taxable years beginning after December 31, 2022. During 2023, U.S. Department of Treasury issued Notices 2023-20, 2023-64 and 2024-10, in addition to Notice 2023-7 that was issued on December 2022, to provide additional interim guidance to assist in determining whether the CAMT applies and how to compute the tax. We evaluated the IR Act, together with the Notices, and concluded it does not result in any material changes to our income tax reporting for the year ended December 31, 2023. We will continue to evaluate the effects of the CAMT on future accounting periods.
Perrigo Company plc
The Organization for Economic Co-operation and Development (“OECD”), which represents a coalition of member countries, has recommended changes to numerous long-standing tax principles. In particular, the OECD's Pillar Two initiative introduces a global per-country minimum tax of 15%. Pillar Two legislation has been enacted or substantively enacted in many of the jurisdictions in which we operate. The legislation will be effective for our financial year beginning January 1, 2024. We are in scope of the enacted or substantively enacted legislation and have performed an assessment of our potential exposure to Pillar Two income taxes.
The assessment of the potential exposure to Pillar Two income taxes is based on the most recent tax filings, country-by-country reporting and financial statements for our constituent entities. Based on the assessment, the Pillar Two effective tax rates in most of the jurisdictions in which we operate are above 15%. However, there are a limited number of jurisdictions where the transitional safe harbor reliefs do not apply and the Pillar Two effective tax rate is below 15%. We do not expect a material exposure to Pillar Two income taxes in those jurisdictions.
NOTE 19 - Item 8COMMITMENTS AND CONTINGENCIES
Note 16
