On August 11, 2021 Perrigo Company plc (NYSE; TASE: PRGO), a leading global provider of Consumer Self-Care Products, reported financial results from continuing operations for the second quarter of fiscal year 2021 ended July 3, 2021 (Press release, Perrigo Company, AUG 11, 2021, View Source [SID1234586283]). The Consumer Self-Care Americas ("CSCA") segment, the Consumer Self-Care International ("CSCI") segment and Corporate are included in results from continuing operations. Financial results from the generic RX pharmaceuticals business are reported as discontinued operations. All comparisons are against the prior year fiscal second quarter, unless otherwise noted.
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President and CEO, Murray S. Kessler commented, "Self-care has never been more important and with our portfolio reconfiguration completed and the investments made in technology, capabilities, talent and manufacturing capacity, as a pure-play consumer company Perrigo is in a great position to capitalize on this trend."
Kessler continued, "I am proud of how the Perrigo team continues to adjust during these challenging times, which have significantly impacted sales mix, channel dynamics and input costs. As a result, Perrigo net sales increased on most of our businesses, with the exception of OTC in the U.S., which was negatively impacted by year-over-year customer inventory reductions and a historically weak cough/cold season. Most importantly, consumer take away rebounded sharply in Q2 on all businesses including cough/cold, according to IRI MULO, which bodes well for the second half. The decline in earnings this quarter was the result of these factors, the reinstatement of brand building support to pre-COVID-19 levels and higher input costs."
Kessler further noted, "We are reaffirming our fiscal 2021 net sales guidance based on the strong rebound in consumer take away. Current consumer trends, along with an expected increase in cough/cold illnesses and the benefit of new products, are expected to result in higher volumes and accelerating growth, which will be compared to a weak year ago second half. However, we now expect adjusted EPS towards the lower end of our guidance range as productivity improvements and Project Momentum cost savings are only expected to partially offset higher input costs, which we now see continuing into early next year. For the first time in a number of years, price increases will also play a role in mitigating inflationary headwinds."
Kessler concluded, "Unless markets begin to shut down again due to a surge in COVID-19, we believe most of the volatility created by the pandemic is behind us. Perrigo is moving forward in a strong position with significant resources to drive returns for shareholders through base business growth, disciplined M&A and reducing uncertainty."
Refer to Tables I – IV at the end of this press release for a reconciliation of non-GAAP adjustments to the current year and prior year periods and additional non-GAAP information. The Company’s reported results are included in the attached Condensed Consolidated Statements of Operations, Balance Sheets and Statements of Cash Flows.
Second Quarter 2021 Financial Highlights From Continuing Operations
Perrigo second quarter net sales were $981 million, an increase of 3.4%, due primarily to growth in most businesses and favorable currency movements, partially offset by year-over-year customer inventory reductions and a historically weak cough/cold season. Organic(1) net sales growth was 0.5%, including a negative 2.3 percentage point impact from lower cough/cold-related net sales.
CSCI second quarter net sales of $359 million were 11.7% higher versus the prior year quarter, with strong organic growth of 4.3%; CSCA second quarter net sales of $622 million were 0.9% lower compared to the prior year quarter, with organic sales down 1.4%.
Reported diluted loss per share ("EPS") for the second quarter of 2021 was $0.84 per diluted share, due primarily to $1.17 per diluted share in impairment charges related to the announced sale of the Latin American business, as compared to EPS of $0.09 per diluted share in the prior year quarter.
Adjusted diluted EPS, which among other adjustments, excludes certain costs required to operate the RX business(2) prior to the sale closing on July 6, 2021, for the second quarter of 2021 decreased 15.3% to $0.50 per diluted share as compared to $0.59 per diluted share in the prior year quarter due primarily to reinstatement of brand and marketing investments.
First Half 2021 Financial Highlights From Continuing Operations
Perrigo first half net sales were $2.0 billion, a decrease of 2.0%, which included a benefit from the pandemic-related pantry load benefit in the prior year period and a negative 4.4 percentage point impact from lower cough/cold-related net sales this year due to the historically weak cough/cold season.
On a two-year CAGR basis, Perrigo net sales grew 4.0%, while organic growth declined 0.1%, including a negative 2.5 percentage point impact from lower cough/cold-related net sales in the first half of 2021.
CSCA first half net sales of $1.3 billion were down 4.9% compared to the prior year period, with organic sales down 6.9%, of which 3.9 percentage points came from the negative impact of lower cough/cold-related net sales; CSCI first half net sales of $728 million were 3.5% higher versus the prior year period, with organic growth down 3.0%, of which 5.5 percentage points came from the negative impact of lower cough/cold-related net sales.
On a two-year CAGR basis, CSCA first half net sales grew 4.2%, while organic growth was flat, as lower cough/cold-related net sales had a negative 2.5 percentage point impact. On a two-year CAGR basis, CSCI first half net sales grew 3.6%, while organic growth declined 0.4%, as lower cough/cold-related net sales also had a negative 2.5 percentage point impact.
Reported diluted loss per share ("EPS") for the first half of 2021 was $0.82 per diluted share as compared to EPS of $0.51 in the prior year period, due primarily to $1.17 per diluted share in impairment charges related to the announced sale of the Latin American business.
Adjusted diluted EPS for the first half of 2021 decreased 20.6% to $1.00 per diluted share as compared to $1.26 per diluted share in the prior year period. The current period was negatively impacted by an estimated $0.18 per diluted share from lower cough/cold-related net sales while the prior year period benefited from the pandemic-related pantry load.
(1) See attached Appendix for details. Organic net sales growth excludes the effects of acquisitions and divestitures and the impact of currency.
(2) In addition to other non-GAAP adjustments as described in the attached appendix, adjusted profit measures, including adjusted EPS and adjusted operating income, exclude from both periods certain costs, which are reported in GAAP continuing operations but were previously allocated to the now divested RX business. On a go-forward basis, such costs will either be covered by the transition services agreement or eliminated following closing. Accordingly, as described below under "Non-GAAP Adjustments", we do not believe such operational costs are representative of the future expenses of our continuing operations. See the attached Appendix for additional details.
Second Quarter 2021 Perrigo Results From Continuing Operations
Perrigo net sales for the second quarter were $981 million, an increase of $32 million or 3.4%, including positive impacts of 0.8 percentage points and 3.7 percentage points from acquisitions and favorable currency movements, respectively, partially offset by a negative impact of 1.5 percentage points from divestitures. Organic net sales increased 0.5%, including a negative 2.3 percentage points impact from lower cough/cold-related net sales.
Net sales in the quarter were driven by 1) organic growth of $4 million, which included $21 million from lower cough/cold-related net sales due to the historically weak cough/cold season, 2) $7 million from the acquisition of Eastern European dermatology brands, and 3) $35 million in net favorable currency movements. These gains were partially offset by 1) the lowering of inventories at U.S. retail customers, impacting CSCA’s OTC business, and 2) a reduction of $14 million from divested businesses.
Second quarter reported operating loss was $126 million in 2021 compared to reported operating income of $63 million in 2020. Adjusted operating income was $118 million in 2021 and $132 million in 2020, a decrease of $14 million or 10.7%. This decrease was due primarily to 1) higher operating expenses due primarily to the reinstatement of brand and marketing investments to pre-COVID-19 levels, 2) lower volumes and unfavorable plant overhead absorption in CSCA’s OTC business due to lower cough/cold-related net sales and the lowering of inventories at U.S. retail customers, 3) higher input costs, including freight and commodities, and 4) divestitures. These factors were partially offset by 1) improved base business performance, outside of cough/cold, 2) lower corporate expenses due partially to Project Momentum savings, and 3) procurement actions and price increases initiated during the quarter.
Reported net loss was $112 million, or $0.84 per diluted share, compared to net income of $12 million, or $0.09 per diluted share in the prior year period. Excluding certain charges as outlined in Table I, second quarter 2021 adjusted net income was $68 million, or $0.50 per diluted share, compared to $82 million, or $0.59 per diluted share, last year due to the factors described above and a negative $0.04 per diluted share impact from a higher tax rate.
Second Quarter 2021 Business Segment Results From Continuing Operations
Consumer Self-Care Americas Segment
CSCA second quarter net sales of $622 million were 0.9%, or $5 million, lower than the prior year period, including a 0.6 percentage point benefit from favorable currency movements. Organic net sales decreased 1.4%, including a negative 2.7 percentage point impact from lower cough/cold-related net sales.
OTC net sales in the quarter were driven by 1) total OTC market growth, led by a rebound in in-store foot traffic, 2) new product sales, including the store brand version of diclofenac, which more than offset purposeful discontinued product sales, and 3) growth in the Skin & Personal Hygiene category, due primarily to higher demand for the minoxidil franchise. More than offsetting these drivers were 1) lower cough/cold-related net sales due to the historically weak cough/cold season, which impacted the Upper Respiratory and Pain and Sleep Aids categories, and 2) the lowering of inventories at U.S. retail customers.
High-teens percentage net sales growth in the Oral Self-Care category was driven by a rebound in in-store consumer demand for both the Company’s branded and store brand products compared to the prior year period, which was impacted by the pandemic.
In the Nutrition category, low double-digit percentage net sales growth was driven by new products, greater consumer demand for oral electrolyte solutions and the success of third-party infant formula contract manufacturing partners. These factors were partially offset by the pandemic-related pantry load benefit in the prior year quarter.
Reported operating loss for CSCA was $72 million, due primarily to $159 million in impairment charges related to the announced sale of the Latin American business. Adjusted operating income decreased $17 million to $107 million due primarily to 1) lower volumes in OTC leading to unfavorable plant overhead absorption, 2) higher operating expenses, including brand and marketing investments and distribution costs, and 3) higher input and freight costs. These factors were partially offset by procurement actions and price increases initiated during the quarter.
Consumer Self-Care International Segment
CSCI net sales of $359 million increased $38 million, or 11.7%, including a positive impact of 9.9 percentage points from favorable currency movements, a positive 2.3 percentage point impact from acquisitions and a negative 4.8 percentage point impact from divestitures. Organic net sales grew 4.3%, including a negative 1.3 percentage point impact from lower cough/cold-related net sales.
Net sales in the quarter were driven by 1) incremental new product sales from brands, including XLS Medical Forte 5 sticks in the Healthy Lifestyle category, the introduction of the Probify probiotics brand in the Vitamins, Minerals & Supplements (VMS) category and the launch of Plackers into new markets in the Oral Self-Care category, 2) the acquisition of three Eastern European OTC Dermatology Brands, 3) higher net sales in the U.K. store brand business, and 4) $32 million in favorable currency movements. These drivers were partially offset by 1) lower cough/cold-related net sales due to the historically weak cough/cold season, which impacted the Upper Respiratory category, 2) lower demand for anti-parasite products within the Skincare & Personal Hygiene category due primarily to a slow start to the mosquito summer season, and 3) divested businesses of $14 million.
Reported operating income was $1 million. Adjusted operating income decreased $3 million to $47 million as procurement actions, favorable currency movements and positive pricing were more than offset by the reinstatement of brand and marketing investments to pre-COVID-19 levels and divested businesses.
Completed Divestiture of Generic Prescription Pharmaceuticals Business (Rx)
On July 6, 2021, Perrigo announced that it completed the sale of its RX Pharmaceuticals business to Altaris Capital Partners, LLC for $1.55 billion, establishing Perrigo as a leading pure-play global consumer self-care company.
Irish Revenue Notice of Amended Assessment ("NoA")
On July 9, 2021, Irish Revenue issued a letter acknowledging that not all relevant facts were known to them when they issued the NoA in 2018 and that, accordingly, they would not object if the Appeal Commissioner were to make certain adjustments reducing Irish Revenue’s original assessment. Such adjustments would reflect contingent royalty payments that were never received by Elan Pharma, deductions for acquisition and development costs incurred, and allowable losses and reliefs, and would, if allowed, result in an aggregate reduction of more than €660.0 million from the income taxes claimed in the NoA as issued. The reduced claim is not a settlement proposal or compromise by Irish Revenue, but rather a confirmation that Irish Revenue would not object to certain adjustments to the underlying assessment given facts now known to Irish Revenue that were not known to Irish Revenue when they issued the NoA in 2018. Accordingly, Perrigo believes that the maximum amount of income tax claims in dispute is now reduced to less than €1.0 billion, not including any interest or penalties, if applicable. There can be no assurances that any settlement is possible on terms acceptable to the Company. Unless and until a final settlement is reached, the Company will vigorously pursue its tax appeal concurrently with any settlement discussions that may occur.
Fiscal 2021 Outlook From Continuing Operations
The Company reaffirmed its fiscal 2021 organic net sales growth outlook of 3% and now expects adjusted diluted EPS towards the lower end of its adjusted diluted EPS range of $2.50 to $2.70.
The Company cannot reconcile its expected adjusted diluted earnings per share to diluted earnings per share under "Fiscal 2021 Outlook" without unreasonable effort because certain items that impact net income and other reconciling metrics are out of the Company’s control and/or cannot be reasonably predicted at this time.