On November 10, 2021 Perrigo Company plc (NYSE: PRGO; TASE) ("Perrigo" or the "Company"), a leading provider of Consumer Self-Care Products, reported financial results for the third quarter of fiscal year 2021 ended October 2, 2021 (Press release, Perrigo Company, NOV 10, 2021, View Source [SID1234595046]). All comparisons are against the prior year fiscal third quarter, unless otherwise noted.
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President and CEO, Murray S. Kessler commented, "Major initiatives were completed in the third quarter that will secure Perrigo a bright future. The RX generic prescription business divestiture was completed, the acquisition of the highly successful HRA Pharma business was announced, and a major overhang on the business was removed through a favorable settlement of the Irish tax dispute paid for with proceeds from the successful arbitration in Belgium. Perrigo is now a solely focused consumer self-care company, poised for strong growth, unencumbered by the major overhangs of the past. Our team is intently focused on driving long-term profitable growth."
Kessler continued, "Our disappointing third quarter results reflect the continuing impacts of the challenging operating environment caused by the global COVID-19 pandemic that began in 2020, have continued in 2021 and are not indicative of our future growth potential. These challenges fall into three categories for Perrigo: a historically weak cough/cold season affecting first quarter sales and manufacturing efficiencies, higher input costs and the sudden supply chain disruption, primarily in the form of a shortage of truck drivers, which began in the third quarter. In combination, these factors are forecasted to negatively impact total year adjusted diluted EPS by $0.79, which could only be partially offset, leading us to lower our earnings guidance."
Kessler also noted, "Importantly, third quarter consumer off-take was very strong, as were factory orders on almost all of our businesses. This included a strong rebound in cough/cold sales. Unfortunately, we exited the quarter with record unshipped orders as there were not enough trucks or drivers to fulfill those orders in the U.S. Supply chain disruptions impacted CSCA net sales growth in the quarter by 5.7 percentage points."
Kessler concluded: "Our cough/cold business is rebounding, which will positively impact sales and manufacturing efficiencies. We have taken multiple steps to adjust our supply chain during this unusual period, which has already resulted in a significant improvement in October. And, we are taking action to mitigate higher input costs, including price increases on approximately 75% of the Company’s portfolio and delivering on project momentum cost savings. Through the combination of these actions, along with the anticipated closing and successful integration of HRA expected in the first half of next year, we still believe we will deliver on our original 2023 EPS transformation plan targets."
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.
Third Quarter 2021 Financial Highlights from Continuing Operations
Perrigo third quarter net sales were $1.04 billion, an increase of 4.0%. Organic(1) net sales growth was 2.6%, despite an increase in unfulfilled orders of 4.3 percentage points as a result of supply chain disruptions.
CSCA third quarter net sales of $694 million increased 4.6%, with organic growth of 4.2%; CSCI third quarter net sales of $349 million increased 2.8%, with organic net sales down by 0.6%.
Reported diluted loss per share was $0.40, compared to reported diluted earnings per share ("EPS") of $0.19 in the prior year quarter.
Adjusted diluted EPS, which excludes certain charges as outlined in Table I, decreased 25.0% to $0.45 per diluted share. Adjusted diluted EPS was negatively impacted by approximately $0.22 per diluted share from lower operating efficiencies, higher materials and freight costs, and two product recalls, as compared to the prior year quarter. The increase in unfulfilled orders depressed adjusted EPS by $0.08 per diluted share.
Year-to-Date 2021 Financial Highlights from Continuing Operations(2)
Perrigo year-to-date net sales were $3.03 billion, or flat, compared to the prior year period, including a negative impact of 3.4 percentage points from lower cough/cold-related net sales due to the historically weak 2020/2021 cough/cold season. Unfulfilled orders due to supply chain disruptions depressed growth by 1.4 percentage points.
CSCA year-to-date net sales of $1.96 billion were 1.8% lower compared to the prior year period; organic net sales were down 3.2%, including a negative 3.2 percentage points impact from lower cough/cold-related net sales. Unfulfilled orders due to supply chain disruptions depressed growth by 1.9 percentage points.
CSCI year-to-date net sales of $1.08 billion grew 3.3% compared to the prior year period; organic net sales were down 2.2%, including a negative 3.9 percentage points impact from lower cough/cold-related net sales. Unfulfilled orders due to supply chain disruptions depressed growth by 0.5 percentage points.
Reported diluted loss per share year-to-date was $1.22 per diluted share as compared to EPS of $0.70 in the prior year period.
Adjusted diluted EPS year-to-date decreased 22.5% to $1.45 per diluted share as compared to $1.87 per diluted share in the prior year period. Adjusted diluted EPS was negatively impacted by lower cough/cold-related net sales, lower operating efficiencies and higher materials and freight expenses.
See attached Appendix for details. Organic net sales growth excludes the effects of acquisitions and divestitures and the impact of currency.
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 RX business. On a go-forward basis, such costs are either covered by the transition services agreement or have been eliminated following closing. We do not believe such operational costs are representative of the future expenses of our continuing operations. See attached appendix for additional details.
Third Quarter 2021 Perrigo Results from Continuing Operations
Perrigo net sales for the third quarter were $1.04 billion, an increase of $40 million, or 4.0%. Favorable currency movements and acquisitions contributed 0.9 and 0.5 percentage points, respectively. Organic net sales growth was 2.6%, despite an increase in unfulfilled orders as a result of supply chain disruptions, including a lack of truck drivers in the U.S. and record backups at global shipping ports, which held back growth by 4.3 percentage points.
Net sales in the quarter were driven by 1) strong growth in e-commerce, primarily in CSCA, 2) contract manufacturing sales to the now-divested RX business, 3) increased pricing, 4) a rebound in cough/cold in the U.S., 5) the November 2020 acquisition of Eastern European dermatology brands in CSCI, and 6) $9 million in net favorable currency movements. These increases were partially offset by 1) discontinued products of $11 million, 2) lost distribution within the Healthy Lifestyle category in CSCA, 3) lower net sales in the CSCI contract manufacturing business, and 4) $4 million from a product recall.
Third quarter reported operating income was $438 million in 2021 compared to $79 million in 2020. Adjusted operating income was $112 million in 2021 and $141 million in 2020, a decrease of $29 million, or 20.6%. This decrease was driven by 1) $29 million from lower operating efficiencies resulting from the weak 2020/2021 cough/cold season, and higher materials and freight expenses, and 2) $9 million of costs from two product recalls. These results were partially offset by lower operating expenses, including project momentum cost savings.
Reported net loss was $54 million, or $0.40 per diluted share, compared to net income of $26 million, or $0.19 per diluted share in the prior year period. Excluding certain charges as outlined in Table I, third quarter 2021 adjusted net income was $61 million, or $0.45 per diluted share, compared to $83 million, or $0.60 per diluted share, last year due to the factors described above.
Third Quarter 2021 Business Segment Results from Continuing Operations
Consumer Self-Care Americas Segment
CSCA third quarter net sales of $694 million grew 4.6%, including a 0.4 percentage point positive impact from favorable currency movements. Organic net sales increased 4.2%, despite an increase in unfulfilled orders slowing growth by 5.7 percentage points as a result of supply chain disruptions, including a lack of truck drivers in the U.S. and record backups at global shipping ports.
OTC net sales were driven by 1) strong growth in e-commerce, 2) contract manufacturing sales to the now divested RX business, 3) higher incidences of cough/cold illness as society returns to in-person activities, benefiting the Cough/Cold and Pain categories, 4) a double-digit percentage increase in the branded OTC business, and 5) increased pricing stemming from management actions taken earlier in the year. These gains were partially offset by 1) lost distribution within the Healthy Lifestyle category, 2) $10 million in discontinued products, primarily from the discontinuation of diabetes care products in the Healthy Lifestyle category, and 3) lower net sales in the Allergy category due primarily to the recall of third-party manufactured product.
Net sales in the Oral Self-Care category declined mid-single digits due primarily to delayed receipt of ex-U.S. manufactured product, leading to record unfulfilled customer orders.
Net sales in the Nutrition category grew mid-single digits driven by new product launches within infant formula as well as strong growth in the oral electrolytes business.
Reported operating income was $90 million in 2021 compared to $122 million in 2020. Adjusted operating income decreased $28 million to $106 million driven by 1) lower operating efficiencies due primarily to the weak 2020/2021 cough/cold season and higher materials and freight expenses, and 2) a product recall during the quarter. These factors were partially offset by lower operating expenses, including project momentum cost savings.
Consumer Self-Care International Segment
CSCI net sales of $349 million increased $10 million, or 2.8%, including a 1.9 percentage point positive impact from favorable currency movements and a 1.5 percentage point positive impact from acquisitions. Organic net sales decreased 0.6%. Unfulfilled orders increased 1.5 percentage points as a result of supply chain disruptions, due primarily to record backups at global shipping ports.
Net sales in the quarter were driven by 1) the November 2020 acquisition of three Eastern European OTC Dermatology Brands, 2) higher net sales in the U.K. store brand business, 3) greater demand for NiQuitin smoking cessation products in the Healthy Lifestyle category, 4) increased pricing, and 5) $6 million in favorable currency movements. These drivers were more than offset by 1) lower than normal buy-in for cough/cold products by pharmacies, 2) a decline in net sales in the contract manufacturing category, 3) lower demand for weight loss products across Europe, which led to lower net sales for XLS Medical within the Healthy Lifestyle category, and 4) a product recall that negatively impacted the Vitamins, Minerals & Supplements (VMS) category.
Reported operating income was $4 million in 2021 compared to $10 million in 2020. Adjusted operating income decreased $6 million to $46 million due to a $6 million negative impact related to the VMS product recall and less favorable product mix, which were partially offset by lower operating expenses.
Settlement of the Irish Revenue Notice of Amended Assessment ("NoA")
The Company announced on September 29, 2021 that it had reached a settlement with the Irish Office of the Revenue Commissioners for the Notice of Amended Assessment ("NoA") dated November 29, 2018. As part of the settlement terms, Perrigo made a total cash payment to Irish Revenue of €266.1 million in the fourth quarter of 2021. This payment has resolved the entire €1.6 billion NoA against the Company.
Receipt in Cash of €355 million from the Belgian Arbitration Decision
Perrigo announced on September 29, 2021 that it received the entire €355 million in cash on behalf of Alychlo NV and Holdco I BE NV ("Sellers") in payment of the previously announced arbitration award issued in favor of Perrigo Ireland 2 ("Perrigo Ireland"). The award was issued August 27, 2021, by a tribunal sitting under the rules of the Belgian Centre for Arbitration and Mediation and related to claims arising under the Stock Purchase Agreement between Sellers and Perrigo Ireland dated November 6, 2014. Under Belgian law, Sellers have the right to challenge the tribunal’s award for up to three months following the date of the award. However, Perrigo does not believe that Sellers have any legal grounds for any such challenge.
Fiscal 2021 Outlook from Continuing Operations
The Company is updating its fiscal 2021 outlook to reflect third quarter results and management expectations for the remainder of the year. The Company now expects calendar year 2021 adjusted diluted EPS of between $2.00 to $2.10.
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.