Perrigo(PRGO) - 2023 Q4 - Annual Report

Part I Business Perrigo is a global self-care company with CSCA and CSCI segments, focusing on OTC products, innovation, and efficiency under strict regulatory oversight - Perrigo operates as a leading pure-play self-care company with a blended business model of branded, value, and store brand product offerings across North America and Europe[14][15] - The company's business is divided into two primary segments: Consumer Self-Care Americas (CSCA) and Consumer Self-Care International (CSCI)[19][23] Key Product Categories | Product Category | Description | | :--- | :--- | | Upper Respiratory | Cough, sinus, and allergy relief products | | Nutrition | Infant formulas and nutritional beverages (beverages exited in 2023) | | Digestive Health | Antacids, anti-diarrheal, and anti-heartburn products | | Pain and Sleep-Aids | Pain relievers, fever reducers, and sleep-aids | | Oral Care | Toothbrushes, floss, whitening products, etc | | Healthy Lifestyle | Smoking cessation and well-being products | | Skin Care | Dermatological care, scar management, lice treatment | | Women's Health | Feminine hygiene and contraceptives | | Vitamins, Minerals, and Supplements (VMS) | Vitamins, minerals, and supplements | - In 2023, sales to Walmart Inc. represented 11.8% of consolidated net sales, making it the only individual customer accounting for more than 10% of net sales[30] - The FDA approved Opill®, the first-ever over-the-counter birth control pill in the United States, which is expected to launch in the first quarter of 2024[22][29] Risk Factors Perrigo faces diverse operational, strategic, global, litigation, tax, and capital risks, including intense competition, regulatory challenges, supply chain disruptions, and acquisition integration issues - Operational Risks: The company faces significant competition, pricing pressure, and the need for continuous product innovation. It is also subject to extensive regulation, which could lead to product recalls, manufacturing shutdowns, or delays. Supply chain disruptions, raw material costs, and cybersecurity breaches are also major concerns[80][86][108][115] - Strategic Risks: There is a risk that the company may not realize the expected benefits and synergies from its acquisitions of HRA Pharma and Gateway. Furthermore, strategic initiatives like the Supply Chain Reinvention Program and Project Energize may not achieve their intended cost savings or efficiency improvements[121][126][128] - Global Risks: The international scope of operations exposes Perrigo to foreign exchange rate volatility, geopolitical instability such as the wars in Ukraine and the Israel/Hamas conflict, and complex international trade and tax laws[133][137][142] - Litigation & Tax Risks: Perrigo is involved in significant litigation, including antitrust lawsuits related to alleged price-fixing in its former Rx business and various securities class actions. The company also faces material risks from ongoing disputes with U.S. and foreign tax authorities over uncertain tax positions[144][146][157] - Capital & Liquidity Risks: The company's substantial indebtedness of $4.1 billion as of December 31, 2023, could affect its ability to implement strategic initiatives. Debt agreements contain restrictive covenants that limit operational and financial flexibility[162][163] Unresolved Staff Comments The company has no unresolved staff comments from the SEC - Not applicable[172] Cybersecurity Perrigo manages cybersecurity with a NIST-aligned, multi-layered risk strategy overseen by the Board, aiming to protect against threats and ensure business continuity - The Board's Nominating & Governance Committee (NGC) oversees cybersecurity risks, policies, and objectives, receiving regular reports from management[173][176] - The company employs a multi-layered risk management strategy based on NIST frameworks, including technology deployment, employee education, incident response plans, and intelligence sharing[174] - To date, no cybersecurity incidents have materially affected the company's business strategy, results of operations, or financial condition[174] Properties Perrigo operates 17 manufacturing facilities globally, primarily owned, with headquarters in Dublin and North American base in Michigan, deemed adequate for current needs - The company operates 17 manufacturing locations worldwide and owns approximately 80% of its facilities[179] - The primary facilities are located in the United States (41 facilities including manufacturing, logistics, and offices), France (8), Belgium (5), China (5), and the United Kingdom (5)[179] Legal Proceedings Details on the company's legal proceedings are provided in Note 19 of the financial statements - Details on legal proceedings are cross-referenced to Item 8, Note 19 of the financial statements[181] Mine Safety Disclosures This item is reported as not applicable to the company's operations - Not applicable[182] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Perrigo's common equity trades on the NYSE under PRGO, with $835.8 million remaining on its share repurchase authorization as of December 31, 2023 - The company's common equity trades on the NYSE under the symbol PRGO[185] - As of December 31, 2023, $835.8 million remained available for purchase under the 2018 share repurchase authorization. No shares were repurchased during 2023 or 2022[188] Management's Discussion and Analysis of Financial Condition and Results of Operations Perrigo's 2023 net sales grew 4.6% to $4.66 billion, with operating income up 92.5%, driven by acquisitions and strategic initiatives despite macroeconomic and regulatory challenges - The company is implementing two major restructuring programs: the Supply Chain Reinvention Program (initiated in 2022) and Project Energize (launching in 2024) to reduce costs and improve efficiency[209][212] Restructuring Program Financial Targets | Program | Expected Annualized Savings | Expected Costs/Investment | | :--- | :--- | :--- | | Supply Chain Reinvention | $200 million - $300 million by 2028 | $350 million - $570 million by 2028 | | Project Energize | $140 million - $170 million by 2026 | $140 million - $160 million by 2026 | - The infant formula business faces challenges from evolving FDA regulatory expectations, leading to lower manufacturing output, increased costs, and a temporary production pause at its Wisconsin facility. Remediation costs in 2024 are estimated at $35 million to $45 million[201][202][205] - A goodwill impairment charge of $90.0 million was recorded in Q4 2023 related to the Rare Diseases reporting unit within the CSCI segment due to market factors and increased discount rates[214] Results of Operations In 2023, consolidated net sales increased 4.6% to $4.66 billion, and operating income rose 92.5%, driven by acquisitions and pricing, despite a CSCI goodwill impairment Consolidated Financial Results (2023 vs. 2022) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $4,655.6 million | $4,451.6 million | 4.6% | | Gross Profit | $1,680.4 million | $1,455.4 million | 15.5% | | Operating Income | $151.9 million | $78.9 million | 92.5% | Segment Financial Results (2023 vs. 2022) | Segment | Net Sales | % Change | Operating Income (Loss) | % Change | | :--- | :--- | :--- | :--- | :--- | | CSCA | $2,962.3 million | 1.2% | $389.6 million | 6.4% | | CSCI | $1,693.3 million | 11.0% | $(35.2) million | (17.3)% | - CSCA net sales growth was driven by acquisitions and strategic pricing, but partially offset by lower sales in infant formula due to evolving FDA regulations and purposeful SKU prioritization[223][225] - CSCI operating income decreased primarily due to a $90.0 million goodwill impairment charge related to the Rare Diseases reporting unit[233] Financial Condition, Liquidity, and Capital Resources As of December 31, 2023, Perrigo's financial position is stable with $751.3 million cash, increased operating cash flow, and total debt of $4.1 billion, with sufficient liquidity for future needs Summarized Cash Flow Activities (2023 vs. 2022) | Activity (in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $405.5 | $307.3 | | Net cash (for) from investing activities | $(77.5) | $(1,958.6) | | Net cash (for) from financing activities | $(187.2) | $421.6 | - The significant decrease in cash used for investing activities was primarily due to the absence of large acquisitions in 2023, compared to the $1.9 billion paid for HRA Pharma in 2022[248] - Total outstanding indebtedness was $4.1 billion at year-end 2023. In December 2023, the company refinanced a portion of its 2024 notes by adding $300 million to its Term B Loan[162][250] - The company paid dividends of $149.7 million, or $1.09 per share, in 2023, an increase from the prior year[252] Critical Accounting Estimates Critical accounting estimates include income taxes, legal contingencies, acquisition accounting, and goodwill impairment testing, all requiring significant judgment and assumptions that could impact financial results - Goodwill Impairment: The annual impairment test requires significant assumptions for discount rates (10.75% to 12.00% in 2023) and perpetual growth rates (2.50%). The fair value of the CSCI reporting unit exceeded its carrying amount by less than 10%, indicating sensitivity to changes in these assumptions[287][289] - Income Taxes: Significant judgment is required in determining the worldwide effective tax rate, assessing the recoverability of deferred tax assets, and establishing reserves for uncertain tax positions in multiple complex jurisdictions[277] - Legal Contingencies: The company records liabilities for legal proceedings when a loss is probable and reasonably estimable. As of December 31, 2023, the accrual for litigation contingencies was $66.9 million[281] - Acquisition Accounting: Valuing assets acquired and liabilities assumed in business combinations, particularly intangible assets like trademarks and customer relationships, requires significant estimates based on discounted future cash flow models[282][283] Quantitative and Qualitative Disclosures About Market Risk Perrigo is exposed to market risks including foreign exchange, interest rate, and inflation, which it manages through hedging, debt structure, and strategic pricing - Foreign Exchange Risk: The company's largest currency exposure is the movement of the U.S. dollar relative to the euro. It uses foreign exchange derivatives to hedge exposures that cannot be naturally offset[294][298] - Interest Rate Risk: The company is exposed to interest rate changes on its borrowings. A hypothetical 1% increase in interest rates would result in approximately $3.6 million of additional annual interest expense in 2024[299] - Inflation Risk: Rising costs for products and overhead may adversely affect operating results. The company manages this through strategic pricing and supply chain cost reduction initiatives[300] Financial Statements and Supplementary Data This section presents consolidated financial statements for 2021-2023, accompanied by an unqualified audit opinion from Ernst & Young LLP and detailed notes on accounting policies and disclosures Key Consolidated Financial Data (2023) | Metric (in millions) | Amount | | :--- | :--- | | Balance Sheet: | | | Total Assets | $10,809.1 | | Total Liabilities | $6,041.2 | | Total Shareholders' Equity | $4,767.9 | | Income Statement: | | | Net Sales | $4,655.6 | | Operating Income | $151.9 | | Net Loss | $(12.7) | - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of the company's internal control over financial reporting as of December 31, 2023[303][322] - Critical Audit Matters identified by the auditor were the valuation of goodwill for the CSCI reporting unit and the measurement of uncertain tax positions, both of which involve significant management judgment and complex assumptions[307][308][312] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure This item is reported as not applicable to the company - Not applicable[609] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2023, with no material changes in internal control during the fourth quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[611] - No changes occurred during the fourth quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[611] Other Information The company amended CEO Patrick Lockwood-Taylor's employment agreement on February 21, 2024, modifying his 2024 Annual Incentive Plan target - CEO Patrick Lockwood-Taylor's 2024 cash bonus target was reduced from 120% to 40% of base salary, with the difference to be compensated via a future RSU grant[612] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the upcoming Proxy Statement - This section incorporates information by reference from the forthcoming 2023 Proxy Statement[615] Executive Compensation Executive compensation information is incorporated by reference from the company's forthcoming Proxy Statement - This section incorporates information by reference from the forthcoming 2023 Proxy Statement[616] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan details are incorporated by reference from the upcoming Proxy Statement - This section incorporates information by reference from the forthcoming 2023 Proxy Statement[618] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the forthcoming Proxy Statement - This section incorporates information by reference from the forthcoming 2023 Proxy Statement[619] Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the company's upcoming Proxy Statement - This section incorporates information by reference from the forthcoming 2023 Proxy Statement[620] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and various exhibits filed with the Form 10-K, including required CEO and CFO certifications - This section contains a comprehensive list of all financial statements, schedules, and exhibits filed with the Form 10-K[623][624]