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 supplier of infant formulas for the store brand market. We also are a leading provider of branded OTC products throughout Europe and the U.S., as well as a leading producer of generic standard topical products such as creams, lotions, and gels, as well as inhalants and injections ("extended topical") prescription drugs. 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.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended
December 31, 2016
. In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation of the unaudited Condensed Consolidated Financial Statements have been included and include our accounts and the accounts of all majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Perrigo Company plc
- Item 1
Note 1
Recent Accounting Standard Pronouncements
Below are recent accounting standard updates that we are still assessing to determine the effect on our Condensed Consolidated Financial Statements. We do not believe that any other recently issued accounting standards could have a material effect on our Condensed Consolidated Financial Statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.
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Recently Issued Accounting Standards Adopted
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Standard
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Description
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Date of adoption
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Effect on the Financial Statements or Other Significant Matters
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Clarifying the Definition of a Business
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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.
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January 1, 2017
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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 six months ended July 1, 2017, we applied the new guidance when determining whether certain product divestitures represented sales of assets or businesses. In each case, we determined that the assets sold did not meet the definition of a business under the new rules.
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Improvements to Employee Share-Based Payment Accounting
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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.
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January 1, 2017
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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.
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Perrigo Company plc
- Item 1
Note 1
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Recently Issued Accounting Standards Not Yet Adopted
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Standard
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Description
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Effective Date
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Effect on the Financial Statements or Other Significant Matters
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Revenue from Contracts with Customers
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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.
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January 1, 2018
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We continue to evaluate the implications of adoption of the new revenue standard on our Consolidated Financial Statements. We have completed an initial assessment of the adoption and are in the process of completing a detailed review of our various customer contracts. In our assessment of the new standard, our contract reviews have been focused on, but not limited to, the concepts of over-time vs. point-in-time recognition, variable consideration and performance obligations. We plan to adopt the new revenue standard effective January 1, 2018 using the modified retrospective method.
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Intra-Entity Asset Transfers of Assets Other Than Inventory
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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.
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January 1, 2018
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We are currently evaluating the implications of adoption on our Consolidated Financial Statements and considering whether to early adopt the standard.
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Leases
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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.
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January 1, 2019
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We are currently evaluating the implications of adoption on our Consolidated Financial Statements.
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Perrigo Company plc
- Item 1
Note 1
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Recently Issued Accounting Standards Not Yet Adopted (continued)
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Standard
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Description
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Effective Date
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Effect on the Financial Statements or Other Significant Matters
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Measurement of Credit Losses on Financial Instruments
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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.
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January 1, 2020
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We are currently evaluating the new standard for potential impacts on our receivables, debt, and other financial instruments.
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Intangibles - Goodwill and Other Simplifying the Test for Goodwill
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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 with an effective date for Perrigo of January 1, 2020, with early adoption permitted as of January 1, 2017.
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January 1, 2020
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We are currently evaluating the implications of adoption on our Consolidated Financial Statements.
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NOTE 2 –
DIVESTITURES
Current Year Divestitures
On
February 1, 2017
, we completed the sale of the Animal Health pet treats plant fixed assets, which were previously classified as held-for sale, and received
$7.7 million
in proceeds which resulted in an immaterial loss.
On
January 3, 2017
, we sold certain Abbreviated New Drug Applications ("ANDAs") for
$15.0 million
to a third party, which was recorded as a gain in
Other operating income
on the Condensed Consolidated Statements of Operations in our Prescription Pharmaceuticals ("RX") segment.
On
April 6, 2017
, we completed the sale of our India Active Pharmaceutical Ingredients ("API") business to Strides Shasun Limited. We received
$22.2 million
of proceeds inclusive of an estimated working capital adjustment. 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.
Prior Year Divestitures
On
August 5, 2016
, we completed the sale of our U.S. Vitamins, Minerals, and Supplements ("VMS") business within our Consumer Healthcare Americas ("
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
$6.2 million
, which was recorded in Impairment charges on the Consolidated Statements of Operations for the year ended December 31, 2016.
Perrigo Company plc
- Item 1
Note 3
NOTE 3 –
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Changes in the carrying amount of goodwill, by reportable segment, were as follows (in millions):
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Reporting Segments:
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December 31,
2016
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Changes in assets held for sale
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Currency translation adjustment
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July 1,
2017
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CHCA
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$
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1,810.6
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$
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—
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$
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3.1
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$
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1,813.7
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CHCI
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1,070.8
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(4.0
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)
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85.2
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1,152.0
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RX
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1,086.6
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—
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7.7
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1,094.3
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Other
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81.4
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—
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8.9
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90.3
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Total goodwill
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$
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4,049.4
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$
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(4.0
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$
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104.9
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$
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4,150.3
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In connection with the preparation of our financial statements for the three months ended April 2, 2016, we identified indicators of impairment for our Branded Consumer Healthcare - Rest of World ("BCH-ROW") reporting unit, which comprises primarily operations attributable to the Omega Pharma Invest N.V. ("Omega") acquisition in all geographic regions except for Belgium. Identification of these indicators of impairment required us to complete interim goodwill impairment testing. The primary impairment indicators included the decline in our 2016 performance expectations and a reduction in our long-range revenue growth forecast. BCH-ROW did not pass step one of goodwill impairment testing. 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 is being more focused to maximize the potential of all brands in the segment's portfolio. Based on our evaluation and 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
$130.5 million
in impairment charges for the three months ended April 2, 2016 within our Consumer Healthcare International ("CHCI") segment.
Intangible Assets
Other intangible assets and related accumulated amortization consisted of the following (in millions):
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July 1, 2017
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December 31, 2016
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Gross
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Accumulated Amortization
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Gross
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Accumulated Amortization
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Definite-lived intangibles
:
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Distribution and license agreements, supply agreements
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$
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309.4
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$
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145.2
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$
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305.6
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$
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120.4
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Developed product technology, formulations, and product rights
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1,385.6
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566.5
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1,418.1
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526.0
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Customer relationships and distribution networks
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1,584.6
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384.8
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1,489.9
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307.5
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Trademarks, trade names, and brands
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1,279.5
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91.8
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1,189.3
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55.3
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Non-compete agreements
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14.6
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12.0
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14.3
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11.2
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Total definite-lived intangibles
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$
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4,573.7
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$
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1,200.3
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$
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4,417.2
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$
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1,020.4
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Indefinite-lived intangibles
:
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Trademarks, trade names, and brands
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$
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51.5
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$
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—
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$
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50.5
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$
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—
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In-process research and development
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51.2
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—
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64.0
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—
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Total indefinite-lived intangibles
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102.7
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—
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114.5
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—
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Total other intangible assets
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$
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4,676.4
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$
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1,200.3
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$
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4,531.7
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$
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1,020.4
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Certain intangible assets are denominated in currencies other than the U.S. dollar; therefore, their gross and accumulated amortization balances are subject to foreign currency movements.
Perrigo Company plc
- Item 1
Note 3
We recorded amortization expense of
$87.2 million
and
$88.9 million
for the
three months ended
July 1, 2017
and
July 2, 2016
, respectively, and
$172.8 million
and
$174.1 million
for the
six months ended
July 1, 2017
and
July 2, 2016
, respectively.
We recorded an impairment charge of
$12.2 million
on certain In Process Research and Development ("IPR&D") assets during the three months ended April 1, 2017 due to changes in the projected development and regulatory timelines for various projects. During the
six months ended
July 1, 2017
, we recorded a decrease in the contingent consideration liability associated with certain IPR&D assets in
Other operating income
on the Condensed Consolidated Statements of Operations. Refer to
Note 6
for additional information.
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 Condensed 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.
In connection with the preparation of our Condensed Consolidated Financial Statements for three-month period 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
, which was recorded in
Impairment charges
on the Condensed 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 is 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, and 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.
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, on April 3, 2016, we reclassified
$364.5 million
of indefinite-lived assets to definite-lived assets with a useful life of
20
years. We began amortizing the assets during the second quarter of 2016.
NOTE 4 -
ACCOUNTS RECEIVABLE FACTORING
We have multiple 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 ranging from
0.07%
to
0.15%
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 50 to 70 basis points. The total amount factored on a non-recourse basis and excluded from accounts receivable was
$27.0 million
and
$50.7 million
at
July 1, 2017
and
December 31, 2016
, respectively.
Perrigo Company plc
- Item 1
Note 5
NOTE 5 –
INVENTORIES
Major components of inventory were as follows (in millions):
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July 1,
2017
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December 31,
2016
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Finished goods
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$
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467.5
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$
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431.1
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Work in process
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136.8
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165.7
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Raw materials
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213.8
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198.2
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Total inventories
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$
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818.1
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$
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795.0
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NOTE 6 –
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.
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Level 1:
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Quoted prices for identical instruments in active markets.
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Level 2:
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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.
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Level 3:
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Valuations derived from valuation techniques in which one or more significant inputs are not observable.
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Perrigo Company plc
- Item 1
Note 6
The following table summarizes the valuation of our financial instruments carried at fair value and measured at fair value on a recurring and non-recurring basis by the above pricing categories (in millions):
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Fair Value
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Fair Value Hierarchy
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July 1,
2017
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December 31,
2016
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Measured at fair value on a recurring basis:
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Assets:
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Investment securities
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Level 1
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$
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13.6
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$
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38.2
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Foreign currency forward contracts
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Level 2
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$
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16.6
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$
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3.8
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Funds associated with Israeli severance liability
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Level 2
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18.1
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15.9
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Total level 2 assets
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$
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34.7
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$
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19.7
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Royalty Pharma contingent milestone payments
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Level 3
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$
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145.8
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$
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—
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Tysabri
®
royalty stream
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Level 3
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—
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2,350.0
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Total level 3 assets
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$
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145.8
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$
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2,350.0
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Liabilities:
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Foreign currency forward contracts
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Level 2
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$
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4.0
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$
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5.0
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Contingent consideration
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Level 3
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$
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49.7
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$
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69.9
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Measured at fair value on a non-recurring basis:
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Assets:
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Goodwill
(1)
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Level 3
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$
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—
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$
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1,148.4
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Indefinite-lived intangible assets
(2)
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Level 3
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13.8
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0.3
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Definite-lived intangible assets
(3)
|
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Level 3
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11.5
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758.0
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Assets held for sale, net
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Level 3
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11.8
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18.2
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Total level 3 assets
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$
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37.1
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$
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1,924.9
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(1)
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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
.
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(2)
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As of April 1, 2017, indefinite-lived intangible assets with a carrying amount of
$26.0 million
were written down to a fair value of
$13.8 million
, resulting in a total impairment charge of
$12.2 million
. 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
.
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(3)
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As of July 1, 2017, definite-lived intangible assets with a carrying amount of
$31.1 million
were written down to a fair value of
$11.5 million
, resulting in a total impairment charge of
$19.6 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
, resulting in a total impairment charge of
$1.5 billion
. 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.
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There were no transfers among Level 1, 2, and 3 during the
three and six months ended
July 1, 2017
or the year ended
December 31, 2016
. Our policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period. See
Note 7
for information on our investment securities. See
Note 8
for a discussion of derivatives.
Foreign currency forward contracts
The fair value of foreign currency forward contracts is determined using a market approach, which utilizes values for comparable derivative instruments.
Perrigo Company plc
- Item 1
Note 6
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 interest rates and yield curves, that are observable at commonly quoted intervals.
Tysabri
®
Royalty Stream
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
.
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.
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.
Given the new market information for Ocrevus
®
, we used industry analyst estimates to reduce our first ten year growth forecasts from an average of 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
®
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.
Perrigo Company plc
- Item 1
Note 6
On
March 27, 2017
, we announced the completed divestment of our Tysabri
®
royalty stream to Royalty Pharma for up to
$2.85 billion
, which consists 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
July 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
$145.8 million
as of
July 1, 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. We assumed volatility of
30.0%
and a rate of return of
8.05%
in the valuation of contingent milestone payments performed as of
July 1, 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
three months ended
July 1, 2017
, the fair value of the Royalty Pharma contingent milestone payments decreased
$39.2 million
as a result of a decrease in the estimated projected Tysabri
®
revenues due to the launch of Ocrevus
®
late in the first quarter of 2017.
Our accounts receivable balance at December 31, 2016 included
$84.4 million
related to the Tysabri
®
royalty stream.
The table below presents a reconciliation for
Royalty Pharma contingent milestone payments
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in millions). Realized losses in the table were recorded in the line item "
Change in financial assets
" on the Condensed Consolidated Statements of Operations.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
July 1,
2017
|
|
July 1,
2017
|
Royalty Pharma Contingent Milestone Payments
|
|
|
|
Beginning balance
|
$
|
184.5
|
|
|
$
|
—
|
|
Purchases or additions
|
—
|
|
|
184.5
|
|
Foreign currency effect
|
0.5
|
|
|
0.5
|
|
Realized losses
|
(39.2
|
)
|
|
(39.2
|
)
|
Ending balance
|
$
|
145.8
|
|
|
$
|
145.8
|
|
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, including the competitive landscape and regulatory approvals that may impact the future sales of a product. We reduced a contingent consideration liability associated with certain IPR&D assets and recorded a corresponding gain of
$15.6 million
during the six months ended
July 1, 2017
. The liability decrease relates to a reduction of the probability of achievement assumptions and anticipated cash flows. Purchases or additions for the six months ended
July 2, 2016
included contingent consideration associated with two transactions. Refer to
Note 3
for additional information.
Perrigo Company plc
- Item 1
Note 6
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 (gains) losses in the table were recorded in
Other expense, net
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Contingent Consideration
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
52.0
|
|
|
$
|
48.0
|
|
|
$
|
69.9
|
|
|
$
|
17.9
|
|
Net realized (gains) losses
|
(1.3
|
)
|
|
(3.9
|
)
|
|
(15.6
|
)
|
|
(3.8
|
)
|
Purchases or additions
|
—
|
|
|
1.0
|
|
|
—
|
|
|
30.5
|
|
Foreign currency effect
|
1.4
|
|
|
(0.2
|
)
|
|
1.3
|
|
|
0.3
|
|
Settlements
|
(2.4
|
)
|
|
—
|
|
|
(5.9
|
)
|
|
—
|
|
Ending balance
|
$
|
49.7
|
|
|
$
|
44.9
|
|
|
$
|
49.7
|
|
|
$
|
44.9
|
|
Goodwill and Indefinite-Lived Intangible Assets
We have
seven
reporting units for which we assess goodwill for impairment. 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 ("MPEEM") to value our indefinite-lived intangible assets, and 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 for the
year ended
December 31, 2016
included long-term growth rates ranging from
2.0%
to
3.0%
. We also utilized discount rates ranging from
7.0%
to
14.5%
, which were deemed to be commensurate with the required investment return and risk involved in realizing the projected free cash flows of each reporting unit. 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 the tax rates that were applicable to the jurisdictions represented within each reporting unit. We recorded
Impairment charges
on the Condensed Consolidated Statements of Operations related to Goodwill and indefinite-lived intangible assets of
$130.5 million
and
$273.4 million
, respectively, for the three months ended April 2, 2016. See
Note 3
for additional detail on impaired goodwill and indefinite-lived intangible assets.
Definite-Lived Intangible Assets
When assessing our definite-lived assets for impairment, we utilize either a MPEEM or a relief from royalty method to determine the fair value of the asset and use the forecasts that are consistent with those used in the reporting unit analysis. Below is a summary of the various metrics used in our valuations:
|
|
|
|
Three Months Ended
|
|
July 1, 2017
|
|
Lumara
|
5-year average growth rate
|
(4.1)%
|
Discount rate
|
13.5%
|
Valuation method
|
MPEEM
|
Perrigo Company plc
- Item 1
Note 6
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Assets Held for sale
When a group of assets is classified as held-for-sale, the book value is evaluated and adjusted to the lower of its carrying amount or fair value less the cost to sell. See
Note 9
for additional information on the impaired assets held for sale, net.
Fixed Rate Long-term Debt
As of
July 1, 2017
and
December 31, 2016
, our fixed rate long-term debt consisted of public bonds, private placement notes, and retail bonds. As of
July 1, 2017
, the public bonds had a carrying value of
$2.6 billion
and a fair value of
$2.7 billion
. As of
December 31, 2016
, the public bonds had a carrying value and fair value of
$4.6 billion
. The fair values of our public bonds for both periods were based on quoted market prices (Level 1).
As of
July 1, 2017
, our retail bonds and private placement notes had a carrying value of
$634.3 million
(excluding a premium of
$40.2 million
) and a fair value of
$682.7 million
. As of
December 31, 2016
, our retail bonds and private placement notes had a carrying value of
$773.1 million
(excluding a premium of
$49.8 million
) and a fair value of
$825.0 million
. The fair values of our retail bonds and private placement notes for both periods were based on interest rates offered for borrowings of a similar nature and remaining maturities (Level 2).
The carrying amounts of our other financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, short-term debt 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):
|
|
|
|
|
|
|
|
|
|
July 1,
2017
|
|
December 31, 2016
|
Equity securities, at cost less impairments
|
$
|
15.5
|
|
|
$
|
16.5
|
|
Gross unrealized gains
|
—
|
|
|
21.7
|
|
Gross unrealized losses
|
(1.9
|
)
|
|
—
|
|
Estimated fair value of equity securities
|
$
|
13.6
|
|
|
$
|
38.2
|
|
The factors affecting the assessment of impairments include both general financial market conditions and factors specific to a particular company. During the six months ended July 2, 2016, we recorded an impairment charge of
$1.7 million
, 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.
Perrigo Company plc
- Item 1
Note 7
During the six months ended
July 1, 2017
, we sold a number of our investment securities and recorded a gain of
$1.6 million
. The gain was reclassified out of Accumulated Other Comprehensive Income (loss) ("AOCI") and into earnings.
Cost Method Investments
Our cost method investments totaled
$7.1 million
and
$6.9 million
at
July 1, 2017
, and
December 31, 2016
, and are included in
Other non-current assets
.
Equity Method Investments
Our equity method investments totaled
$4.9 million
and
$4.6 million
at
July 1, 2017
and
December 31, 2016
, respectively, and are included in
Other non-current assets
. We recorded net
gain
s of
$0.2 million
and
$0.3 million
during the
three and six months ended
July 1, 2017
, respectively, and net
loss
es of
$1.6 million
and
$3.9 million
during the
three and six months ended
July 2, 2016
, respectively, for our proportionate share of the equity method investment earnings or losses. The gains and losses were recorded in Other expense, net.
During the
six months ended
July 2, 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 expense, net
during the
six months ended
July 2, 2016
.
NOTE 8 –
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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.
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, 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 of
July 1, 2017
and
December 31, 2016
. Designated derivatives meet hedge accounting criteria, which means the fair value of the hedge is recorded in shareholders’ equity as a component of OCI, net of tax. The deferred gains and losses are recognized in income in 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. All of our designated derivatives are assessed for hedge effectiveness quarterly.
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 1
Note 8
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.
During 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 result of the senior note repayments on June 15, 2017, the proportionate amount remaining 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
, we entered into a forward interest rate swap to hedge against changes in the benchmark interest rate between the date 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
six months ended
July 2, 2016
.
Foreign Currency Derivatives
We enter into foreign currency forward contracts, both designated and non-designated, 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 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
$644.9 million
and
$533.5 million
as of
July 1, 2017
and
December 31, 2016
, respectively.
Effects of Derivatives on the Financial Statements
The below tables indicate the effects of all derivative instruments on the Condensed Consolidated Financial Statements. All amounts exclude income tax effects and are presented in millions.
The balance sheet location and gross fair value of our outstanding derivative instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
|
July 1,
2017
|
|
December 31,
2016
|
Designated derivatives:
|
|
|
|
|
|
Foreign currency forward contracts
|
Other current assets
|
|
$
|
5.2
|
|
|
$
|
3.1
|
|
Non-designated derivatives:
|
|
|
|
|
|
Foreign currency forward contracts
|
Other current assets
|
|
$
|
11.4
|
|
|
$
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
|
July 1,
2017
|
|
December 31,
2016
|
Designated derivatives:
|
|
|
|
|
|
Foreign currency forward contracts
|
Accrued liabilities
|
|
$
|
2.9
|
|
|
$
|
3.0
|
|
Non-designated derivatives:
|
|
|
|
|
|
Foreign currency forward contracts
|
Accrued liabilities
|
|
$
|
1.1
|
|
|
$
|
2.0
|
|
Perrigo Company plc
- Item 1
Note 8
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)
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Designated Cash Flow Hedges
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Interest rate swap agreements
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(9.0
|
)
|
Foreign currency forward contracts
|
|
2.7
|
|
|
(0.3
|
)
|
|
5.2
|
|
|
1.3
|
|
Total
|
|
$
|
2.7
|
|
|
$
|
(0.3
|
)
|
|
$
|
5.2
|
|
|
$
|
(7.7
|
)
|
The gains (losses) reclassified from AOCI into 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)
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Designated Cash Flow Hedges
|
|
Income Statement Location
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Interest rate swap agreements
|
|
Interest expense, net
|
|
$
|
(0.6
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(1.1
|
)
|
|
|
Other expense, net
|
|
(5.9
|
)
|
|
—
|
|
|
(5.9
|
)
|
|
—
|
|
Foreign currency forward contracts
|
|
Net sales
|
|
0.6
|
|
|
(0.1
|
)
|
|
0.9
|
|
|
0.4
|
|
|
|
Cost of sales
|
|
0.9
|
|
|
0.6
|
|
|
1.6
|
|
|
0.9
|
|
|
|
Interest expense, net
|
|
(0.5
|
)
|
|
(0.6
|
)
|
|
(1.1
|
)
|
|
(0.9
|
)
|
|
|
Other expense, net
|
|
—
|
|
|
1.7
|
|
|
(0.5
|
)
|
|
1.9
|
|
Total
|
|
|
|
$
|
(5.5
|
)
|
|
$
|
1.0
|
|
|
$
|
(6.3
|
)
|
|
$
|
1.2
|
|
The net of tax amount expected to be reclassified from AOCI into earnings during the next 12 months is a
$2.0 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)
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Designated Cash Flow Hedges
|
|
Income Statement
Location
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Interest rate swap agreements
|
|
Other expense, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
Foreign currency forward contracts
|
|
Net sales
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
0.1
|
|
|
|
Cost of sales
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
|
Other expense, net
|
|
0.1
|
|
|
0.6
|
|
|
1.0
|
|
|
0.6
|
|
Total
|
|
|
|
$
|
0.1
|
|
|
$
|
0.4
|
|
|
$
|
1.0
|
|
|
$
|
0.6
|
|
The effects of our non-designated derivatives on the Condensed Consolidated Statements of Operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss) Recognized against Earnings
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Non-Designated Derivatives
|
|
Income Statement Location
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Foreign currency forward contracts
|
|
Other expense, net
|
|
$
|
(5.0
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
(13.9
|
)
|
|
$
|
(8.5
|
)
|
|
|
Interest expense, net
|
|
(0.7
|
)
|
|
(0.6
|
)
|
|
(1.1
|
)
|
|
(0.5
|
)
|
Total
|
|
|
|
$
|
(5.7
|
)
|
|
$
|
(2.2
|
)
|
|
$
|
(15.0
|
)
|
|
$
|
(9.0
|
)
|
Perrigo Company plc
- Item 1
Note 8
NOTE 9 –
ASSETS HELD FOR SALE
Our India API business was classified as held-for-sale beginning as of December 31, 2015. We recorded an impairment charge totaling
$6.3 million
during the year ended December 31, 2016 after determining the carrying value of the India API business exceeded its fair value less the cost to sell. The API business is reported in our Other segment. As described in
Note 2
,
on
April 6, 2017
, we completed the sale of our India API business.
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. As described in
Note 2
,
on
February 1, 2017
, we completed the sale of our Animal Health pet treats plant fixed assets. We determined that the carrying value 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 are reported in our
CHCA
segment.
During the
three months ended
July 1, 2017, management committed to a plan to sell our Russian business. Such assets were classified as held-for-sale beginning at July 1, 2017. We determined that the carrying value of the goodwill associated with our Russian business exceeded the fair value less the cost to sell. We recorded impairment charges totaling
$3.7 million
during the three months ended July 1, 2017. The assets associated with our Russian business are reported in our
CHCI
segment.
The assets held-for-sale are reported within
Prepaid expenses and other current assets
and liabilities held-for-sale are reported in
Accrued liabilities
. The amounts consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1,
2017
|
|
December 31,
2016
|
|
CHCI
|
|
CHCA
|
|
Other
|
Assets held for sale
|
|
|
|
|
|
Current assets
|
$
|
17.0
|
|
|
$
|
—
|
|
|
$
|
5.1
|
|
Goodwill
|
7.7
|
|
|
—
|
|
|
5.5
|
|
Property, plant and equipment
|
—
|
|
|
13.5
|
|
|
33.2
|
|
Other assets
|
—
|
|
|
—
|
|
|
3.8
|
|
Less: impairment reserves
|
(3.7
|
)
|
|
(3.7
|
)
|
|
(35.3
|
)
|
Total assets held for sale
|
$
|
21.0
|
|
|
$
|
9.8
|
|
|
$
|
12.3
|
|
Liabilities held for sale
|
|
|
|
|
|
Current liabilities
|
$
|
8.0
|
|
|
$
|
0.1
|
|
|
$
|
1.9
|
|
Other liabilities
|
1.2
|
|
|
—
|
|
|
1.9
|
|
Total liabilities held for sale
|
$
|
9.2
|
|
|
$
|
0.1
|
|
|
$
|
3.8
|
|
Perrigo Company plc
- Item 1
Note 10
NOTE 10 –
INDEBTEDNESS
Total borrowings outstanding are summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1,
2017
|
|
December 31,
2016
|
Term loans
|
|
|
|
|
|
|
2014 term loan due December 5, 2019
|
(1)
|
|
$
|
428.6
|
|
|
$
|
420.7
|
|
Notes and Bonds
|
|
|
|
|
|
|
Coupon
|
Due
|
|
|
|
|
|
|
4.500%
|
May 23, 2017
|
(1)(2)
|
|
—
|
|
|
189.3
|
|
|
5.125%
|
December 12, 2017
|
(1)(2)
|
|
342.9
|
|
|
315.6
|
|
|
2.300%
|
November 8, 2018
|
|
|
—
|
|
|
600.0
|
|
|
5.000%
|
May 23, 2019
|
(1)(2)
|
|
137.1
|
|
|
126.2
|
|
|
3.500%
|
March 15, 2021
|
|
|
280.4
|
|
|
500.0
|
|
|
3.500%
|
December 15, 2021
|
|
|
309.6
|
|
|
500.0
|
|
|
5.105%
|
July 19, 2023
|
(1)(2)
|
|
154.3
|
|
|
142.0
|
|
|
4.000%
|
November 15, 2023
|
|
|
215.6
|
|
|
800.0
|
|
|
3.900%
|
December 15, 2024
|
|
|
700.0
|
|
|
700.0
|
|
|
4.375%
|
March 15, 2026
|
|
|
700.0
|
|
|
700.0
|
|
|
5.300%
|
November 15, 2043
|
|
|
90.5
|
|
|
400.0
|
|
|
4.900%
|
December 15, 2044
|
|
|
303.9
|
|
|
400.0
|
|
|
Total notes and bonds
|
|
|
3,234.3
|
|
|
5,373.1
|
|
Other financing
|
2.9
|
|
|
3.6
|
|
Unamortized premium (discount), net
|
29.1
|
|
|
33.0
|
|
Deferred financing fees
|
(20.1
|
)
|
|
(33.1
|
)
|
Total borrowings outstanding
|
3,674.8
|
|
|
5,797.3
|
|
|
Current indebtedness
|
(406.9
|
)
|
|
(572.8
|
)
|
Total long-term debt less current portion
|
$
|
3,267.9
|
|
|
$
|
5,224.5
|
|
|
|
(1)
|
Debt denominated in Euros subject to fluctuations in the euro-to-U.S. dollar exchange rate.
|
|
|
(2)
|
Debt assumed from Omega.
|
As previously disclosed, during the three months ended April 1, 2017 we entered into amendments to the 2014 Revolver and the 2014 term loan to modify provisions of such agreements necessary as a result of the correction in accounting related to the Tysabri
®
royalty stream, as well as waivers of any default or event of default that may have arisen from any restatement of or deficiencies in our financial statements for the periods specified in such amendments and waivers. We are in compliance with all covenants under our debt agreements as of
July 1, 2017
.
Revolving Credit Agreements
We have a revolving credit agreement with a borrowing capacity of
$1.0 billion
(the "2014 Revolver"). There were no borrowings outstanding under the 2014 Revolver as of
July 1, 2017
and
December 31, 2016
.
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". There were no balances outstanding under the facilities at
July 1, 2017
and
December 31, 2016
.
Perrigo Company plc
- Item 1
Note 10
Debt Repayments and Related Extinguishment
During the six months ended July 1, 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
|
|
July 1, 2017
|
|
2014 term loan due December 5, 2019
|
|
Scheduled quarterly payment
|
|
14.5
|
|
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
|
|
|
|
|
|
|
|
$
|
2,229.1
|
|
As a result of the debt retirements 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
|
|
NOTE 11 –
EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY
Earnings per Share
A reconciliation of the numerators and denominators used in the basic and diluted earnings per share ("EPS") calculation is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Numerator:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(69.6
|
)
|
|
$
|
(534.3
|
)
|
|
$
|
2.0
|
|
|
$
|
(1,063.5
|
)
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic EPS
|
143.3
|
|
|
143.2
|
|
|
143.3
|
|
|
143.2
|
|
Dilutive effect of share-based awards*
|
—
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
Weighted average shares outstanding for diluted EPS
|
143.3
|
|
|
143.2
|
|
|
143.6
|
|
|
143.2
|
|
|
|
|
|
|
|
|
|
Anti-dilutive share-based awards excluded from computation of diluted EPS*
|
—
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
* In the period of a net loss, diluted shares equal basic shares.
Perrigo Company plc
- Item 1
Note 11
Shareholders' Equity
Shares
We issued shares related to the exercise and vesting of share-based compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
31,900
|
|
|
19,000
|
|
|
46,400
|
|
|
98,000
|
|
Share Repurchases
On October 22, 2015, the Board of Directors approved a share repurchase plan of up to
$2.0 billion
(the "2015 Authorization"). During the
three months ended
July 1, 2017
, we repurchased
812,184
ordinary shares at an average repurchase price of
$71.67
per share, for a total of
$58.2 million
. As of July 1, 2017, there was
$1.4 billion
still available to be repurchased through December 31, 2018 under the 2015 Authorization. We did not repurchase any shares under the share repurchase plan during the
six months ended
July 2, 2016
.
NOTE 12 –
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in our AOCI balances, net of tax were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
Fair value of derivative financial instruments, net of tax
|
|
Fair value of investment securities, net of tax
|
|
Post-retirement and pension liability adjustments, net of tax
|
|
Total AOCI
|
Balance at December 31, 2016
|
$
|
(67.9
|
)
|
|
$
|
(19.5
|
)
|
|
$
|
15.1
|
|
|
$
|
(9.5
|
)
|
|
$
|
(81.8
|
)
|
OCI before reclassifications
|
220.1
|
|
|
3.5
|
|
|
(14.7
|
)
|
|
—
|
|
|
208.9
|
|
Amounts reclassified from AOCI
|
—
|
|
|
5.0
|
|
|
(1.6
|
)
|
|
—
|
|
|
3.4
|
|
Other comprehensive income (loss)
|
220.1
|
|
|
8.5
|
|
|
(16.3
|
)
|
|
—
|
|
|
212.3
|
|
Balance at July 1, 2017
|
$
|
152.2
|
|
|
$
|
(11.0
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(9.5
|
)
|
|
$
|
130.5
|
|
NOTE 13 –
INCOME TAXES
The effective tax rate for the
three months ended
July 1, 2017
was
8.7%
on net loss reported in the period compared to
34.2%
on a net loss for the
three months ended
July 2, 2016
. The effective tax rate for the
six months ended
July 1, 2017
was
89.9%
on net income reported in the period compared to
18.3%
on net loss for the
six months ended
July 2, 2016
. The effective tax rate for the
six months ended
July 1, 2017
was negatively impacted by non-deductible fees related to our debt cancellation and additional valuation allowances recorded against deferred tax assets.
Our tax rate is subject to adjustment over the balance of the fiscal year due 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 valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various tax returns; adjustments based on differing interpretations of the applicable 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. international tax reform); changes in U.S. 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 for taxes.
The total liability for uncertain tax positions was
$427.4 million
and
$398.0 million
as of
July 1, 2017
and
December 31, 2016
, respectively, before considering the federal tax benefit of certain state and local items.
Perrigo Company plc
- Item 1
Note 13
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
$71.8 million
and
$63.5 million
as of
July 1, 2017
and
December 31, 2016
, respectively.
We file income tax returns in numerous jurisdictions and are therefore subject to audits by tax authorities. Our primary income tax jurisdictions are Ireland, the United States, Israel, Belgium, France, and the United Kingdom.
Although we believe that the 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 estimates or from historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our 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.
In the United States, the Internal Revenue Service ("IRS") audit of our fiscal years ended June 27, 2009 and June 26, 2010 had previously concluded with the issuance of a statutory notice of deficiency on August 27, 2014. While we had previously agreed on certain adjustments and made associated payments of
$8.0 million
(inclusive of interest) in November 2014, the statutory notice of deficiency asserted various additional adjustments, including transfer pricing adjustments. The statutory notice of deficiency's adjustments for fiscal years 2009 and 2010 asserted an incremental tax obligation of approximately
$68.9 million
, inclusive of interest and penalties. We disagree with the IRS’s positions asserted in the statutory notice of deficiency. To contest the IRS's adjustments, in January 2015 we paid the incremental tax obligation (a prerequisite to contesting the proposed adjustments in U.S. district court), and in June 2015, we filed an administrative request for a refund with the IRS. The payment was recorded during the three months ended March 28, 2015 as a deferred charge on the balance sheet given our anticipated action to recover this amount. The IRS subsequently denied our request for a refund. We anticipate filing a complaint in U.S. district court claiming a refund of the paid amounts in August 2017.
The IRS issued a statutory notice of deficiency on April 20, 2017 for the IRS audits of our fiscal years ended June 25, 2011 and June 30, 2012. While we agreed to certain adjustments with respect to these years in October 2016 and made minimal associated payments, the statutory notice of deficiency asserted various additional adjustments, including transfer pricing adjustments. The statutory notice of deficiency for fiscal years 2011 and 2012 asserted an incremental tax obligation of approximately
$74.2 million
, inclusive of interest and penalties. We disagree with the IRS's positions asserted in this notice. In anticipation of contesting the IRS's adjustments, in May 2017 we paid the incremental tax obligation (a prerequisite to contesting the proposed adjustments in U.S. District Court) and filed an administrative request for a refund. The payment was recorded in the second quarter of the year ending December 31, 2017 as a deferred charge on the balance sheet given our anticipated action to recover this amount.
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. 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.
Unfavorable resolutions of the audit matters discussed above could have a material impact on our consolidated financial statements in future periods.
Perrigo Company plc
- Item 1
Note 13
We have ongoing audits in multiple other jurisdictions the resolution of which remains uncertain. These jurisdictions include, but are not limited to, the United States, Israel and France. The IRS is currently auditing our fiscal years ended June 29, 2013 and June 28, 2014. The Israel Tax Authority is currently auditing our fiscal years ended June 29, 2013 and June 28, 2014. The French Tax Authority is currently auditing the years ended December 2014, December 2015 and December 2016.
NOTE 14 –
COMMITMENTS AND CONTINGENCIES
In view of the inherent difficulties of predicting the outcome of various types of legal proceedings, we cannot determine the ultimate resolution of the matters described below. We establish reserves for litigation and regulatory matters when losses associated with the claims become probable and the amounts can be reasonably estimated. The actual costs of resolving legal matters may be substantially higher or lower than the amounts reserved for those matters. For matters where the likelihood or extent of a loss is not probable or cannot be reasonably be estimated as of
July 1, 2017
, we have not recorded a loss reserve. If certain of these matters are determined against the Company, there could be a material adverse effect on our financial condition, results of operations, or cash flows. We currently believe we have valid defenses to the claims in these lawsuits and intend to defend these lawsuits vigorously regardless of whether or not we have a loss reserve. Other than what is disclosed below, we do not expect the outcome of the litigation matters to which we are currently subject to individually or in the aggregate, have a material adverse effect on our financial condition, results of operations, or cash flows.
Antitrust Violations
We have been named as a counterclaim co-defendant in the lawsuit
Fera Pharmaceuticals, LLC v. Akorn, Inc., et al.
, in which Akorn, Inc. (“Akorn”) alleges tortious interference and antitrust violations against us and Fera Pharmaceuticals, LLC (“Fera”). This litigation arises from our acquisition of bacitracin ophthalmic ointment from Fera in 2013. Akorn asserts claims under Sections 1 and 2 of the Sherman Antitrust Act alleging that we and Fera conspired to monopolize, attempted to monopolize, and did unlawfully monopolize the market for sterile bacitracin ophthalmic ointment in the United States through the use of an exclusive agreement with a supplier of sterile bacitracin active pharmaceutical ingredient. The lawsuit is currently pending in the Southern District of New York. A mediation is scheduled for September 2017 and a trial is set for January 2018. Akorn seeks damages, injunctive relief, and attorney’s fees. Any award of antitrust damages would be subject to trebling under antitrust laws. An estimate of any possible loss cannot be determined at this time.
We believe the claims are without merit and intend to defend them vigorously. We have preserved our indemnification rights against Fera for potential liability, defense costs, and expenses incurred as a result of this litigation.
Price-Fixing Lawsuits
We have been named as a co-defendant with other manufacturers in a number of cases alleging that we and other manufacturers of the same product engaged in anti-competitive behavior to fix or raise the prices of certain drugs starting, in some instances, as early as June 2013. The products in question are Clobetasol, Desonide, and Econazole and one complaint involving Levothyroxine, a product that we neither made nor sold. At this stage, we cannot reasonably predict the outcome of the liability, if any, associated with these claims.
Securities Litigation
In the United States
On May 18, 2016, a shareholder filed a securities case against the Company and our former CEO, Joseph Papa, in the U.S. District Court for the District of New Jersey (
Roofers’ Pension Fund v. Papa, et al.)
. The plaintiff purported to represent a class of shareholders for the period from April 21, 2015 through May 11, 2016, inclusive. The original complaint alleged violations of Securities Exchange Act sections 10(b) (and Rule 10b‑5) and 14(e) against both defendants and 20(a) control person liability against Mr. Papa. In general, the allegations concerned the actions taken by the Company and the former executive to defend against the unsolicited takeover bid by Mylan in the period from April 21, 2015 through November 13, 2015. The plaintiff also alleged that the defendants provided inadequate disclosure concerning alleged integration problems related to the Omega
Perrigo Company plc
- Item 1
Note 14
acquisition in the period from April 21, 2015 through May 11, 2016. On July 19, 2016, a different shareholder filed a securities class action against the Company and our former CEO, Joseph Papa, also in the District of New Jersey (
Wilson v. Papa, et al
.). The plaintiff purported to represent a class of persons who sold put options on the Company shares between April 21, 2015 and May 11, 2016. In general, the allegations and the claims were the same as those made in the original complaint filed in the
Roofers' Pension Fund
case described above. On December 8, 2016, the court consolidated
Roofers' Pension Fund
case and the
Wilson
case under the Roofers' Pension Fund case number. In February 2017, the court selected the lead plaintiffs for the consolidated case and the lead counsel to the putative class. In March 2017, the court entered a scheduling order.
On June 21, 2017, the court-appointed lead plaintiffs filed an amended complaint that superseded the original complaints in the
Roofers’ Pension Fund
case and the
Wilson
case. The lead plaintiffs seek to represent a class of shareholders for the period April 21, 2015 through May 3, 2017, and identifies three subclasses - shareholders who traded during the entire period on the US exchanges; shareholders who traded during the entire period on the Tel Aviv exchange; and shareholders who traded during the period while the Mylan tender offer was pending (April 21, 2015 through November 13, 2015). The amended complaint names as defendants the Company and 11 current or former directors and officers of Perrigo (Mses. Judy Brown, Laurie Brlas, Jacqualyn Fouse, Ellen Hoffing, and Messrs. Joe Papa, Marc Coucke, Gary Cohen, Michael Jandernoa, Gerald Kunkle, Herman Morris, and Donal O’Connor). The amended complaint alleges violations of Securities Exchange Act sections 10(b) (and Rule 10b‑5) and 14(e) against all defendants and 20(a) control person liability against the 11 individuals. In general, the allegations concern the actions taken by the Company and the former executive to defend against the unsolicited takeover bid by Mylan in the period from April 21, 2015 through November 13, 2015 and the allegedly inadequate disclosure throughout the entire class period related to purported integration problems related to the Omega acquisition, alleges incorrect reporting of organic growth at the Company, alleges price fixing activities with respect to six generic prescription pharmaceuticals, and alleges improper accounting for the Tysabri
®
royalty stream. The amended complaint does not include an estimate of damages. The time for the defendants to respond to the amended complaint has not yet expired. We will defend the lawsuit vigorously.
In Israel
Because the Company’s shares are traded on the Tel Aviv exchange under a dual trading arrangement, the Company is subject to securities litigation in Israel. Three cases are currently pending. Perrigo is consulting Israeli counsel about its response to these allegations and will defend these cases vigorously.
On May 22, 2016, shareholders filed a securities class action against the Company and five individual defendants: Our former CEO Mr. Papa, our former Executive Vice President and General Manager of the BCH segment Marc Coucke, our Chief Executive Officer John Hendrickson, and our Board members Gary Kunkle, Jr. and Laurie Brlas alleging violations of Israeli law in the District Court of Tel Aviv-Jaffa (
Schweiger et al. v. Perrigo Company plc, et al.).
On June 15, 2016, Perrigo filed a motion to stay the case pending the outcome of the securities class action pending in the New Jersey Federal Court. The plaintiffs did not oppose the motion. The Israeli court granted the motion on the same day, and the
Schweiger
action is stayed. We will defend the lawsuit vigorously when and if the stay is lifted.
On March 29, 2017, plaintiff Eyal Keinan commenced an action in the District Court of Tel Aviv-Jaffa asserting securities claims against two defendants: Perrigo and its auditor Ernst & Young LLP ("EY"). The case is styled
Keinan v. Perrigo Company plc, et al.
The action seeks certification of a class of purchasers of Perrigo shares on the Israeli exchange beginning February 6, 2014. The proposed closing date for the class is not clear from the complaint though it appears to extend into 2017. In general, the plaintiff asserts that Perrigo improperly accounted for its stream of royalty income from two drugs: Tysabri
®
and Prialt. The court filings contend that the alleged improper accounting caused the audited financial results for Perrigo to be incorrect for the six month period ended December 31, 2015, and the years ended June 27, 2015 and June 28, 2014 and the other financial data released by the Company over those years and 2016 to also be inaccurate. The plaintiff maintains that the defendants are liable under Israeli securities law or, in the alternative, under U.S. securities law. The plaintiff indicates an initial, preliminary class damages estimate of
686.0 million
NIS (approximately
$192.0 million
at 1 NIS =
$0.28 cent
). The response from the defendants is not yet due. We intend to defend the lawsuit vigorously.
On June 28, 2017, a plaintiff filed a complaint in Tel Aviv District Court styled
Israel Elec. Corp. Employees’ Educ. Fund v. Perrigo Company plc, et al.
The lead plaintiff seeks to represent a class of shareholders who traded
Perrigo Company plc
- Item 1
Note 14
in Perrigo stock on the Tel Aviv exchange during the period April 24, 2015 through May 3, 2017. The amended complaint names as defendants the Company, EY (the Company’s auditor), and 11 current or former directors and officers of Perrigo (Mses. Judy Brown, Laurie Brlas, Jacqualyn Fouse, Ellen Hoffing, and Messrs. Joe Papa, Marc Coucke, Gary Cohen, Michael Jandernoa, Gerald Kunkle, Herman Morris, and Donal O’Connor). The complaint alleges violations under US securities laws of Securities Exchange Act sections 10(b) (and Rule 10b‑5) and 14(e) against all defendants and 20(a) control person liability against the 11 individuals or, in the alternative, under Israeli securities laws. In general, the allegations concern the actions taken by the Company and the former executive to defend against the unsolicited takeover bid by Mylan in the period from April 21, 2015 through November 13, 2015 and the allegedly inadequate disclosure concerning purported integration problems related to the Omega acquisition, alleges incorrect reporting of organic growth at the Company, alleges price fixing activities with respect to six generic prescription pharmaceuticals, and alleges improper accounting for the Tysabri
®
royalty stream. The plaintiff indicates an initial, preliminary class damages estimate of
2.7 billion
NIS (approximately
$760.0 million
at 1 NIS =
$0.28 cent
). We intend to defend the lawsuit vigorously.
On July 12, 2017, the plaintiff in the
Israel Elec. Corp. Employees’ Educ. Fund v. Perrigo Company plc, et al.
case filed a motion to have all three cases pending in Israel either consolidated or the other two cases dismissed so that the Israel Elec. Corp. Educ. Fund plaintiff can proceed as the sole plaintiff. That motion is pending. A variety of other procedural motions are also pending at this time having to do with the timing of any response by defendants.
Eltroxin
During October and November 2011, nine applications to certify a class action lawsuit were filed in various courts in Israel related to Eltroxin, a prescription thyroid medication manufactured by a third party and distributed in Israel by our subsidiary, Perrigo Israel Agencies Ltd. The respondents included our subsidiaries, Perrigo Israel Pharmaceuticals Ltd. and/or Perrigo Israel Agencies Ltd., the manufacturers of the product, and various healthcare providers who provide healthcare services as part of the compulsory healthcare system in Israel.
One of the applications was dismissed and the remaining eight applications were consolidated into one application. The applications arose from the 2011 launch of a reformulated version of Eltroxin in Israel. The consolidated application generally alleges that the respondents (a) failed to timely inform patients, pharmacists and physicians about the change in the formulation; and (b) failed to inform physicians about the need to monitor patients taking the new formulation in order to confirm patients were receiving the appropriate dose of the drug. As a result, claimants allege they incurred the following damages: (a) purchases of product that otherwise would not have been made by patients had they been aware of the reformulation; (b) adverse events to some patients resulting from an imbalance of thyroid functions that could have been avoided; and (c) harm resulting from the patients' lack of informed consent prior to the use of the reformulation.
Several hearings on whether or not to certify the consolidated application took place in December 2013 and January 2014. On May 17, 2015, the District Court certified the motion against Perrigo Israel Agencies Ltd. and dismissed it against the remaining respondents, including Perrigo Israel Pharmaceuticals Ltd.
On June 16, 2015, we submitted a motion for permission to appeal the decision to certify to the Israeli Supreme Court together with a motion to stay the proceedings of the class action until the motion for permission to appeal is adjudicated. We have filed our statement of defense to the underlying proceedings. The parties are currently engaged in mediation in an attempt to settle the matter. The underlying proceedings have been stayed pending the outcome of the mediation process and, if necessary, a decision on the motion to appeal.
Perrigo Company plc
- Item 1
Note 14
Tysabri
®
Product Liability Lawsuits
We and our collaborator Biogen are co-defendants in product liability lawsuits arising out of the occurrence of Progressive Multifocal Leukoencephalopathy, a serious brain infection, and serious adverse events, including deaths, which occurred in patients taking Tysabri
®
. Each co-defendant would be responsible for 50% of losses and expenses arising out of any Tysabri
®
product liability claims. During calendar year 2016, one case in the U.S. was settled and two others were dismissed with prejudice. In April 2017, another case was dismissed with prejudice. While we intend to vigorously defend the remaining lawsuits, management cannot predict how these cases will be resolved. Adverse results in one or more of these lawsuits could result in substantial judgments against us.
Claim Arising from the Omega Acquisition
On December 16, 2016, we and Perrigo Ireland 2 brought an arbitral claim ("Claim") against Alychlo NV ("Alychlo") and Holdco I BE NV ("Holdco") (together the Sellers) in accordance with clause 26.2 of the Share Purchase Agreement dated November 6, 2014 ("SPA") and the rules of the Belgian Centre for Arbitration and Mediation ("CEPANI"). Our Claim relates to the accuracy and completeness of information about Omega provided by the Sellers as part of the sale process, the withholding of information by the Sellers during that process and breaches of Sellers’ warranties. We are seeking monetary damages from the Sellers. The Sellers served their respective responses to the Claim on February 20, 2017. In its response, Alychlo has asserted a counterclaim for monetary damages contending that we breached the duty of good faith in performing the SPA. There can be no assurance that our Claim will be successful, and Sellers deny liability for the Claim. We deny that Alychlo is entitled to any relief (including monetary relief) under the counterclaim. The arbitration proceedings are confidential as required by the SPA and the rules of the CEPANI.
NOTE 15 –
RESTRUCTURING CHARGES
We periodically take action to reduce redundant expenses and improve operating efficiencies. The following reflects our restructuring activity (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Beginning balance
|
$
|
51.5
|
|
|
$
|
13.0
|
|
|
$
|
19.7
|
|
|
$
|
20.7
|
|
Additional charges
|
12.1
|
|
|
5.8
|
|
|
50.8
|
|
|
11.3
|
|
Payments
|
(23.6
|
)
|
|
(6.6
|
)
|
|
(30.7
|
)
|
|
(24.8
|
)
|
Non-cash adjustments
|
(0.3
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
5.0
|
|
Ending balance
|
$
|
39.7
|
|
|
$
|
12.2
|
|
|
$
|
39.7
|
|
|
$
|
12.2
|
|
Restructuring activity includes severance, lease exit costs, and asset impairments. The charges incurred during the
three and six months ended
July 1, 2017
were primarily associated with actions we took to streamline our organization as announced on February 21, 2017. During the
three and six months ended
July 1, 2017
,
$12.1 million
and
$50.8 million
of restructuring expenses were recorded, respectively. Of the amount recorded during the six months ended
July 1, 2017
,
$28.0 million
was related to the CHCA segment. There were no other material restructuring programs that significantly impacted any other reportable segment. All charges are recorded in Restructuring expense. The remaining
$35.5 million
liability for employee severance benefits is expected to be paid within the next year, while the remaining
$4.2 million
liability for lease exit costs is expected to be incurred over the remaining terms of the applicable leases.
NOTE 16 –
SEGMENT INFORMATION
Our reporting segments are as follows:
|
|
•
|
CHCA
,
comprises our U.S., Mexico and Canada consumer healthcare business (OTC, contract, infant formula and Animal Health categories).
|
Perrigo Company plc
- Item 1
Note 16
|
|
•
|
CHCI
,
comprises our legacy Branded Consumer Healthcare segment and now includes our consumer focused businesses in the U.K., Australia, and Israel. This segment also includes our U.K. liquid licensed products business.
|
|
|
•
|
RX
,
comprises our U.S. Prescription Pharmaceuticals business.
|
We also have an "
Other
" reporting segment that consists of our legacy API business, which does not meet the quantitative threshold required to be a separately reportable segment. Effective January 1, 2017, due to the sale of the Tysabri
®
financial asset, all legal expenses associated with the former Specialty Sciences segment were moved to unallocated expenses. Our segments reflect the way in which our chief operating decision maker reviews our operating results and allocates resources.
The below tables show select financial measures by reporting segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
July 1,
2017
|
|
December 31,
2016
|
CHCA
|
|
$
|
3,907.1
|
|
|
$
|
3,351.3
|
|
CHCI
|
|
5,012.1
|
|
|
4,795.2
|
|
RX
|
|
2,560.8
|
|
|
2,646.4
|
|
Specialty Sciences
|
|
—
|
|
|
2,775.8
|
|
Other
|
|
312.2
|
|
|
301.4
|
|
Total
|
|
$
|
11,792.2
|
|
|
$
|
13,870.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 1, 2017
|
|
July 2, 2016
|
|
Net
Sales
|
|
Operating Income (Loss)
|
|
Intangible Asset Amortization
|
|
Net
Sales
|
|
Operating Income (Loss)
|
|
Intangible Asset Amortization
|
CHCA
|
$
|
604.9
|
|
|
$
|
104.2
|
|
|
$
|
17.0
|
|
|
$
|
629.9
|
|
|
$
|
116.8
|
|
|
$
|
17.6
|
|
CHCI
|
376.5
|
|
|
3.9
|
|
|
47.5
|
|
|
415.9
|
|
|
0.6
|
|
|
44.9
|
|
RX
|
240.4
|
|
|
69.3
|
|
|
22.3
|
|
|
276.9
|
|
|
92.6
|
|
|
25.9
|
|
Specialty Sciences
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.8
|
)
|
|
—
|
|
Other
|
16.1
|
|
|
4.1
|
|
|
0.4
|
|
|
17.8
|
|
|
(1.3
|
)
|
|
0.5
|
|
Unallocated
|
—
|
|
|
(32.7
|
)
|
|
—
|
|
|
—
|
|
|
(20.1
|
)
|
|
—
|
|
Total
|
$
|
1,237.9
|
|
|
$
|
148.8
|
|
|
$
|
87.2
|
|
|
$
|
1,340.5
|
|
|
$
|
184.8
|
|
|
$
|
88.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
July 1, 2017
|
|
July 2, 2016
|
|
Net
Sales
|
|
Operating Income (Loss)
|
|
Intangible Asset Amortization
|
|
Net
Sales
|
|
Operating Income (Loss)
|
|
Intangible Asset Amortization
|
CHCA
|
$
|
1,187.6
|
|
|
$
|
179.2
|
|
|
$
|
34.2
|
|
|
$
|
1,269.0
|
|
|
$
|
217.4
|
|
|
$
|
35.7
|
|
CHCI
|
751.5
|
|
|
4.2
|
|
|
93.2
|
|
|
855.3
|
|
|
(395.8
|
)
|
|
86.1
|
|
RX
|
457.8
|
|
|
157.5
|
|
|
44.6
|
|
|
525.0
|
|
|
184.0
|
|
|
51.4
|
|
Specialty Sciences
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5.2
|
)
|
|
—
|
|
Other
|
35.0
|
|
|
9.7
|
|
|
0.8
|
|
|
38.5
|
|
|
4.2
|
|
|
0.9
|
|
Unallocated
|
—
|
|
|
(73.3
|
)
|
|
—
|
|
|
—
|
|
|
(51.4
|
)
|
|
—
|
|
Total
|
$
|
2,431.9
|
|
|
$
|
277.3
|
|
|
$
|
172.8
|
|
|
$
|
2,687.8
|
|
|
$
|
(46.8
|
)
|
|
$
|
174.1
|
|
NOTE 17 –
SUBSEQUENT EVENTS
On
August 4, 2017
, we signed a definitive agreement for the sale of our Israel API business to SK Capital for
$110.0 million
in cash, inclusive of a working capital adjustment. We expect to finalize the sale within the next six months, and the sale is not expected to have a material impact on our operations.
Perrigo Company plc
- Item 2
Executive Overview