Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________________
 FORM 10-Q
_______________________________________________
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 29, 2018
OR
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-36353
_______________________________________________
Perrigo Company plc
(Exact name of registrant as specified in its charter)
_______________________________________________
Ireland
 
Not Applicable
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
Treasury Building, Lower Grand Canal Street, Dublin 2, Ireland
 
-
(Address of principal executive offices)
 
(Zip Code)
+353 1 7094000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days.    YES [X]    NO  [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  [X]   NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[X]
 
Accelerated filer
[ ]
 
Non-accelerated filer
 
 
Smaller reporting company
[ ]
 
Emerging growth company
[ ]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
[ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   [ ]  YES  [X] NO
As of November 2, 2018, there were 135,856,544 ordinary shares outstanding.




PERRIGO COMPANY PLC
FORM 10-Q
INDEX
 
PAGE
NUMBER
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
 
 
 
2
 
 
 
3
 
 
 
4
 
 
 
5
 
 
 
6
 
 
 
7
 
 
 
8
 
 
 
9
 
 
 
10
 
 
 
11
 
 
 
12
 
 
 
13
 
 
 
14
 
 
 
15
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. In particular, statements about our expectations, beliefs, plans, objectives, assumptions, future events or future performance contained in this report, including certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” "forecast," “predict,” “potential” or the negative of those terms or other comparable terminology.

We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control, including: the timing, amount and cost of any share repurchases; future impairment charges; the success of management transition; customer acceptance of new products; competition from other industry participants, some of whom have greater marketing resources or larger market share in certain product categories than we do; pricing pressure from customers and consumers; potential third-party claims and litigation, including litigation relating to our restatement of previously-filed financial information; potential impacts of ongoing or future government investigations and regulatory initiatives; resolution of uncertain tax positions; the impact of tax reform legislation and healthcare policy; general economic conditions; fluctuations in currency exchange rates and interest rates; the consummation of announced acquisitions or dispositions and the success of such transactions, and our ability to realize the desired benefits thereof; and our ability to execute and achieve the desired benefits of announced cost-reduction efforts and strategic and other initiatives. Statements regarding the separation of our Prescription Pharmaceuticals business, including the expected benefits, anticipated timing, form of any such separation and whether the separation ultimately occurs, are all subject to various risks and uncertainties, including future financial and operating results, our ability to separate the business, the effect of existing interdependencies with our manufacturing and shared service operations, and the tax consequences of the planned separation to us or our shareholders. In addition, we may identify new, or be unable to remediate previously identified, material weaknesses in our internal control over financial reporting. Furthermore, we may incur additional tax liabilities in respect of 2016 and prior years or be found to have breached certain provisions of Irish company law in connection with our restatement of our previously-filed financial statements, which may result in additional expenses and penalties. These and other important factors, including those discussed in our Form 10-K for the year ended December 31, 2017, in this report under “Risk Factors” and in any subsequent filings with the United States Securities and Exchange Commission, may cause actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. The forward-looking statements in this report are made only as of the date hereof, and unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

TRADEMARKS, TRADE NAMES AND SERVICE MARKS

This report contains trademarks, trade names and service marks that are the property of Perrigo Company plc, as well as, for informational purposes, trademarks, trade names, and service marks that are the property of other organizations. Solely for convenience, certain trademarks, trade names, and service marks referred to in this report appear without the ®, ™ and SM symbols, but those references are not intended to indicate that we or the applicable owners, as the case may be, will not assert, to the fullest extent under applicable law, our or their rights to such trademarks, trade names, and service marks.

1

Perrigo Company plc - Item 1

PART I.     FINANCIAL INFORMATION

ITEM 1.        FINANCIAL STATEMENTS (UNAUDITED)

PERRIGO COMPANY PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net sales
$
1,133.1

 
$
1,231.3

 
$
3,536.5

 
$
3,663.1

Cost of sales
708.3

 
733.5

 
2,148.0

 
2,196.4

Gross profit
424.8

 
497.8

 
1,388.5

 
1,466.7

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Distribution
22.5

 
21.5

 
71.0

 
64.2

Research and development
43.7

 
38.4

 
174.0

 
120.8

Selling
134.7

 
143.5

 
451.2

 
454.1

Administration
105.6

 
123.3

 
310.0

 
326.9

Impairment charges
221.8

 
7.8

 
223.5

 
47.4

Restructuring
18.0

 
3.8

 
23.2

 
54.7

Other operating expense (income)
0.5

 
(2.9
)
 
6.6

 
(41.0
)
Total operating expenses
546.8

 
335.4

 
1,259.5

 
1,027.1

 
 
 
 
 
 
 
 
Operating income (loss)
(122.0
)
 
162.4

 
129.0

 
439.6

 
 
 
 
 
 
 
 
Change in financial assets
(74.9
)
 
2.6

 
(65.9
)
 
24.2

Interest expense, net
31.7

 
34.7

 
95.2

 
133.1

Other (income) expense, net
0.2

 
(3.6
)
 
12.3

 
(1.1
)
Loss on extinguishment of debt

 

 
0.5

 
135.2

Income (loss) before income taxes
(79.0
)
 
128.7

 
86.9

 
148.2

Income tax expense (benefit)
(11.5
)
 
84.2

 
37.3

 
101.8

Net income (loss)
$
(67.5
)
 
$
44.5

 
$
49.6

 
$
46.4

 
 
 
 
 
 
 
 
Earnings (loss) per share
 
 
 
 
 
 
 
Basic
$
(0.49
)
 
$
0.31

 
$
0.36

 
$
0.33

Diluted
$
(0.49
)
 
$
0.31

 
$
0.36

 
$
0.32

 
 
 
 
 
 
 
 
Weighted-average shares outstanding
 
 
 
 
 
 
 
Basic
137.4

 
141.3

 
138.5

 
142.5

Diluted
137.4

 
141.7

 
139.0

 
142.8

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.19

 
$
0.16

 
$
0.57

 
$
0.48


See accompanying Notes to the Condensed Consolidated Financial Statements

2

Perrigo Company plc - Item 1

PERRIGO COMPANY PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net income (loss)
$
(67.5
)
 
$
44.5

 
$
49.6

 
$
46.4

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(9.9
)
 
69.9

 
(102.5
)
 
289.9

Change in fair value of derivative financial instruments, net of tax
(0.9
)
 
0.1

 
(5.0
)
 
8.7

Change in fair value of investment securities, net of tax

 
(8.1
)
 

 
(24.4
)
Change in post-retirement and pension liability, net of tax
(1.0
)
 
(1.2
)
 
(1.4
)
 
(1.2
)
Other comprehensive income (loss), net of tax
(11.8
)
 
60.7

 
(108.9
)
 
273.0

Comprehensive income (loss)
$
(79.3
)
 
$
105.2

 
$
(59.3
)
 
$
319.4

See accompanying Notes to the Condensed Consolidated Financial Statements


3

Perrigo Company plc - Item 1

PERRIGO COMPANY PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
(unaudited)
 
September 29,
2018
 
December 31,
2017
Assets
 
 
 
Cash and cash equivalents
$
444.2

 
$
678.7

Accounts receivable, net of allowance for doubtful accounts of $6.9 and $6.2, respectively
1,079.8

 
1,130.8

Inventories
885.3

 
806.9

Prepaid expenses and other current assets
359.5

 
203.2

Total current assets
2,768.8

 
2,819.6

Property, plant and equipment, net
820.2

 
833.1

Goodwill and other indefinite-lived intangible assets
4,042.0

 
4,265.7

Other intangible assets, net
2,959.3

 
3,290.5

Non-current deferred income taxes
0.8

 
10.4

Other non-current assets
351.8

 
409.5

Total non-current assets
8,174.1

 
8,809.2

Total assets
$
10,942.9

 
$
11,628.8

Liabilities and Shareholders’ Equity
 
 
 
Accounts payable
$
503.6

 
$
450.2

Payroll and related taxes
129.2

 
148.8

Accrued customer programs
416.4

 
419.7

Accrued liabilities
194.1

 
230.8

Accrued income taxes
56.0

 
116.1

Current indebtedness
194.2

 
70.4

Total current liabilities
1,493.5

 
1,436.0

Long-term debt, less current portion
3,071.0

 
3,270.8

Non-current deferred income taxes
294.7

 
321.9

Other non-current liabilities
423.7

 
429.5

Total non-current liabilities
3,789.4

 
4,022.2

Total liabilities
5,282.9

 
5,458.2

Commitments and contingencies - Refer to Note 13

 

Shareholders’ equity
 
 
 
Controlling interests:
 
 
 
Preferred shares, $0.0001 par value per share, 10 shares authorized

 

Ordinary shares, €0.001 par value per share, 10,000 shares authorized
7,436.3

 
7,892.9

Accumulated other comprehensive income
143.2

 
253.1

Retained earnings (accumulated deficit)
(1,919.7
)
 
(1,975.5
)
Total controlling interest
5,659.8

 
6,170.5

Noncontrolling interest
0.2

 
0.1

Total shareholders’ equity
5,660.0

 
6,170.6

Total liabilities and shareholders' equity
$
10,942.9

 
$
11,628.8

 
 
 
 
Supplemental Disclosures of Balance Sheet Information
 
 
 
Ordinary shares, issued and outstanding
135.9

 
140.8


See accompanying Notes to the Condensed Consolidated Financial Statements

4

Perrigo Company plc - Item 1

PERRIGO COMPANY PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
Cash Flows From (For) Operating Activities
 
 
 
Net income
$
49.6

 
$
46.4

Adjustments to derive cash flows:
 
 
 
Depreciation and amortization
324.0

 
333.1

Share-based compensation
26.6

 
28.1

Impairment charges
223.5

 
47.4

Change in financial assets
(65.9
)
 
24.2

Loss on extinguishment of debt
0.5

 
135.2

Restructuring charges
23.2

 
54.7

Deferred income taxes
(8.4
)
 
(16.3
)
Amortization of debt premium
(6.2
)
 
(18.4
)
Other non-cash adjustments, net
5.9

 
(27.2
)
Subtotal
572.8

 
607.2

Increase (decrease) in cash due to:
 
 
 
Accounts receivable
20.2

 
38.4

Inventories
(101.3
)
 
(28.3
)
Accounts payable
44.5

 
(6.0
)
Payroll and related taxes
(40.8
)
 
(36.7
)
Accrued customer programs
(1.2
)
 
(15.8
)
Accrued liabilities
(31.1
)
 
(18.8
)
Accrued income taxes
(60.0
)
 
(61.5
)
Other, net
(4.4
)
 
3.5

Subtotal
(174.1
)
 
(125.2
)
Net cash from operating activities
398.7

 
482.0

Cash Flows From (For) Investing Activities
 
 
 
Proceeds from royalty rights
11.4

 
86.4

Purchase of investment securities
(7.5
)
 

Asset acquisitions
(32.8
)
 

Additions to property, plant and equipment
(56.8
)
 
(55.2
)
Net proceeds from sale of business and other assets
5.0

 
46.7

Proceeds from sale of the Tysabri® financial asset

 
2,200.0

Other investing, net

 
(5.8
)
Net cash from (for) investing activities
(80.7
)
 
2,272.1

Cash Flows From (For) Financing Activities
 
 
 
Issuances of long-term debt
431.0

 

Payments on long-term debt
(470.0
)
 
(2,243.7
)
Borrowings (repayments) of revolving credit agreements and other financing, net
(8.7
)
 

Deferred financing fees
(2.4
)
 
(4.2
)
Premium on early debt retirement

 
(116.1
)
Issuance of ordinary shares
1.0

 
0.5

Repurchase of ordinary shares
(400.0
)
 
(191.5
)
Cash dividends
(78.7
)
 
(68.7
)
Other financing, net
(9.8
)
 
2.7

Net cash (for) financing activities
(537.6
)
 
(2,621.0
)
Effect of exchange rate changes on cash and cash equivalents
(14.9
)
 
20.5

Net increase (decrease) in cash and cash equivalents
(234.5
)
 
153.6

Cash and cash equivalents, beginning of period
678.7

 
622.3

Cash and cash equivalents, end of period
$
444.2

 
$
775.9


See accompanying Notes to the Condensed Consolidated Financial Statements

5

Perrigo Company plc - Item 1
Note 1



NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General Information

The Company

Perrigo Company plc was incorporated under the laws of Ireland on June 28, 2013 and became the successor registrant of Perrigo Company, a Michigan corporation, on December 18, 2013 in connection with the acquisition of Elan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo," the "Company," "we," "our," "us," and similar pronouns used herein refer to Perrigo Company plc, its subsidiaries, and all predecessors of Perrigo Company plc and its subsidiaries.

We are a leading global healthcare company, delivering value to our customers and consumers by providing Quality Affordable Healthcare Products®. Founded in 1887 as a packager of home remedies, we have built a unique business model that is best described as the convergence of a fast-moving consumer goods company, a high-quality pharmaceutical manufacturing organization and a world-class supply chain network. We believe we are one of the world's largest manufacturers of over-the-counter (“OTC”) healthcare products and suppliers of infant formulas for the store brand market. We are a leading provider of branded OTC products throughout Europe, and also a leading producer of generic prescription pharmaceutical topical products such as creams, lotions, gels, and nasal sprays ("extended topical"). 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, 2017. 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.

Recent Accounting Standard Pronouncements
    
Below are recent Accounting Standard Updates ("ASU") 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.

6

Perrigo Company plc - Item 1
Note 1


Recently Issued Accounting Standards Not Yet Adopted
Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
ASU 2016-02 Leases (Topic 842)

ASU 2018-01 Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842

ASU 2018-10 Leases Improvements to (Topic 842)

ASU 2018-11 Leases (Topic 842): Targeted Improvements
 
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. The guidance is required to be adopted using the modified retrospective approach. Early adoption is permitted.
 
January 1, 2019
 
We have substantially completed: (1) our identification of the global lease population, and (2) the data migration to a lease integration tool that will support the accounting and disclosure requirements under the standard. We are currently in the testing and review phase of the tool and designing processes and internal controls over the post-implementation leasing activities. We intend to apply the transition package of practical expedients allowed by the standard and to transition to the standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019. We expect our financial statement disclosures in the period of adoption to be expanded to present additional qualitative and quantitative details of our leasing arrangements. At this time, we are unable to reasonably estimate the expected increase in assets and liabilities on our Consolidated Balance Sheets; however, we do expect the right of use asset and corresponding liability to be material.
ASU 2018-02 Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
 
This guidance permits tax effects stranded in accumulated other comprehensive income as a result of tax reform to be reclassified to retained earnings. This reclassification is optional and will require additional disclosure regarding whether or not reclassification is elected.
 
January 1, 2019

 
We are currently evaluating the implications of adoption on our Consolidated Financial Statements.
ASU 2017-12 Derivatives and Hedging (Topic 815)
 
This update was issued to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. In addition, the amendments simplify the application of hedge accounting in certain situations. Under the new rule, the entity’s ability to hedge non-financial and financial risk components is expanded. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and also eases certain documentation and assessment requirements. Early adoption is permitted.
 
January 1, 2019
 
We plan to adopt the standard on the effective date and upon adoption, we expect to elect the policy to amortize excluded components. We are currently evaluating the implications of adoption on our Consolidated Financial Statements.
ASU 2018-15: Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
 
This guidance requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred.
 
January 1, 2020
 
We expect to adopt the standard prospectively on the effective date. As a result, no impact is currently expected on transition, however, future hosting arrangements treated as a service contract will need to be evaluated for capitalizable costs during implementation. The Consolidated Financial Statement impact will align with the presentation of the underlying hosting contracts, which is expected to be included within Operating expenses.
ASU 2018-13: Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement
 
This guidance amends ASC 820 to add, remove, and modify certain disclosure requirements for fair value measurements.
 
January 1, 2020
 
We plan to adopt the standard on the effective date and, upon adoption, we will be required to provide additional disclosures on Level 3 fair value measurements.
ASU) 2016-13: Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
 
This guidance changes the impairment model for most financial assets and certain other instruments, replacing the current "incurred loss" approach with an "expected loss" credit impairment model, which will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities and off-balance sheet credit exposures such as letters of credit. Early adoption is permitted.
 
January 1, 2020
 
We are currently evaluating the implications of adoption on our Consolidated Financial Statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

7

Perrigo Company plc - Item 1
Note 1


Recently Issued Accounting Standards Not Yet Adopted (Continued)
Standard
 
Description
 
Effective Date
 
Effects on the Financial Statements or Other Significant Matters
ASU 2017-04 Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
 
The objective of this update is to reduce the cost and complexity of subsequent goodwill accounting and simplify the impairment test by removing the Step 2 requirement to perform a hypothetical purchase price allocation when the carrying value of a reporting unit exceeds its fair value. If a reporting unit’s carrying value exceeds its fair value, an entity would record an impairment charge based on that difference, limited to the amount of goodwill attributed to that reporting unit. The proposal would not change the guidance on completing Step 1 of the goodwill impairment test. The proposed guidance would be applied prospectively. Early adoption is permitted.
 
January 1, 2020
 
Upon adoption, this guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment. After adoption, a Step 1 failure will result in an immediate impairment charge based on the carrying value of the reporting unit. We plan to adopt the standard prospectively on the effective date.
Accounting Standards Update (ASU) No. 2018-14: Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans
 
This guidance amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans.
 
December 31, 2020
 
We plan to adopt the standard on the effective date. We are currently evaluating the implications of adoption on our Condensed Consolidated Financial Statements.

NOTE 2 – REVENUE RECOGNITION

We adopted ASU 2014-09 Revenue from Contracts with Customers and its related amendments (collectively, "ASC 606"), as required, on January 1, 2018 using the modified retrospective method for all contracts not completed as of the adoption date. The reported results for the periods in 2018 reflect the application of ASC 606 while the results for the comparable reporting periods in 2017 were prepared under the guidance of Revenue Recognition ("ASC 605"). The adoption of ASC 606 represents a change in accounting principle that closely aligns revenue recognition with the transfer of control of our products and will provide enhanced disclosures of the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. In accordance with ASC 606, revenue is recognized when or as a customer obtains control of promised products. The amount of revenue recognized reflects the consideration we expect to be entitled to receive in exchange for these products.

Product Revenue

We generally recognize product revenue for our contract performance obligations at a point in time, typically upon shipment or delivery of products to customers. For point in time customers for which control transfers on delivery to the customer due to free on board destination terms (“FOB”), an adjustment is recorded to defer revenue recognition over an estimate of days until control transfers at the point of delivery. Where we recognize revenue at a point in time, the transfer of title is the primary indicator that control has transferred. In other limited instances, primarily relating to those contracts that relate to contract manufacturing performed for our customers and certain store branded products, control transfers as the product is manufactured. Control is deemed to transfer over time for these contracts as the product does not have an alternative use and we have a contractual right to payment for performance completed to date. Revenue for contract manufacturing contracts is recognized over the transfer period using an input method that measures progress towards completion of the performance obligation as costs are incurred. For store branded product revenue recognized over time, an output method is used to recognize revenue when production of a unit is completed because product customization occurs when the product is packaged as a finished good under the store brand label of the customer.

Net product sales include estimates of variable consideration for which accruals and allowances are established. Variable consideration for product sales consists primarily of chargebacks, rebates, sales returns, shelf stock allowances, administrative fees and other incentive programs. Certain of these accruals and allowances are

8

Perrigo Company plc - Item 1
Note 2


recorded in the balance sheet as current liabilities and others are recorded as a reduction in accounts receivable. Where appropriate, these estimates take into consideration a range of possible outcomes in which relevant factors, such as historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns, are either probability weighted to derive an estimate of expected value or the estimate reflects the single most likely outcome. Overall, these reserves reflect the best estimates of the amount of consideration to which we are entitled based on the terms of the contract. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from the estimates, these estimates are adjusted, which would affect revenue and earnings in the period such variances become known.

Other Revenue Policies

We receive payments from our customers based on billing schedules established in each contract. Amounts are recorded as accounts receivable when our right to consideration is unconditional. In most cases, the timing of the unconditional right to payment aligns with shipment or delivery of the product and the recognition of revenue; however, for those customers where revenue is recognized at a time prior to shipment or delivery due to over time revenue recognition, a contract asset is recorded and is reclassified to an accounts receivable when it becomes unconditional under the contract upon shipment or delivery to the customer.

We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised products to the customer will be one year or less, which is the case with substantially all customers.

Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue.  

Shipping and handling costs billed to customers are included in Net sales. Conversely, shipping and handling expenses we incur are included in Cost of sales.

Disaggregation of Revenue

We generated net sales in the following geographic locations(1) (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 29,
2018
U.S.
$
739.0

 
$
2,297.7

Europe(2)
317.2

 
1,023.4

All other countries(3)
76.9

 
215.4

 
$
1,133.1

 
$
3,536.5


(1) Derived from the location of the entity that sells to a third party.
(2) Includes Ireland net sales of $9.9 million and $20.3 million for the three and nine months ended September 29, 2018, respectively.
(3) Includes net sales generated primarily in Israel, Mexico, Australia and Canada.

9

Perrigo Company plc - Item 1
Note 2



The following is a summary of our net sales by category (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 29,
2018
CHCA(1)
 
 
 
Cough/Cold/Allergy/Sinus
$
113.8

 
$
364.6

Infant Nutritionals
112.4

 
325.0

Analgesics
96.8

 
282.7

Gastrointestinal
95.4

 
290.6

Smoking Cessation
72.8

 
209.9

Animal Health
20.4

 
78.6

Vitamins, Minerals and Dietary Supplements
5.0

 
12.3

Other CHCA(2)
79.6

 
230.9

Total CHCA
596.2

 
1,794.6

CHCI
 
 
 
Cough/Cold/Allergy/Sinus
94.8

 
278.2

Lifestyle
70.5

 
246.3

Personal Care and Derma-Therapeutics
60.0

 
215.3

Natural Health and Vitamins, Minerals and Dietary Supplements
32.2

 
93.3

Anti-Parasite
30.2

 
88.7

Other CHCI(3)
69.9

 
218.2

Total CHCI
357.6

 
1,140.0

Total RX
179.3

 
601.9

Total net sales
$
1,133.1

 
$
3,536.5


(1)    Includes net sales from our OTC contract manufacturing business.
(2)
Consists primarily of branded OTC, diabetic care, diagnostic products and other miscellaneous or otherwise uncategorized product lines and markets, none of which is greater than 10% of the segment net sales.
(3)
Consists primarily of liquid licensed products, diagnostic products and other miscellaneous or otherwise uncategorized product lines and markets, none of which is greater than 10% of the segment net sales.

While the majority of revenue is recognized at a point in time, certain of our product revenue is recognized on an over time basis. Predominately, over time customer contracts exist in contract manufacturing arrangements, which occur in both the Consumer Healthcare Americas ("CHCA") and Consumer Healthcare International ("CHCI") segments. Contract manufacturing revenue was $85.6 million and $231.8 million for the three and nine months ended September 29, 2018, respectively.

We also recognized a portion of the store brand OTC product revenues in the CHCA segment on an over time basis; however, the timing between over time and point in time revenue recognition for store brand contracts is not significant due to the short time period between the customization of the product and shipment or delivery.

Contract Balances

The following table provides information about contract assets from contracts with customers (in millions):
 
Balance Sheet Location
 
January 1,
2018
 
September 29,
2018
Short-term contract assets
Prepaid expenses and other current assets
 
$
20.5

 
$
28.8



10

Perrigo Company plc - Item 1
Note 2


Impact on consolidated financial statements

Net sales and Cost of sales were higher in the three and nine months ended September 29, 2018 as a result of adopting ASC 606 due to net sales from contract manufacturing and certain OTC product sales being recognized on an over time basis as the performance obligation was satisfied, compared to the previous revenue recognition under ASC 605, which would have occurred when the product was shipped or delivered. This has resulted in the recognition of a contract asset.
Condensed Consolidated Statements of Operations
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 29, 2018
(in millions, except per share amounts)
As
reported
 
Adjustments
 
Before adoption of ASC 606
 
As
reported
 
Adjustments
 
Before adoption of ASC 606
Net sales
$
1,133.1

 
$
(9.7
)
 
$
1,123.4

 
$
3,536.5

 
$
(8.4
)
 
$
3,528.1

Cost of sales
708.3

 
(5.4
)
 
702.9

 
2,148.0

 
(4.3
)
 
2,143.7

Gross profit
424.8

 
(4.3
)
 
420.5

 
1,388.5

 
(4.1
)
 
1,384.4

 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
(122.0
)
 
(4.3
)
 
(126.3
)
 
129.0

 
(4.1
)
 
124.9

 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense (benefit)
(11.5
)
 
0.1

 
(11.4
)
 
37.3

 

 
37.3

Net income (loss)
$
(67.5
)
 
$
(4.4
)
 
$
(71.9
)
 
$
49.6

 
$
(4.1
)
 
$
45.5

 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share
 
 
 
 
 
 
 
 
 
 
 
Basic
$
(0.49
)
 
$
(0.03
)
 
$
(0.52
)
 
$
0.36

 
$
(0.03
)
 
$
0.33

Diluted
$
(0.49
)
 
$
(0.03
)
 
$
(0.52
)
 
$
0.36

 
$
(0.03
)
 
$
0.33


Condensed Consolidated Statements of Comprehensive Income (Loss)
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 29, 2018
(in millions)
As
reported
 
Adjustments
 
Before adoption of ASC 606
 
As
reported
 
Adjustments
 
Before adoption of ASC 606
Net income (loss)
$
(67.5
)
 
$
(4.4
)
 
$
(71.9
)
 
$
49.6

 
$
(4.1
)
 
$
45.5

Comprehensive income (loss)
$
(79.3
)
 
$
(4.4
)
 
$
(83.7
)
 
$
(59.3
)
 
$
(4.1
)
 
$
(63.4
)


11

Perrigo Company plc - Item 1
Note 2


Condensed Consolidated Balance Sheet
 
September 29, 2018
(in millions)
As
reported
 
Adjustments
 
Before adoption of ASC 606
Assets
 
 
 
 
 
Inventories
$
885.3

 
$
19.1

 
$
904.4

Prepaid expenses and other current assets
359.5

 
(28.8
)
 
330.7

Total current assets
2,768.8

 
(9.7
)
 
2,759.1

Total assets
$
10,942.9

 
$
(9.7
)
 
$
10,933.2

Liabilities and Shareholders’ Equity
 
 
 
 
 
Other non-current liabilities
$
423.7

 
$
(0.2
)
 
$
423.5

Total non-current liabilities
3,789.4

 
(0.2
)
 
3,789.2

Total liabilities
5,282.9

 
(0.2
)
 
5,282.7

Shareholders’ equity
 
 
 
 
 
Controlling interests:
 
 
 
 
 
Accumulated deficit
(1,919.7
)
 
(9.5
)
 
(1,929.2
)
Total controlling interests
5,659.8

 
(9.5
)
 
5,650.3

Total shareholders’ equity
5,660.0

 
(9.5
)
 
5,650.5

Total liabilities and shareholders' equity
$
10,942.9

 
$
(9.7
)
 
$
10,933.2


Condensed Consolidated Statement of Cash Flows
 
Nine Months Ended
 
September 29, 2018
(in millions)
As
reported
 
Adjustments
 
Before adoption of ASC 606
Cash Flows From (For) Operating Activities
 
 
 
 
 
Net income
$
49.6

 
$
(4.1
)
 
$
45.5

(Decreases) in cash due to:
 
 
 
 
 
Inventories
(101.3
)
 
(4.3
)
 
(105.6
)
Accrued income taxes
(60.0
)
 

 
(60.0
)
Other, net
(4.4
)
 
8.4

 
4.0

Subtotal
(174.1
)
 
4.1

 
(170.0
)
Net cash from operating activities
$
398.7

 
$

 
$
398.7


NOTE 3 – ACQUISITIONS AND DIVESTITURES

Acquisitions during the nine months ended September 29, 2018

Diclofenac Sodium Gel 3%

On August 24, 2018, we purchased the Abbreviated New Drug Application ("ANDA") for Diclofenac Sodium Gel, 3% ("Diclo 3%"), for $30.4 million in cash, which we capitalized as a developed product technology intangible asset. We expect to launch Diclo 3% within the next twelve months and will amortize the developed product technology over a 20-year useful life. Operating results attributable to Diclo 3% will be included within our Prescription Pharmaceuticals ("RX") segment.

Nasonex-branded products

On May 29, 2018, we entered into a license agreement with Merck Sharp & Dohme Corp. ("Merck") allowing us to develop and commercialize an OTC version of Nasonex-branded products containing the compound, mometasone furoate monohydrate. The acquisition was accounted for as an asset acquisition based on our assessment that substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable asset to be used for research and development. In accordance with Accounting Standards Codification Topic 730 Research and Development, the non-refundable upfront license fee of $50.0 million was recorded in

12

Perrigo Company plc - Item 1
Note 3


Research and Development ("R&D") expense in our CHCA segment because the intangible research and development asset acquired has no alternative use. The agreement requires us to make contingent payments if we obtain regulatory approval and achieve certain sales milestones. We will also be obligated to make royalty payments on potential future sales. The contingent consideration will be included in the measurement of the cost of the asset when the contingency is resolved and the consideration is paid or becomes payable. Consideration paid after FDA approval will be capitalized and amortized to cost of goods sold over the economic life of each product.

Divestitures during the nine months ended September 30, 2017

On January 3, 2017, we sold certain ANDAs to a third party for $15.0 million, which was recorded as a gain in Other operating expense (income) on the Condensed Consolidated Statements of Operations in our RX segment.

On February 1, 2017, we completed the sale of the animal health pet treats plant fixed assets within our CHCA segment, which were previously classified as held-for sale. We received $7.7 million in proceeds, which resulted in an immaterial loss.

On April 6, 2017, we completed the sale of our India Active Pharmaceuticals Ingredient ("API") business to Strides Shasun Limited. We received $22.2 million of proceeds, inclusive of an estimated working capital adjustment, which resulted in an immaterial gain recorded in our legacy Other segment. 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 Condensed Consolidated Statements of Operations for the year ended December 31, 2016.

On August 25, 2017, we completed the sale of our Russian business, which was previously classified as held-for-sale, to Alvogen Pharma LLC and Alvogen CEE Kft. The total sale price was €12.7 million ($15.1 million), inclusive of an estimated working capital adjustment, which resulted in an immaterial gain recorded in our CHCI segment. Prior to closing the sale, we determined that the carrying value of the Russian business exceeded its fair value less the cost to sell, resulting in an impairment charge of $3.7 million, which was recorded in Impairment charges on the Condensed Consolidated Statements of Operations for the three months ended July 1, 2017.

NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

Changes in the carrying amount of goodwill, by reportable segment, were as follows (in millions):
 
 
December 31,
2017
 
Impairments
 
Currency translation adjustments
 
September 29,
2018
CHCA
 
$
1,847.4

 
$
(136.7
)
 
$
(0.5
)
 
$
1,710.2

CHCI
 
1,205.7

 

 
(39.3
)
 
1,166.4

RX
 
1,122.3

 

 
(4.7
)
 
1,117.6

Total goodwill
 
$
4,175.4

 
$
(136.7
)
 
$
(44.5
)
 
$
3,994.2


Animal Health

During the three months ended September 29, 2018, the animal health reporting unit continued to experience declines in its year-to-date financial results and had additional indications of potential impairment due to changes in channel dynamics and a decline in the forecasted outlook of the reporting unit. In addition, as discussed below, we determined a significant asset group within the reporting unit was not recoverable, and we impaired certain intangible assets within the asset group. In step one of the goodwill impairment testing, we determined the fair value of the reporting unit had fallen below its net book value.

The second step of the test requires that we determine the fair value of the animal health reporting unit’s goodwill, which involves determining the value of the reporting unit’s assets and liabilities. Based on our evaluation and initial estimates of the fair values of the assets and liabilities and the deficit of the fair value when compared to the related book value, we recorded an estimated impairment charge of $136.7 million in Impairment charges on the

13

Perrigo Company plc - Item 1
Note 4


Condensed Consolidated Statements of Operations. We expect to finalize the fair value calculation during the three months ending December 31, 2018, which could result in an adjustment to the estimated impairment charge. As of September 29, 2018, the implied fair value of the impaired goodwill is $42.2 million (refer to Note 6).

Intangible Assets

Other intangible assets and related accumulated amortization consisted of the following (in millions):
 
September 29, 2018
 
December 31, 2017
 
Gross
 
Accumulated Amortization
 
Gross
 
Accumulated Amortization
Definite-lived intangibles:
 
 
 
 
 
 
 
Distribution and license agreements and supply agreements
$
180.9

 
$
95.9

 
$
311.2

 
$
169.8

Developed product technology, formulations, and product rights
1,324.2

 
634.0

 
1,358.4

 
598.7

Customer relationships and distribution networks
1,601.7

 
541.3

 
1,642.0

 
460.6

Trademarks, trade names, and brands
1,296.3

 
173.9

 
1,335.4

 
129.5

Non-compete agreements
14.5

 
13.2

 
14.7

 
12.6

Total definite-lived intangibles
$
4,417.6

 
$
1,458.3

 
$
4,661.7

 
$
1,371.2

Indefinite-lived intangibles:
 
 
 
 
 
 
 
Trademarks, trade names, and brands
$
18.5

 
$

 
$
52.1

 
$

In-process research and development
29.3

 

 
38.2

 

Total indefinite-lived intangibles
47.8

 

 
90.3

 

Total other intangible assets
$
4,465.4

 
$
1,458.3

 
$
4,752.0

 
$
1,371.2


We recorded amortization expense of $84.3 million and $256.8 million for the three and nine months ended September 29, 2018, respectively, and $88.5 million and $261.3 million for the three and nine months ended September 30, 2017, respectively.
    
We recorded impairment charges of $8.5 million and $12.7 million on certain In-process Research and Development ("IPR&D") assets in our CHCA and RX segments, respectively, during the nine months ended September 29, 2018 and September 30, 2017, respectively, due to changes in the projected development and regulatory timelines for various projects. In addition, we recorded a decrease in the contingent consideration liability associated with certain IPR&D assets in Other operating expense (income) on the Condensed Consolidated Statements of Operations (refer to Note 6).

Animal Health

During the three months ended September 29, 2018, the animal health reporting unit continued to experience declines in its year-to-date financial results and had additional indications of potential impairment due to changes in channel dynamics, a strategic decision to re-prioritize our brands, and a decline in the forecasted outlook of the reporting unit. We performed an impairment test of an indefinite-lived intangible asset as of September 29, 2018 and determined the fair value of the indefinite-lived intangible asset had fallen below its net book value. Based on our estimate of the fair value of the indefinite-lived intangible asset, we recorded a brand intangible asset impairment charge of $27.7 million in Impairment charges on the Condensed Consolidated Statements of Operations within our CHCA segment (refer to Note 6).

As a result of the strategic decision to re-prioritize a brand within the indefinite-lived asset, we reassessed the useful life of the indefinite-lived intangible asset and reclassified the remaining $5.4 million asset to a definite-lived asset.


14

Perrigo Company plc - Item 1
Note 4


For the reasons indicated above, we also performed a recoverability test and determined a significant asset group was not recoverable. As such, we performed an impairment test as of September 29, 2018 and determined the amount by which the fair value of the asset group had fallen below its net book value. Based on our estimate of the fair value of the definite-lived intangible assets in the asset group, we recorded a developed product technology intangible asset impairment of $41.6 million, a supply agreement intangible asset impairment of $2.8 million, and a trade name and trademark intangible asset impairment of $4.5 million, in Impairment charges on the Condensed Consolidated Statements of Operations within our CHCA segment (refer to Note 6).

Lumara Health, Inc.

During the three months ended July 1, 2017, we identified impairment indicators for our Lumara Health, Inc. product assets. The primary impairment indicators included the decline in our 2017 performance expectations and a reduction in our long-range revenue growth forecast. As part of our assessment, we utilized the multi-period excess earnings method to determine fair value. This 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.

NOTE 5 – INVENTORIES

Major components of inventory were as follows (in millions):
 
 
September 29,
2018
 
December 31,
2017
Finished goods
$
473.7

 
$
454.3

Work in process
180.3

 
152.8

Raw materials
231.3

 
199.8

Total inventories
$
885.3

 
$
806.9


NOTE 6 – FAIR VALUE MEASUREMENTS

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):
 
 
September 29, 2018
 
December 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
 
$
7.0

 
$

 
$

 
$
17.0

 
$

 
$

Foreign currency forward contracts
 

 
3.3

 

 

 
6.3

 

Funds associated with Israeli severance liability
 

 
14.2

 

 

 
16.3

 

Royalty Pharma contingent milestone payments
 

 

 
200.4

 

 

 
134.5

Total assets
 
$
7.0

 
$
17.5

 
$
200.4

 
$
17.0

 
$
22.6

 
$
134.5

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$

 
$
6.6

 
$

 
$

 
$
3.8

 
$

Contingent consideration
 

 

 
16.4

 

 

 
22.0

Total liabilities
 
$

 
$
6.6

 
$
16.4

 
$

 
$
3.8

 
$
22.0

 
 
 
 
 
 
 
 
 
 
 
 
 
Measured at fair value on a non-recurring basis:
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill(1)
 
$

 
$

 
$
42.2

 
$

 
$

 
$

Indefinite-lived intangible assets(2)
 

 

 
10.5

 

 

 

Definite-lived intangible assets(3)
 

 

 
22.4

 

 

 
11.5

Total assets
 
$

 
$

 
$
75.1

 
$

 
$

 
$
11.5



15

Perrigo Company plc - Item 1
Note 6


(1)
As of September 29, 2018, goodwill with a carrying amount of $178.9 million was written down to a fair value of $42.2 million.
(2)
As of September 29, 2018, indefinite-lived intangible assets with a carrying amount of $46.7 million were written down to a fair value of $10.5 million.
(3)
As of September 29, 2018, definite-lived intangible assets with a carrying amount of $71.3 million were written down to a fair value of $22.4 million. As of December 31, 2017, definite-lived intangible assets with a carrying amount of $31.2 million were written down to a fair value of $11.5 million.

There were no transfers among Level 1, 2, and 3 during the three and nine months ended September 29, 2018 or the year ended December 31, 2017.

Financial Assets

On March 27, 2017, we announced the completed divestment of our Tysabri® financial asset to Royalty Pharma for up to $2.85 billion, consisting of $2.2 billion in cash and $250.0 million and $400.0 million in milestone payments if the royalties on global net sales of Tysabri® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we transferred the entire financial asset to Royalty Pharma and recorded a $17.1 million gain during the three months ended April 1, 2017. We elected to account for the contingent milestone payments using the fair value option method, and these were recorded at an estimated fair value of $184.5 million as of April 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.

Royalty Pharma Contingent Milestone Payments

We valued our contingent milestone payments from Royalty Pharma 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 until the contingent milestones are resolved. Volatility and the estimated fair value of the milestones have a positive relationship such that higher volatility translates to a higher estimated fair value of the contingent milestone payments. In the valuation of contingent milestone payments performed, we assumed volatility of 30.0% as of both September 29, 2018 and September 30, 2017 and a rate of return of 8.07% and 8.06% as of September 29, 2018 and September 30, 2017, respectively. 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.

The fair value of the Royalty Pharma contingent milestone payments increased by $74.9 million during the three months ended September 29, 2018. This increase included $67.7 million and $7.2 million increases in the fair value of the 2018 and 2020 contingent milestone payments, respectively. During the nine months ended September 29, 2018, the fair value of the contingent milestone payments increased by $65.9 million. This increase included $53.2 million and $12.7 million increases in the fair value of the 2018 and 2020 contingent milestone payments, respectively. The net changes in the fair value of the contingent milestone payments were driven by higher projected global net sales of Tysabri® and the estimated probability of achieving the respective earn-outs as of September 29, 2018.

The fair value of the Royalty Pharma contingent milestone payments decreased $2.9 million and $42.1 million during the three and nine months ended September 30, 2017, respectively, as a result of a decrease in the estimated Tysabri® revenues due to the launch of Ocrevus® in the U.S. market late in the first quarter of 2017.

Payment of the contingent milestone payments is dependent on actual global net sales of Tysabri® in 2018 and 2020. Of the $200.4 million of estimated fair value contingent milestone payments as of September 29, 2018, $133.0 million and $67.4 million relates to the 2018 and 2020 contingent milestone payments, respectively. If Tysabri® global net sales do not meet the prescribed threshold in 2018, we will write off the $133.0 million asset as an expense. If the prescribed threshold is exceeded, we will increase the asset to $250.0 million and recognize income of $117.0 million in Change in financial assets on the Condensed Consolidated Statements of Operations. If Tysabri® global net sales do not meet the prescribed threshold in 2020, we will write off the $67.4 million asset as an expense. If the prescribed threshold is exceeded, we will increase the asset to $400.0 million and recognize income of $332.6 million in Change in financial assets on the Condensed Consolidated Statements of Operations.

Global Tysabri® net sales need to exceed $1.85 billion and $1.95 billion in 2018 and 2020, respectively, in order for Royalty Pharma to receive the level of royalties needed to trigger the milestone payments owed to us.


16

Perrigo Company plc - Item 1
Note 6


The table below presents a reconciliation for the Royalty Pharma contingent milestone payments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in millions). Change in fair value in the table was recorded in Change in financial assets on the Condensed Consolidated Statements of Operations.
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Royalty Pharma Contingent Milestone Payments
 
 
 
 
 
 
 
Beginning balance
$
125.5

 
$
145.8

 
$
134.5

 
$

Additions

 

 

 
184.5

Foreign currency effect

 
0.3

 

 
0.8

Change in fair value
74.9

 
(2.9
)
 
65.9

 
(42.1
)
Ending balance
$
200.4

 
$
143.2

 
$
200.4

 
$
143.2


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 (refer to Note 4) and recorded a corresponding gain of $17.0 million during the nine months ended September 30, 2017. The liability decrease related to a reduction of the probability of achievement assumptions and anticipated cash flows.

The table below presents a reconciliation for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in millions). Net realized losses in the table were recorded in Other operating expense (income) on the Condensed Consolidated Statements of Operations.
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Contingent Consideration
 
 
 
 
 
 
 
Beginning balance
$
16.2

 
$
49.7

 
$
22.0

 
$
69.9

Net realized (gains) losses
1.1

 
(2.9
)
 
(0.3
)
 
(18.5
)
Currency translation adjustments
(0.3
)
 
0.2

 
(0.3
)
 
1.5

Settlements
(0.6
)
 
(2.1
)
 
(5.0
)
 
(8.0
)
Ending balance
$
16.4

 
$
44.9

 
$
16.4

 
$
44.9


Goodwill and Indefinite-Lived Intangible Assets

Animal Health

            When determining the fair value of our animal health reporting unit, we utilized a combination of comparable company market and discounted cash flow techniques. In our comparable company market approach, we considered observable market information and transactions for companies that we deemed to be of a comparable nature, scope, and size of animal health (Level 2 inputs). Our cash flow projections included revenue assumptions related to new products, product line extensions, and existing products, plus gross margin, advertising and promotion, and other operating expenses based on the growth plans (Level 3 inputs). In our discounted cash flow analysis, we utilized projected sales growth rate and discount rate assumptions of 2.5% and 9.75%, respectively.  The discount rate correlates with the required investment return and risk that we believe market participants would apply to the projected growth. In addition, we burdened projected free cash flows with the capital spending deemed necessary to support the cash flows and applied the jurisdictional tax rate of 22.8%. We weighted indications of fair value resulting from the market approach and present value techniques, considering the reasonableness of the range of measurements and the point within the range that we determined was most representative of fair market conditions (refer to Note 4). 


17

Perrigo Company plc - Item 1
Note 6


When assessing our animal health indefinite-lived intangible asset, we utilized a multi-period excess earnings method ("MPEEM") to determine the fair value of the intangible asset. Our cash flow projections included revenue assumptions related to new products, product line extensions, and existing products. We utilized long-term growth rate and discount rate assumptions of (0.3)% and 9.75%, respectively, and we applied a jurisdictional tax rate of 22.8% (refer to Note 4). 

Definite-Lived Intangible Assets

When assessing our animal health definite-lived assets for impairment, we utilized a combination of MPEEM and relief from royalty methods to determine the fair values of definite-lived assets within the asset group. The projected financial information, inputs, and assumptions utilized were consistent with those utilized in the goodwill discounted cash flow analysis described above (refer to Note 4).

Fixed Rate Long-term Debt    

Our fixed rate long-term debt consisted of the following (in millions):
 
September 29, 2018
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 1
 
Level 2
Public Bonds
 
 
 
 
 
 
 
Carrying Value (excluding discount)
$
2,600.0

 
 
 
$
2,600.0

 
 
Fair value
$
2,513.9

 
 
 
$
2,650.8

 
 
 
 
 
 
 
 
 
 
Retail bond and private placement note
 
 
 
 
 
 
 
Carrying value (excluding premium)
 
 
$
296.1

 
 
 
$
306.0

Fair value
 
 
$
321.1

 
 
 
$
342.1


The fair values of our public bonds for all periods were based on quoted market prices. The fair values of our retail bond and private placement note for all periods were based on interest rates offered for borrowings of a similar nature and remaining maturities.

The carrying amounts of our other financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, short-term debt and variable rate long-term debt, approximate their fair value.

NOTE 7 – INVESTMENTS

The following table summarizes the measurement category, balance sheet location, and balances of our equity securities (in millions):
Measurement Category
 
Balance Sheet Location
 
September 29,
2018
 
December 31,
2017(2)
Fair value method
 
Prepaid expenses and other current assets
 
$
7.0

 
$
17.0

Fair value method(1)
 
Other non-current assets
 
$
4.8

 
$
6.3

Equity method
 
Other non-current assets
 
$
14.1

 
$
4.9


(1) The September 29, 2018 equity securities are measured at fair value using the Net Asset Value practical expedient.
(2) The December 31, 2017 balances presented reflect historical recognition and measurement investment categories existing prior to the adoption of ASU 2016-01, which include available for sale and cost method securities.


18

Perrigo Company plc - Item 1
Note 7


The following table summarizes the expense (income) recognized in earnings of our equity securities (in millions):
 
 
 
 
Three Months Ended
 
Nine Months Ended
Measurement Category
 
Income Statement Location
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Fair value method
 
Other (income) expense, net
 
$
0.9

 
$

 
$
11.6

 
$

Equity method
 
Other (income) expense, net
 
$
(1.0
)
 
$
0.1

 
$
(1.6
)
 
$
(0.2
)

On January 1, 2018, as a result of the adoption of ASU 2016-01 Financial Instruments - Recognition and Measurement of Financial Assets and Liabilities ("ASU 2016-01"), we made a $1.0 million cumulative-effect adjustment to Retained earnings (accumulated deficit) net of tax that consisted of net unrealized losses on previously classified available for sale securities from Other comprehensive income ("OCI").

During the nine months ended September 29, 2018, we increased our equity method investment in Zibo Xinhua - Perrigo Pharmaceutical Company Limited by $7.5 million.

NOTE 8 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     All of our designated derivatives were classified as cash flow hedges as of September 29, 2018 and December 31, 2017.

Interest Rate Swaps

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 9). As a result of these senior note repayments, 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 (income) expense, net, during the three months ended July 1, 2017 for the amount remaining in OCI.

Foreign Currency Forward Contracts

The total notional amount for our foreign currency forward contracts was $598.4 million and $592.3 million as of September 29, 2018 and December 31, 2017, 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.

The balance sheet location and gross fair value of our outstanding derivative instruments was as follows (in millions):
 
Asset Derivatives
 
Balance Sheet Location
 
Fair Value
 
 
 
September 29,
2018
 
December 31,
2017
Designated derivatives:
 
 
 
 
 
Foreign currency forward contracts
Prepaid expenses and other current assets
 
$
1.0

 
$
4.1

Non-designated derivatives:
 
 
 
 
 
Foreign currency forward contracts
Prepaid expenses and other current assets
 
$
2.3

 
$
2.2


19

Perrigo Company plc - Item 1
Note 8


 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
 
 
September 29,
2018
 
December 31,
2017
Designated derivatives:
 
 
 
 
 
Foreign currency forward contracts
Accrued liabilities
 
$
5.2

 
$
1.4

Non-designated derivatives:
 
 
 
 
 
Foreign currency forward contracts
Accrued liabilities
 
$
1.4

 
$
2.4


The gain (loss) recorded in OCI for the effective portion of our designated cash flow hedges was as follows:
 
 
Amount of Gain/(Loss) Recorded in OCI
(Effective Portion)
 
 
Three Months Ended
 
Nine Months Ended
Designated Cash Flow Hedges
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Foreign currency forward contracts
 
$

 
$
1.1

 
$
(4.2
)
 
$
6.3


The gain (loss) reclassified from Accumulated other comprehensive income ("AOCI") into earnings for the effective portion of our designated cash flow hedges was as follows (in millions):
 
 
 
 
Amount of Gain/(Loss) Reclassified from AOCI into Earnings (Effective Portion)
 
 
 
 
Three Months Ended
 
Nine Months Ended
Designated Cash Flow Hedges
 
Income Statement Location
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Interest rate swap agreements
 
Interest expense, net
 
$
(0.4
)
 
$
(0.4
)
 
$
(1.3
)
 
$
(1.7
)
 
 
Other (income) expense, net
 

 

 

 
(5.9
)
Foreign currency forward contracts
 
Net sales
 
0.4

 

 
0.4

 
0.9

 
 
Cost of sales
 
(0.3
)
 
1.8

 
3.5

 
3.5

 
 
Interest expense, net
 
(1.1
)
 
(0.7
)
 
(3.1
)
 
(1.8
)
 
 
Other (income) expense, net
 
2.5

 
(1.2
)
 
2.0

 
(1.7
)
Total
 
 
 
$
1.1

 
$
(0.5
)
 
$
1.5

 
$
(6.7
)

The net of tax amount expected to be reclassified out of AOCI into earnings during the next 12 months is a $5.2 million loss.

The gain (loss) recognized in earnings for the ineffective portion of our designated cash flow hedges was as follows (in millions):
 
 
 
Amount of Gain/(Loss) Recognized in Earnings
(Ineffective Portion)
 
 
 
Three Months Ended
Nine Months Ended
Designated Cash Flow Hedges
 
Income Statement
Location
 
September 30,
2017
 
September 30,
2017
Foreign currency forward contracts
 
Net sales
 
0.2

 
0.1

 
 
Cost of sales
 
0.1

 
0.1

Foreign currency forward contracts
 
Other (income) expense, net
 

 
1.0

Total
 
 
 
$
0.3

 
$
1.2


20

Perrigo Company plc - Item 1
Note 8



The effects of our non-designated derivatives on the Condensed Consolidated Statements of Operations were as follows (in millions):
 
 
 
 
Amount of Gain/(Loss) Recognized against Earnings
 
 
 
 
Three Months Ended
 
Nine Months Ended
Non-Designated Derivatives
 
Income Statement Location
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Foreign currency forward contracts
 
Other (income) expense, net
 
$
(2.0
)
 
$
10.1

 
$
6.6

 
$
(3.8
)
 
 
Interest expense, net
 
(0.2
)
 
(1.8
)
 
(0.9
)
 
(2.9
)
Total
 
 
 
$
(2.2
)
 
$
8.3

 
$
5.7

 
$
(6.7
)

NOTE 9 – INDEBTEDNESS

Total borrowings outstanding are summarized as follows (in millions):
 
 
 
 
 
September 29,
2018
 
December 31,
2017
Term loans
 
 
 
 
 
 
2018 Term loan due March 8, 2020(1)
 
 
$
368.3

 
$

 
2014 Term loan due December 5, 2019(1)
 
 

 
420.0

 
Total term loans
 
 
368.3

 
420.0

Notes and Bonds
 
 
 
 
 
 
Coupon
Due
 
 
 
 
 
 
5.000%
May 23, 2019(1)
 
 
139.4

 
144.0

 
3.500%
March 15, 2021
 
 
280.4

 
280.4

 
3.500%
December 15, 2021
 
 
309.6

 
309.6

 
5.105%
July 19, 2023(1)
 
 
156.7

 
162.0

 
4.000%
November 15, 2023
 
 
215.6

 
215.6

 
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

 
90.5

 
4.900%
December 15, 2044
 
 
303.9

 
303.9

 
Total notes and bonds
 
 
2,896.1

 
2,906.0

Other financing
3.7

 
11.7

Unamortized premium (discount), net
14.4

 
21.4

Deferred financing fees
(17.3
)
 
(17.9
)
Total borrowings outstanding
3,265.2

 
3,341.2

 
Current indebtedness
(194.2
)
 
(70.4
)
Total long-term debt less current portion
$
3,071.0

 
$
3,270.8


(1) Debt denominated in euros subject to fluctuations in the euro-to-U.S. dollar exchange rate.
    
We are in compliance with all covenants under our debt agreements as of September 29, 2018.

Revolving Credit Agreements

On December 5, 2014, Perrigo Finance entered into a $600.0 million revolving credit agreement, which increased to $1.0 billion on March 30, 2015 (the "2014 Revolver"). On March 8, 2018, we terminated the 2014 Revolver and entered into a $1.0 billion revolving credit agreement maturing on March 8, 2023 (the "2018 Revolver"). There were no borrowings outstanding under the 2018 Revolver as of September 29, 2018 or under the 2014 Revolver as of December 31, 2017.


21

Perrigo Company plc - Item 1
Note 9



Term Loans

On December 5, 2014, Perrigo Finance entered into a term loan agreement consisting of a €500.0 million ($614.3 million) tranche, maturing December 5, 2019. On March 8, 2018, we refinanced the €350.0 million outstanding under the term loan with the proceeds of a new €350.0 million ($431.0 million) term loan, maturing March 8, 2020. In addition, as a result of the refinancing during the three months ended March 31, 2018, we recorded a loss of $0.5 million, consisting of the write-off of deferred financing fees in Loss on extinguishment of debt on the Condensed Consolidated Statements of Operations. During the nine months ended September 29, 2018, we made $39.0 million in scheduled principal payments.

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 borrowings outstanding at September 29, 2018. The balance outstanding under the overdraft facilities was $6.9 million at December 31, 2017.

Debt Extinguishment

As a result of early redemption and tender offer transactions during the three months ended July 1, 2017, we recorded a loss of $135.2 million in Loss on extinguishment of debt on our Condensed Consolidated Statements of Operations (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 10 – 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
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
(67.5
)
 
$
44.5

 
$
49.6

 
$
46.4

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding for basic EPS
137.4

 
141.3

 
138.5

 
142.5

Dilutive effect of share-based awards*

 
0.4

 
0.5

 
0.3

Weighted average shares outstanding for diluted EPS
137.4

 
141.7

 
139.0

 
142.8

 
 
 
 
 
 
 
 
Anti-dilutive share-based awards excluded from computation of diluted EPS

 
1.0

 
1.2

 
0.8


* In the period of a net loss, diluted shares equal basic shares.