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10-K: PERRIGO CO PLC

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(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis ("MD&A") is intended to provide readers with an understanding of our financial condition, results of operations, and cash flows by focusing on changes in certain key measures from year to year. This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying Notes found in Item 8 of this report. See also " Cautionary Note Regarding Forward-Looking Statements ."

EXECUTIVE OVERVIEW

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.

Our vision is to make lives better by bringing Quality, Affordable Self-Care Products that consumers trust everywhere they are sold. We are a leading provider of over-the-counter ("OTC") health and wellness solutions that enhance individual well-being by empowering consumers to proactively prevent or treat conditions that can be self-managed. We are also a leading producer of generic prescription pharmaceutical topical products including creams, lotions, gels and nasal sprays.

This vision is designed to support our global reach as we shift our focus to our consumer branded and store brand portfolio and embrace the opportunities for growth we see ahead of us, while remaining loyal to our heritage. Our vision represents an evolution from healthcare to self-care, which takes advantage of a massive global trend and opens up a large number of adjacent growth opportunities. We define self-care as not just treating disease or helping individuals feel better after using a product, but also maintaining and enhancing their overall health and wellness. Consistent with our vision, in 2019 Perrigo's management and board of directors launched a three-year strategy to transform the Company into a consumer self-care leader. Significant progress has been made on our transformation journey towards achieving the major components of management's transformation strategy, which consists of: reconfiguring the portfolio, delivering on base plans, creating repeatable platforms for growth, driving organizational effectiveness and capabilities, funding growth sustainably, allocating capital, and delivering consistent and sustainable results in line with consumer-packaged goods peers.

Our fiscal year begins on January 1 and ends on December 31 of each year. We end our quarterly accounting periods on the Saturday closest to the end of the calendar quarter, with the fourth quarter ending on December 31 of each year.

Our Segments

Our reporting and operating segments are as follows:

Consumer Self-Care Americas ("CSCA") comprises our consumer self-care business (OTC, infant formula, and oral self-care categories, our divested animal health category, and contract manufacturing) in the U.S., Mexico and Canada.

Our segments reflect the way in which our management makes operating decisions, allocates resources and manages the growth and profitability of the Company.

For information on each segment, our business environment, and competitive landscape, refer to Item 1. Business . For results by segment and geographic locations see below " Segment Results " and Item 8. Note 2 and Note 20 .

Perrigo Company plc - Item 7 Executive Overview

Strategy

Our objective is to grow our business by responsibly bringing our self-care vision to life. We aim to accomplish this by leveraging our global infrastructure to expand our product offerings, thereby providing new innovative products and product line extensions to existing consumers and servicing new consumers through entry into adjacent product categories, new geographies and new channels of distribution. Critical to this strategy is investing in and continually improving all aspects of our five strategic pillars which we call the Perrigo Advantage:

High quality;

while remaining true to our three core values, Integrity - we do what is right; Respect - we demonstrate the value we hold for one another; and Responsibility - we hold ourselves accountable for our actions. While delivering on our strategy, we remain committed to our corporate responsibility and sustainability programs, which include environmental and social initiatives, as summarized in Item 1. Business - Corporate Social Responsibility .

We utilize shared services and Research and Development ("R&D") centers of excellence in order to help ensure consistency in our processes around the world, and to maintain focus on our five strategic pillars.

We continually reinvest in our R&D pipeline and work with partners as necessary to strive to be first-to-market with new products. Our organic growth has been driven by successful new product launches across all our segments and expansion in new channels like e-commerce. We expect to continue to grow inorganically through expansion into adjacent products, product categories, and channels, as well as potentially through entry into new geographic markets. We evaluate potential acquisition targets using an internally developed 12-point scale that is weighted towards accretive revenue growth which is highly correlated with increases in shareholder value.

Competitive Advantage

Our consumer-facing business model combines the unique competencies of a fast-moving consumer goods company and a pharmaceutical manufacturing company with the supply chain breadth necessary to support customers in the markets we serve. These durable business model competencies align with our five strategic pillars and provide us a competitive advantage in the marketplace. We fully integrate quality in our operational systems across all products. Our ability to manage our supply chain complexity across multiple dosage forms, formulations, and stock-keeping units, as well as acquisitions, integrations, and hundreds of global partners provides value to our customers. Product development capacity and life cycle management are at the core of our operational investments. Globally we have 21 manufacturing plants that are all in good regulatory compliance standing and have systems and structures in place to guide our continued success. Our leadership team is fully engaged in aligning all our metrics and objectives around sustainable compliance with industry associations and regulatory agencies.

Among other things, we believe the following give us a competitive advantage and provide value to our customers:

Leadership in first-to-market product development and product life cycle management;

Recent Highlights

Year Ended December 31, 2020

On March 1, 2021, we announced a definitive agreement to sell our generic RX Pharmaceuticals business to Altaris Capital Partners, LLC for total consideration of $1.55 billion, including $1.5 billion in cash. As part of the consideration, Altaris Capital Partners, LLC will also assume more than $50.0 million in potential R&D milestone payments and contingent purchase obligations with third-party Rx partners. The transaction is subject to antitrust and other customary closing conditions and is expected to close by the end of the third quarter of 2021. The sale of the generic RX Pharmaceuticals business is an important step in our transformation plan and will establish Perrigo as a pure-play consumer self-care company. The generic RX Pharmaceuticals business will be classified as discontinued operations starting in the first quarter of 2021.

On March 1, 2021, CEO & President Murray S. Kessler signed a three-year contract extension until October 8, 2024 to complete the Company's self-care transformation. See Item 9B. Other Information for additional details.

During the year ended December 31, 2020, we completed strategic acquisitions and a divestiture that advanced our self-care transformation. We acquired the oral care assets of High Ridge Brands ("Dr. Fresh"), three Eastern European OTC dermatological brands from Sanofi, entered a strategic investment in and long-term supply agreement with Kazmira LLC, and divested our U.K.- based Rosemont Pharmaceuticals business. For additional details on these and other asset acquisitions and the divestiture refer to the "Recent Trends and Developments" discussion in the CSCA and CSCI sections below.

During the year ended December 31, 2020, we repurchased $164.2 million worth of shares at an average purchase price of $48.28 as part of our authorized share repurchase plan.

Effective December 15, 2020, our board of directors appointed Orlando D. Ashford to serve as a director of the Company and a member of its Remuneration Committee.

On October 27, 2020, we announced that we will be establishing a new North American Corporate Headquarters in Grand Rapids, Michigan. We signed an agreement to lease space located in Michigan State University's Grand Rapids Innovation Park and expect the building to be ready for occupancy in mid-2022. This new location will help us support cross-functional collaboration and position us to routinely interact with a statewide education and research network within the Grand Rapids Medical Mile. This expansion is consistent with our self-care transformation and will advance our self-care vision.

Effective July 29, 2020, our board of directors appointed Katherine C. Doyle to serve as a director of the Company and a member of its Audit Committee.

On June 19, 2020, we, through our subsidiary, issued $750.0 million in aggregate principal amount of 3.150% Senior Notes due 2030 (the "2020 Notes") and received net proceeds of $737.1 million after fees and market discount. On July 6, 2020, we used a portion of the proceeds to fund the redemption of $280.4 million of our 3.500% Senior Notes due March 15, 2021 and $309.6 million of our 3.500% Senior Notes due December 15, 2021.

Year Ended December 31, 2019

On July 8, 2019, we completed the sale of our animal health business to PetIQ for cash consideration of $182.5 million, which resulted in a pre-tax gain of $71.7 million recorded in Other (income) expense, net on the Consolidated Statements of Operations.

Perrigo Company plc - Item 7 Executive Overview

On July 1, 2019, we acquired 100% of the outstanding equity interest in Ranir Global Holdings, LLC ("Ranir"), a privately-held company. After post-closing adjustments, the total cash consideration paid was $747.7 million, net of $11.5 million cash acquired. Ranir is headquartered in Grand Rapids, Michigan, and is a leading global supplier of private label and branded oral self-care products. This transaction advanced our transformation to a consumer-focused, self-care company and enhanced our position as a global leader in consumer self-care solutions. Ranir operations are reported in our CSCA and CSCI segments (refer to Item 8. Note 3).

Impact of COVID-19 Pandemic

We have been impacted by the coronavirus (COVID-19) global pandemic and the responses by government entities to combat the virus. We currently continue to operate in all our jurisdictions and are complying with the rules and guidelines prescribed in each jurisdiction. We are closely monitoring the impact of COVID-19 on all aspects of our business in all our global locations. Our first priority has been, and will continue to be, the safety of our employees who continue to come to work and are dedicated to keeping our essential products flowing into the market. We have taken extra precautions at our facilities, to help ensure the health and safety of our employees, that are in line with guidance from global and local health authorities. Among other precautions implemented, we have generally restricted access to our production facilities worldwide to essential employees only and permitted a limited number of nonessential employees into other facilities with a strict approval process, implemented a multi-step pre-screening access process before an employee can enter a facility, communicated regularly with employees and provided education and implemented controls related to physical distancing and hygiene measures, implemented remote work arrangements where appropriate, restricted business travel, and prioritized production of essential products for several months following the initial outbreak. To date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting, and disclosure controls and procedures.

Both the outbreak of the disease and the actions to slow its spread have had an adverse impact on our operations by, among other things, increasing absenteeism, affecting the supply of raw materials and third party supplied finished goods, and preventing many of our employees from coming to work. We have responded to such impacts by, among other things, implementing protocols to protect the health of factory workers, adjusting production schedules, and seeking alternate suppliers where available, and so far, most of our facilities have continued to produce at high levels despite these challenges. However, a number of jurisdictions that relaxed such restrictions, or have experienced limited public adherence with suggested safety measures, have experienced new surges in COVID-19 cases. Many of these jurisdictions continue to contemplate or implement new or renewed restrictions. In addition, as conditions worldwide continue to evolve, there is uncertainty about the timing of widespread availability and acceptance of vaccines. As such, if the pandemic continues or intensifies, it is possible that these or other challenges may begin having a larger impact on our operations. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has adversely impacted, and may continue to adversely impact our stock price and our ability to access capital markets. The situation surrounding COVID-19 remains fluid, and we are actively managing our response and assessing potential impacts to our financial condition, supply chains and other operations, employees, results of operations, consumer demand for our products, and our ability to access capital. The magnitude of any such adverse impact cannot currently be determined due to a number of uncertainties surrounding COVID-19 (refer to Item 1A. Risk Factors - Operational Risks for related risks).

During the year ended December 31, 2020, all of our segments experienced product demand shifts that caused net sales to increase in certain product categories and decrease in other categories. We attribute these demand shifts to consumer and customer behavior surrounding the COVID-19 pandemic and the movement and social distancing restrictions put in place to combat spreading of the virus, such as travel bans, country lock-downs, and school closings as well as mask mandates. We also believe that the social distancing measures and mask mandates contributed to the decline in total cough and cold illnesses during the fourth quarter of 2020, which resulted in a decline of net sales for cough and cold products in our upper respiratory category. We currently expect this impact to continue in the first half of 2021.

Also, during the year ended December 31, 2020, we had incremental operating costs of approximately $18.0 million related to COVID-19, primarily due to the precautions implemented to keep our employees safe and properly rewarded during the pandemic as well as increased material costs. We expect that similar costs will continue into calendar year 2021. We also experienced a decrease in our effective tax rate due to additional interest and depreciation deductions provided for in the Coronavirus Aid, Relief and Economic Security Act (the "CARES

Act") enacted on March 27, 2020 resulting in a reduction of income tax expense by approximately $36.6 million during the year ended December 31, 2020. Given our financial strength, we expect to continue to maintain sufficient liquidity as we manage through the pandemic.

Moving forward, whether the consumer and customer behavior surrounding COVID-19 that we have experienced in our segments will continue or change and if the incremental operating costs will continue or change is uncertain and will likely depend on the duration and severity of the COVID-19 pandemic, including if new strains of the virus become more prevalent, contagious or harmful, and each individual country's response to the pandemic. These factors may continue to increase or decrease consumer and/or customer demand for certain products within all our business segments. In addition, these dynamics may continue or change now that COVID-19 vaccines have been authorized for emergency use around the world with vaccination programs commencing at various rates. The impact of these vaccination efforts on the evolution of the pandemic globally remains uncertain at this time.

RESULTS OF OPERATIONS







        CONSOLIDATED
        Consolidated Financial Results
                                                                     Year Ended
                                                 December 31,       December 31,       December 31,
            (in millions, except percentages)        2020               2019               2018
            Net sales                           $    5,063.3       $    4,837.4       $    4,731.7
            Gross profit                        $    1,815.2       $    1,773.3       $    1,831.5
            Gross profit %                              35.9  %            36.7  %            38.7  %
            Operating income                    $      115.4       $      204.8       $      236.5
            Operating income %                           2.3  %             4.2  %             5.0  %
        


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Year Ended December 31, 2020 vs. December 31, 2019

Net sales increased $225.9 million, or 5%, due to:

products, $31.2 million for the establishment of the estimated Albuterol recall reserve, and lower prescription volumes from the COVID-19 pandemic related reductions in doctor visits.

Operating income decreased $89.4 million, or 44%, due to:

$41.9 million increase in gross profit due primarily to increased net sales as described above, which was partially offset by the net charge of $22.5 million from the Albuterol recall, infant nutrition operational inefficiencies, increased labor and overhead costs associated with the COVID-19 pandemic, and an increase in commodity costs for a certain OTC brand. Gross profit as a percentage of net sales decreased 80 basis points due primarily to the gross profit factors discussed above, unfavorable product mix mainly due to the oral self-care acquisitions, and normal pricing pressures, partially offset by the absence of the Ranitidine retail market withdrawal included in the prior year; more than offset by

$131.3 million increase in operating expenses due primarily to:

Year Ended December 31, 2019 vs. December 31, 2018

Net sales increased $105.7 million, or 2%, due to:

$9.2 million decrease due to the retail market withdrawal of Ranitidine products.

Operating income decreased $31.7 million, or 13%, due to:

$58.2 million decrease in gross profit, or a 200 basis point decrease in gross profit as a percentage of net sales, due primarily to normal levels of competition-driven pricing pressure in our RX segment, the retail market withdrawal of Ranitidine products and unfavorable product mix; partially offset by

$26.5 million decrease in operating expenses due primarily to:

Recent Developments

Internal Revenue Service Audits of Perrigo Company, a U.S. Subsidiary

We are engaged in a series of tax disputes in the U.S. relating primarily to transfer pricing adjustments including income in connection with the purchase, distribution, and sale of store-brand OTC pharmaceutical products in the United States, including the heartburn medication omeprazole. On August 27, 2014, we received a statutory notice of deficiency from the IRS relating to our fiscal . . .

Mar 01, 2021

COMTEX_381948748/2041/2021-03-01T15:56:29

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