2014 Q3 10Q

 
 
 
 
 
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: March 29, 2014
OR
o
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 6040031
(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, and (2) has been subject to such filing requirements for the past 90 days.    YES T    NO   £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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  T   NO  £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
T
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    £ YES    T NO
As of May 2, 2014, there were 133,799,876 Ordinary Shares outstanding.
 
 
 
 
 

Table of Contents

PERRIGO COMPANY PLC
FORM 10-Q
INDEX
 
 
PAGE
NUMBER
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

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 the Company’s future financial performance and involve known and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance or achievements of the Company or its industry to be materially different from those expressed or implied by any forward-looking statements. In particular, statements about the Company’s 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,” “predict,” “potential” or the negative of those terms or other comparable terminology.

Please see Item 1A of the Form 10-K of Perrigo Company, of which the Company is the successor registrant, for the year ended June 29, 2013 and Part II, Item 1A of this Form 10-Q for a discussion of certain important risk factors that relate to forward-looking statements contained in this report. The Company has based these forward-looking statements on its current expectations, assumptions, estimates and projections. While the Company believes 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 the Company’s control. These and other important factors 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, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



1
Table of Contents

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
 
March 29,
2014
 
March 30,
2013
 
March 29,
2014
 
March 30,
2013
Net sales
$
1,004.2

 
$
919.8

 
$
2,916.6

 
$
2,572.6

Cost of sales
689.2

 
588.4

 
1,884.7

 
1,648.8

Gross profit
315.0

 
331.4

 
1,031.9

 
923.8

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Distribution
13.9

 
12.6

 
41.2

 
35.0

Research and development
44.7

 
28.5

 
114.5

 
84.2

Selling
52.5

 
49.1

 
150.0

 
129.6

Administration
81.1

 
62.6

 
314.2

 
176.0

Write-off of in-process research and development
—

 
—

 
6.0

 
—

Restructuring
19.5

 
—

 
36.5

 
—

              Total operating expenses
211.7

 
152.8

 
662.4

 
424.8

 
 
 
 
 
 
 
 
Operating income
103.3

 
178.6

 
369.5

 
499.0

 
 
 
 
 
 
 
 
Interest, net
26.2

 
16.1

 
77.3

 
47.2

Other expense, net
1.7

 
0.8

 
6.8

 
0.8

Loss on sales of investments
12.7

 
1.6

 
12.7

 
4.7

Loss on extinguishment of debt
—

 
—

 
165.8

 
—

Income before income taxes
62.7

 
160.1

 
106.9

 
446.3

Income tax expense
14.6

 
48.2

 
33.5

 
122.8

Net income
$
48.1

 
$
111.9

 
$
73.4

 
$
323.5

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic earnings per share
$
0.36

 
$
1.19

 
$
0.67

 
$
3.45

Diluted earnings per share
$
0.36

 
$
1.18

 
$
0.67

 
$
3.42

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
133.7

 
94.0

 
108.9

 
93.8

Diluted
134.3

 
94.5

 
109.4

 
94.4

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.105

 
$
0.09

 
$
0.285

 
$
0.26

  
See accompanying Notes to Condensed Consolidated Financial Statements.

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PERRIGO COMPANY PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
March 29, 2014
 
March 30, 2013
 
March 29,
2014
 
March 30,
2013
Net income
$
48.1

 
$
111.9

 
$
73.4

 
$
323.5

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in fair value of derivative financial instruments, net of tax
(1.0
)
 
1.6

 
(11.6
)
 
8.3

Foreign currency translation adjustments
6.2

 
4.8

 
59.3

 
38.2

Change in fair value of investment securities, net of tax
10.5

 
0.3

 
5.7

 
1.3

Post-retirement and pension liability adjustments, net of tax
—

 
—

 
(0.1
)
 
—

Other comprehensive income, net of tax
15.7

 
6.7

 
53.3

 
47.8

Comprehensive income
$
63.8

 
$
118.6

 
$
126.7

 
$
371.3

See accompanying Notes to Condensed Consolidated Financial Statements.


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PERRIGO COMPANY PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(unaudited)
 
March 29,
2014
 
June 29,
2013
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
609.4

 
$
779.9

Investment securities
7.7

 
—

Accounts receivable, net of allowance for doubtful accounts of $2.8 million and $2.1 million, respectively
793.1

 
651.9

Inventories
693.5

 
703.9

Current deferred income taxes
66.1

 
47.1

Income taxes refundable
74.4

 
6.1

Prepaid expenses and other current assets
60.2

 
48.0

Total current assets
2,304.4

 
2,236.9

Property and equipment
1,407.5

 
1,290.4

Less accumulated depreciation
(666.6
)
 
(609.0
)
 
740.9

 
681.4

Goodwill and other indefinite-lived intangible assets
3,276.1

 
1,174.1

Equity method investments
60.6

 
4.4

Other intangible assets, net
7,181.4

 
1,157.6

Non-current deferred income taxes
23.8

 
20.3

Other non-current assets
155.5

 
76.1

 
$
13,742.7

 
$
5,350.8

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
325.3

 
$
382.0

Short-term debt
—

 
5.0

Payroll and related taxes
103.5

 
82.1

Accrued customer programs
219.7

 
131.7

Accrued liabilities
152.5

 
95.6

Accrued income taxes
10.2

 
11.6

Current deferred income taxes
0.1

 
0.2

Current portion of long-term debt
141.7

 
41.2

Total current liabilities
953.0

 
749.4

Non-current liabilities
 
 
 
Long-term debt, less current portion
3,125.5

 
1,927.8

Non-current deferred income taxes
830.4

 
127.8

Other non-current liabilities
275.1

 
213.2

Total non-current liabilities
4,231.0

 
2,268.8

Shareholders’ Equity
 
 
 
Controlling interest:
 
 
 
Preferred shares, $0.0001 par value, 10 million shares authorized
—

 
—

Ordinary shares, €0.001 par value, 10 billion shares authorized
6,670.5

 
538.5

Accumulated other comprehensive income
130.3

 
77.0

Retained earnings
1,757.3

 
1,715.9

 
8,558.1

 
2,331.4

Noncontrolling interest
0.6

 
1.2

Total shareholders’ equity
8,558.7

 
2,332.6

 
$
13,742.7

 
$
5,350.8

Supplemental Disclosures of Balance Sheet Information
 
 
 
Preferred shares, issued and outstanding
—

 
—

Ordinary shares, issued and outstanding
133.8

 
94.1


See accompanying Notes to Condensed Consolidated Financial Statements.

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PERRIGO COMPANY PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
Nine Months Ended
 
March 29, 2014
 
March 30, 2013
Cash Flows From (For) Operating Activities
 
 
 
Net income
$
73.4

 
$
323.5

Adjustments to derive cash flows
 
 
 
Loss on extinguishment of debt
165.8

 
—

Write-off of IPR&D
6.0

 
—

Non-cash restructuring charges
17.6

 
—

Loss on sales of investments
12.7

 
4.7

Depreciation and amortization
237.6

 
112.8

Share-based compensation
18.5

 
14.0

Income tax benefit from exercise of stock options
(1.0
)
 
(0.3
)
Excess tax benefit of stock transactions
(6.4
)
 
(15.4
)
Deferred income taxes
(27.1
)
 
(3.1
)
Subtotal
497.1

 
436.2

Changes in operating assets and liabilities, net of acquisitions
 
 
 
Accounts receivable
(90.0
)
 
(5.9
)
Inventories
19.7

 
(81.3
)
Accounts payable
(52.4
)
 
(17.4
)
Payroll and related taxes
(40.3
)
 
(21.4
)
Accrued customer programs
82.6

 
10.0

Accrued liabilities
8.8

 
10.1

Accrued income taxes
(21.3
)
 
31.2

Other
(3.4
)
 
18.6

Subtotal
(96.3
)
 
(56.1
)
Net cash from operating activities
400.8

 
380.1

Cash Flows (For) From Investing Activities
 
 
 
Acquisitions of businesses, net of cash acquired
(1,598.3
)
 
(607.8
)
Purchase of securities
(15.0
)
 
—

Proceeds from sales of securities
81.4

 
8.6

Proceeds from sales of property and equipment
6.2

 
—

Additions to property and equipment
(120.0
)
 
(63.5
)
Net cash for investing activities
(1,645.7
)
 
(662.7
)
Cash Flows (For) From Financing Activities
 
 
 
Purchase of noncontrolling interest
(7.2
)
 
—

Borrowings (repayments) of short-term debt, net
(5.0
)
 
4.4

Premium on early retirement of debt
(133.5
)
 
—

Net proceeds from debt issuances
3,293.6

 
40.8

Repayments of long-term debt
(2,000.0
)
 
(40.0
)
Deferred financing fees
(48.8
)
 
(0.6
)
Excess tax benefit of stock transactions
6.4

 
15.4

Issuance of common stock
8.9

 
8.7

Repurchase of common stock
(7.5
)
 
(12.3
)
Cash dividends
(32.0
)
 
(24.5
)
Net cash from (for) financing activities
1,074.9

 
(8.1
)
Effect of exchange rate changes on cash
(0.5
)
 
(11.0
)
Net decrease in cash and cash equivalents
(170.5
)
 
(301.7
)
Cash and cash equivalents, beginning of period
779.9

 
602.5

Cash and cash equivalents, end of period
$
609.4

 
$
300.8

 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 
 
Cash paid/received during the period for:
 
 
 
Interest paid
$
54.7

 
$
31.2

Interest received
$
2.1

 
$
2.5

Income taxes paid
$
83.3

 
$
93.5

Income taxes refunded
$
3.6

 
$
1.3

See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

PERRIGO COMPANY PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 29, 2014

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Perrigo Company plc (formerly known as Perrigo Company Limited, and prior thereto, Blisfont Limited) ("Perrigo" or "the Company"), was incorporated under the laws of Ireland on June 28, 2013, and became the successor registrant of Perrigo Company on December 18, 2013 in connection with the consummation of the acquisition of Elan Corporation, plc ("Elan"), which is discussed further in Note 2. From its beginnings as a packager of home remedies in 1887, Perrigo has grown to become a leading global healthcare supplier. Perrigo develops, manufactures and distributes over-the-counter ("OTC") and generic prescription ("Rx") pharmaceuticals, nutritional products and active pharmaceutical ingredients ("API"), and has a specialty sciences business comprised of assets focused predominantly on the treatment of Multiple Sclerosis (Tysabri®). The Company is the world's largest manufacturer of OTC healthcare products for the store brand market. Perrigo's mission is to offer uncompromised "Quality Affordable Healthcare Products®", and it does so across a wide variety of product categories primarily in the United States, United Kingdom, Mexico, Israel and Australia, as well as many other key markets worldwide, including Canada, China and Latin America.
    
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. In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation have been included.
    
The Company’s sales of OTC pharmaceutical products are subject to the seasonal demands for cough/cold/flu and allergy products and consumer dynamics in the retail environments in which our customers operate. In addition, the Company's animal health products are subject to the seasonal demand for flea and tick products, which typically peaks during the warmer weather months. Accordingly, operating results for the three and nine months ended March 29, 2014 are not necessarily indicative of the results that may be expected for a full fiscal year. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes included in Perrigo Company’s Annual Report on Form 10-K for the year ended June 29, 2013.

The Company has five reportable segments, aligned primarily by type of product: Consumer Healthcare, Nutritionals, Rx Pharmaceuticals, API, and Specialty Sciences. In conjunction with the acquisition of Elan, the Company expanded its operating segments to include the Specialty Sciences segment, which is comprised of assets focused predominantly on the treatment of Multiple Sclerosis (Tysabri®). In addition, the Company has an Other category that consists of the Israel Pharmaceutical and Diagnostic Products operating segment, which does not individually meet the quantitative thresholds required to be a separately reportable segment. This segment structure is consistent with the way management makes operating decisions, allocates resources and manages the growth and profitability of the Company’s business.     

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Investment Securities

The Company determines the appropriate classification of securities as held-to-maturity, available-for-sale, or trading. The classification depends on the purpose for which the financial assets were acquired. Marketable equity securities are classified as available-for-sale. These securities are carried at fair value with unrealized gains and losses included in Accumulated Other Comprehensive Income ("AOCI"). The assessment for impairment of marketable securities classified as available-for-sale is based on established financial methodologies, including quoted market prices for publicly traded securities.

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Non-marketable equity securities are carried at cost, less write-down-for-impairments, and are adjusted for impairment based on methodologies, including the valuation achieved in the most recent private placement by an investee, an assessment of the impact of general private equity market conditions, and discounted projected future cash flows. Non-marketable equity securities are recorded in other non-current assets on the Consolidated Balance Sheets.
The factors affecting the assessment of impairments include both general financial market conditions and factors specific to a particular company. In the case of equity classified as available-for-sale, a significant and prolonged decline in the fair value of the security below its carrying amount is considered in determining whether the security is impaired. If any such evidence exists, an impairment loss is recognized in earnings.

As a result of the Elan acquisition, the Company acquired equity investment securities. The investments primarily included a 14.6% share in Prothena Corporation plc ("Prothena"), a drug discovery business incorporated in Ireland and traded on the NASDAQ Global Market. The investments also included a number of smaller stakes in both public and privately-held emerging pharmaceutical and biotechnology companies.

At March 29, 2014, the Company held a total of $25.6 million of equity investment securities carried at fair value, of which $7.7 million were current and $17.9 million were non-current, recorded in other non-current assets on the Consolidated Balance Sheets. Due to changes in fair value, the Company recorded gross unrealized gains of $8.4 million and $3.5 million in Other Comprehensive Income ("OCI") during the three and nine months ended March 29, 2014. The gains are recorded net of tax as a component of AOCI. Additionally, the Company held $8.9 million of non-marketable equity securities carried at cost.

During the third quarter of fiscal 2014, the Company sold its ownership stake in Prothena, net of underwriting discounts and commissions, for $79.4 million and recognized a loss on the sale of $9.9 million. The loss was reclassified out of AOCI and into earnings.

Also during the third quarter of fiscal 2014, the Company entered into a series of agreements with former collaboration partner Transition Therapeutics Inc. ("Transition") to progress the clinical development of ELND005 (Scyllo-inositol) in a number of important indications including Alzheimer's disease, Bipolar Disorder and Down Syndrome. As part of the agreement, Transition acquired all of the shares of a wholly owned, indirect Irish subsidiary of the Company, and is now solely responsible for all ongoing development activities and costs associated with ELND005. The Company made a $15.0 million investment in return for 2,255,640 common shares of Transition and will be eligible to receive royalties and milestone payments should ELND005 be commercialized. The investment is carried at fair value and is included in other non-current assets on the Consolidated Balance Sheets.

Equity Method Investments

The equity method of accounting is used for unconsolidated entities over which the Company has significant influence; generally this represents ownership interests of at least 20% and not more than 50%. Under the equity method of accounting, the Company records the investments at carrying value adjusted for a proportionate share of the profits and losses of these entities. The Company evaluates its equity method investments for recoverability in accordance with ASC Topic 323, "Investments - Equity Method and Joint Ventures". If the Company determines that a loss in the value of the investment is other than temporary, the investment is written down to its estimated fair value. Any such losses are recorded in other expense, net. Evaluations of recoverability under ASC 323 are based primarily on projected cash flows. Due to uncertainties in the estimation process, actual results could differ from such estimates.

The Company's equity method investments totaled $60.6 million at March 29, 2014. The Company acquired three equity method investments with the Elan acquisition as follows:

Janssen AI - A subsidiary of Johnson & Johnson, which in 2009, acquired all of the assets and liabilities related to Elan's Alzheimer’s Immunotherapy Program ("AIP") collaboration with Wyeth (which has since been acquired by Pfizer). During the third quarter of fiscal 2014, the Company sold its 49.9% equity interest for $2.0 million, recording a loss on the sale of $2.8 million. Additionally, the Company recorded net losses of $0.6 million and $1.6 million for the three and nine months ended March 29, 2014 related to the Company's share of Janssen AI's losses before it was sold.
 
Newbridge Pharmaceutical Limited ("Newbridge") - Newbridge is a Dubai-based pharmaceuticals company specializing in in-licensing, acquiring, registering and commercializing drugs approved by the U.S. Food and Drug Administration ("FDA"), the European Medicines Agency and Japanese Pharmaceuticals and Medical Devices Agency to treat diseases with high regional prevalence in the Middle East, Africa, Turkey and the Caspian region. The Company has a 48% equity stake in Newbridge with a carrying value of $37.2 million at March 29, 2014. The Company has an option to acquire the majority of the remaining

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equity for approximately $243.0 million until March 2015. The Company recorded net losses of $2.6 million and $2.8 million for the three and nine months ended March 29, 2014, respectively, related to the Company's share of Newbridge losses during those periods.

Proteostasis Therapeutics, Inc. ("Proteostasis") - Proteostasis is focused on the discovery and development of disease modifying small molecule drugs and diagnostics for the treatment of neurodegenerative disorders and dementia-related diseases. The Company has a 22% equity interest in Proteostasis with a carrying value of $19.3 million at March 29, 2014. The Company recorded net losses of $0.6 million and $0.7 million for the three and nine months ended March 29, 2014, respectively, related to the Company's share of Proteostasis losses during those time periods.
    
Defined Benefit Pension Plans

As part of the Elan acquisition, the Company assumed responsibility for the funding of two Irish defined benefit pension plans. The defined benefit pension plans were closed to new members in March 2009 and the future accrual of benefits ceased for active members of the plans on January 31, 2013. The defined benefit pension plans are managed externally and the related pension costs and liabilities are assessed in accordance with the advice of a qualified professional actuary. An actuarial valuation was completed at December 18, 2013, the date the Company acquired Elan.  Two significant assumptions, the discount rate and the expected rate of return on plan assets, are important elements of expense and/or liability measurement. The Company evaluates these assumptions with the assistance of an actuary. Other assumptions involve employee demographic factors such as retirement patterns, mortality, turnover and the rate of compensation increase.

Actuarial gains and losses are recognized using the corridor method. Under the corridor method, to the extent that any cumulative unrecognized net actuarial gain or loss exceeds 10% of the greater of the present value of the defined benefit obligation and the fair value of the plan assets, that portion is recognized over the expected average remaining working lives of the plan participants. Otherwise, the net actuarial gain or loss is recorded in OCI. The Company recognizes the funded status of benefit plans on the Consolidated Balance Sheets. In addition, the Company recognizes the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic pension cost of the period as a component of OCI.

At March 29, 2014, the funded status of the plans was a pension surplus of $22.7 million. As a result, the Company did not make any contributions to the plans from December 18, 2013 to March 29, 2014, nor does it expect to for the remainder of fiscal 2014. No pension expense was incurred from December 18, 2013 to March 29, 2014.

Recently Adopted Accounting Standards

          In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). The amendments in ASU 2014-08 raise the threshold for a disposal to qualify as a discontinued operation and require new disclosures of both discontinued operations and certain other disposals that do not currently meet the definition of a discontinued operation. Additional disclosures will include an entity’s continuing involvement with a discontinued operation following the disposal date and retained equity method investments in a discontinued operation. ASU 2014-08 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014 with early adoption permitted. This guidance will be effective for the Company beginning in the first quarter of fiscal 2016. The Company does not anticipate the adoption will have a material effect on its Consolidated Results of Operations or financial condition.
    
In February 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"). Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. ASU 2013-02 was effective for the Company in the first quarter of fiscal 2014. The additional disclosures required by this ASU have been included in Note 11. Because this standard only impacts presentation and disclosure requirements, its adoption did not impact the Company's Consolidated Results of Operations or financial condition.
        

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In July 2012, the FASB issued ASU 2012-02, "Intangibles-Goodwill and Other (ASC Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment." This amendment was made to simplify the asset impairment test. It allows an organization the option to first assess the qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization that elects to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired. This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, although early adoption is also permitted. This guidance was effective for the Company in the first quarter of fiscal 2014 and did not have any effect on the Company's Consolidated Results of Operations or financial condition.

In December 2011, the FASB issued ASU 2011-11 “Disclosures about Offsetting Assets and Liabilities” ("ASU 2011-11"), as clarified with ASU 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” ("ASU 2013-01") issued in January 2013. These common disclosure requirements are intended to help investors and other financial statement users better assess the effect or potential effect of offsetting arrangements on a portfolio’s financial position. They also improve transparency in the reporting of how companies mitigate credit risk, including disclosure of related collateral pledged or received. In addition, ASU 2011-11 facilitates comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards. ASU 2011-11 requires entities to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position, and disclose instruments and transactions subject to an agreement similar to a master netting agreement. Both ASU 2011-11 and ASU 2013-01 were effective for the Company in the first quarter of fiscal 2014. Because this standard only impacts presentation and disclosure requirements, its adoption did not impact the Company's Consolidated Results of Operations or financial condition.

NOTE 2 – ACQUISITIONS

All of the below acquisitions, with the exception of the Vedants transaction, have been accounted for under the acquisition method of accounting, and the related assets acquired and liabilities assumed were recorded at fair value as of the acquisition date. For valuations that are indicated as preliminary, the allocation of the purchase price is based on valuation information, estimates and assumptions available at March 29, 2014. As the Company finalizes the fair value of assets acquired and liabilities assumed, any additional purchase price adjustments will be recorded during the measurement period. Fair value estimates are based on a complex series of judgments about future events and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations. The finalization of the purchase accounting assessment may result in changes in the valuation of assets acquired and liabilities assumed and may have a material impact on the Company's results of operations and financial position.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized. It is not amortized for financial reporting purposes and, excluding the Sergeant's acquisition, is not amortized for tax purposes. Goodwill is subject to annual impairment testing - see Note 6 regarding the timing of the Company's annual goodwill impairment testing.
  

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Fiscal 2014

Aspen Global Inc. – On February 28, 2014, the Company acquired a basket of value-brand OTC products sold in Australia and New Zealand from Aspen Global Inc. ("Aspen") for $53.7 million in cash. The acquisition of this product portfolio broadens the Company's product offering in Australia and New Zealand and furthers the Company's strategy to expand the Consumer Healthcare portfolio internationally. Acquisition fees expensed were de minimus. Operating results attributable to the acquired Aspen products were included in the Consumer Healthcare segment of the Company's Consolidated Results of Operations beginning March 1, 2014.

The following table summarizes the preliminary fair values of the assets acquired related to the acquired Aspen products (in millions):
 
Preliminary Allocation
Inventory
$
2.7

Goodwill
4.6

Other intangible assets
46.4

Total assets acquired
$
53.7


No liabilities were assumed as part of the acquisition. The allocation of the purchase price above is considered preliminary and was based on valuation information, estimates and assumptions available at March 29, 2014. Management is still in the process of verifying data and finalizing information related to the valuation and recording of identifiable intangible assets, deferred income taxes and the resulting effects on the value of goodwill. The Company expects to finalize these matters within the measurement period as final valuations are completed.

Other intangible assets acquired in the acquisition were valued as follows ($ in millions):
 
Value
 
Useful Life (years)
Trade name and trademarks
$
34.8

 
25
Customer relationships
9.8

 
15
Non-compete agreements
1.8

 
5
        Total intangible assets acquired
$
46.4

 
 
    
Management assigned fair values to the identifiable intangible assets through a combination of the relief from royalty method, excess earnings method and the lost income method. Customer relationships are amortized on a proportionate basis consistent with the economic benefits derived therefrom, while the other two intangible assets are amortized on a straight-line basis.

Fera Pharmaceuticals, LLC – On February 18, 2014, the Company acquired a distribution and license agreement for the marketing and sale of methazolomide from Fera Pharmaceuticals, LLC ("Fera"), a privately-held specialty pharmaceutical company, for a cash payment of $17.3 million. The acquisition of this agreement further expands the Company's ophthalmic offerings. Acquisition fees expensed were de minimus. $17.0 million of the purchase price was preliminarily allocated to the distribution and license agreement intangible asset, while the remaining $0.3 million was allocated to inventory acquired. No liabilities were assumed as part of the acquisition. Management assigned a fair value to the intangible asset through the excess earnings method. The distribution and license agreement was assigned a 15-year useful life and is being amortized on a proportionate basis consistent with the economic benefits derived therefrom. Operating results attributable to this agreement were included in the Rx Pharmaceuticals segment of the Company's consolidated results of operations beginning February 19, 2014.

Elan Corporation, plc - On December 18, 2013, the Company acquired Elan in a cash and stock transaction valued at approximately $9.5 billion. At the completion of the transaction, the holder of each Elan ordinary share and each Elan American Depositary Share received from Perrigo $6.25 in cash and 0.07636 of a Perrigo ordinary share. As a result of the transaction, based on the number of outstanding shares of Perrigo and Elan as of December 18, 2013, former Perrigo and Elan shareholders held approximately 71% and 29%, respectively, of Perrigo's ordinary shares immediately after giving effect to the acquisition.
    

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Elan, headquartered in Dublin, Ireland, provides the Company with assets focused on the treatment of Multiple Sclerosis (Tysabri®). The Company's management believes the acquisition of Elan will provide recurring annual operational synergies, related cost reductions and tax savings. Certain of these synergies result from the elimination of redundant public company costs while optimizing back-office support. Additionally, in fiscal 2015, the Company expects to have a lower annual effective tax rate due to changes to the estimated jurisdictional mix of income and the new corporate structure attributable to the acquisition of Elan.

The operating results for Elan were included in a new "Specialty Sciences" segment of the Company's Consolidated Results of Operations beginning December 18, 2013. See Note 14 for further information on this new reportable segment. During the three and nine months ended March 29, 2014, the Company incurred one-time acquisition-related costs of $1.2 million and $284.9 million, respectively, which were expensed as incurred. These costs were recorded in unallocated expenses and related primarily to general transaction costs (legal, banking and other professional fees), financing fees, and debt extinguishment. See Note 7 for further details on the debt extinguishment. The table below details these transaction costs and where they were recorded in the Condensed Consolidated Statements of Operations for the nine months ended March 29, 2014 (in millions).
 
 
Nine Months Ended
Line item
 
March 29, 2014
Administration expense
 
$
108.9

Interest, net
 
10.0

Other expense, net
 
0.2

Loss on extinguishment of debt
 
165.8

Total acquisition-related costs
 
$
284.9


Fair Value of Consideration Transferred

The total purchase price for the acquisition of Elan was approximately $9.5 billion, comprised of Perrigo share consideration valued at $6.1 billion, cash consideration for outstanding Elan shares of $3.2 billion and cash consideration for vested Elan option and share award holders of $111.5 million as follows (in millions except for per share data):
Elan shares outstanding as of December 18, 2013
 
515.7

Exchange ratio per share
 
0.07636

Total Perrigo shares issued to Elan shareholders
 
39.4

Perrigo per share value at transaction close on December 18, 2013
 
$
155.34

Total value of Perrigo shares issued to Elan shareholders
 
$
6,117.2

Cash consideration paid at $6.25 per Elan share
 
3,223.2

Cash consideration paid for vested Elan stock options and share awards

 
111.5

Total consideration
 
$
9,451.9


In addition, the Company paid cash consideration of $16.1 million to the Elan stock option and share award holders for the unvested portion of their awards in the second quarter of fiscal 2014, which was charged to earnings.


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Preliminary Estimated Fair Values

The preliminary allocation of the purchase price through March 29, 2014 was (in millions):
 
 
Preliminary Allocation
Cash and cash equivalents
 
$
1,807.3

Investment securities (current and non-current)
 
100.0

Accounts receivable
 
44.2

Prepaids and other current assets
 
27.1

Property and equipment
 
9.2

Goodwill
 
2,088.5

Equity method investments
 
66.3

Definite-lived intangible assets
 
6,111.0

Other non-current assets
 
27.1

     Total assets acquired
 
10,280.7

 
 
 
Accounts payable
 
2.0

Accrued expenses
 
93.5

Deferred tax liabilities
 
702.2

Other non-current liabilities
 
31.1

     Total liabilities assumed
 
828.8

     Net assets acquired
 
$
9,451.9


The allocation of the purchase price above is considered preliminary and was based on valuation information, estimates and assumptions available at March 29, 2014. Management is still in the process of verifying data and finalizing information related to the valuation and recording of identifiable intangible assets, investments, accrued expenses, tax accounts and the resulting effects on the value of goodwill. The Company expects to finalize these matters within the measurement period as final asset and liability valuations are completed. During the third quarter of fiscal 2014, the Company recorded an additional $8.7 million in non-current liabilities related to tax accruals, an additional $3.7 million in accrued expenses and expensed $0.5 million that was initially included in the purchase price, which resulted in a net increase of $11.9 million in goodwill.

Goodwill represents the expected synergies of the combined company, which are further described above. As a result of these anticipated synergies, $831.3 million of the $2.1 billion of goodwill was preliminarily allocated to certain segments as follows: $423.7 million to Consumer Healthcare, $316.1 million to Rx Pharmaceuticals and $91.5 million to Nutritionals.

Definite-lived intangible assets acquired in the acquisition were as follows:
    
1)
Tysabri®: The Company is entitled to royalty payments from Biogen Idec Inc. (“Biogen”) based on its Tysabri® revenues in all indications and geographies. Specifically, for the twelve-month period beginning May 1, 2013, a 12% royalty applies. Following the initial twelve-month period, annual sales up to $2.0 billion accrue an 18% royalty and incremental annual sales above $2.0 billion accrue a 25% royalty. The Company will continue to receive royalties on all global Tysabri® sales. The asset's preliminary value is $6.1 billion, which is being amortized on a straight-line basis over its useful life of 20 years.

2)
Prialt: The Company is entitled to royalty payments based on Prialt revenues. Specifically, a 7% royalty rate for annual sales in the U.S. up to $12.5 million, a 10.25% royalty rate for annual sales in the U.S. between $12.5 million and $20.0 million, a 17.5% royalty rate for annual sales in the U.S. between $20.0 million and $35.0 million, a 13.5% royalty rate for annual sales in the U.S. between $35.0 million and $50.0 million, and a 10.25% royalty rate for annual sales in the U.S. above $50.0 million. The preliminary value of the intangible asset is $11.0 million, which is being amortized on a straight-line basis over its estimated useful life of 10 years.

For both intangible assets, an income approach was utilized to calculate the present value of the projected royalty payments and continued related operating costs, using a discount rate that reflected the risks inherent in the cash flow stream as

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well as the nature of the asset. Some of the more significant assumptions inherent in the development of the identifiable intangible asset valuations, from the perspective of a market participant, include the estimated revenues that will be received for each product, the appropriate discount rate selected in order to measure the risk inherent in each future cash flow stream, the assessment of each asset's life cycle and competitive trends impacting each asset's cash flow stream, as well as other factors. The fair value estimate for identifiable intangible assets is preliminary and is determined based on the assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). The final fair value determination for identified intangibles may differ from this preliminary determination.

See Note 1 for discussion of the investment securities and equity method investments acquired.

Actual and Pro Forma Impact of Fiscal 2014 Acquisitions

The Company's consolidated financial statements include operating results from the Fera, Aspen, and Elan acquisitions from the date of each acquisition through March 29, 2014. Net sales and operating loss attributable to the acquisitions during this period and included in the Company's condensed consolidated financial statements for the nine months ended March 29, 2014 totaled $65.5 million and $70.7 million, respectively. The $70.7 million operating loss includes $85.0 million of intangible asset amortization expense and $32.0 million of restructuring charges, both of which relate to the Elan acquisition. See Note 15 for additional information on the restructuring charges.

The following unaudited pro forma information gives effect to the Company's Fera, Aspen, and Elan acquisitions as if the acquisitions had occurred on July 1, 2012 and had been included in the Company's Consolidated Results of Operations for the nine months ended March 29, 2014 and March 30, 2013:

(in millions)
Nine Months Ended
(Unaudited)
March 29, 2014
 
March 30, 2013
Net sales
$
3,048.4

 
$
2,618.1

Net income (loss)
$
119.4

 
$
(390.7
)

The historical consolidated financial information of the Company, Elan, and the acquired Fera and Aspen assets has been adjusted in the pro forma information to give effect to pro forma events that are (1) directly attributable to the transactions, (2) factually supportable and (3) expected to have a continuing impact on combined results. In order to reflect the occurrence of the acquisitions on July 1, 2012 as required, the unaudited pro forma results include adjustments to reflect the incremental amortization expense to be incurred based on the current preliminary values of each acquisition's identifiable intangible assets, along with the reclassification of acquisition-related costs from the period ended March 29, 2014 to the period ended March 30, 2013. The unaudited pro forma results do not reflect future events that have occurred or may occur after the acquisitions, including but not limited to, the anticipated realization of ongoing savings from operating synergies and tax savings in subsequent periods.

Vedants Drug & Fine Chemicals Private Limited - To further improve the long-term cost position of its API business, on August 6, 2009, the Company acquired an 85% stake in Vedants Drug & Fine Chemicals Private Limited ("Vedants"), an API manufacturing facility in India, for $11.5 million in cash. The Company purchased the remaining 15% stake in Vedants during the second quarter of fiscal 2014 for $7.2 million in cash. The transaction was accounted for as an equity transaction and resulted in the elimination of the noncontrolling interest.

Fiscal 2013

Fera Pharmaceuticals, LLC – On June 17, 2013, the Company acquired an ophthalmic sterile ointment and solution product portfolio from Fera for an up-front cash payment of $88.4 million plus potential future contingent consideration of up to approximately $22.2 million. See Note 4 regarding the valuation of the contingent consideration. During fiscal 2013, the Company incurred $0.1 million of acquisition costs, which were expensed in operations in the fourth quarter of fiscal 2013. The acquisition of this product portfolio expanded the Company's ophthalmic offerings and position within the Rx extended topical space.

The operating results for the acquired Fera product portfolio were included in the Rx Pharmaceuticals segment of the Company's Consolidated Results of Operations beginning June 17, 2013.

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The following table summarizes the final fair values of the assets acquired and liabilities assumed related to the Fera acquisition (in millions):
 
Final Valuation
Inventory
$
1.3

Goodwill
2.8

Other intangible assets - Developed product technology
107.0

Total assets acquired
111.1

 
 
Accrued customer programs
0.5

Total liabilities assumed
0.5

Net assets acquired
$
110.6


Management assigned fair values to the developed product technology intangible assets through the relief from royalty method. The developed product technology assets are based on a 15-year useful life and amortized on a straight-line basis.

Velcera, Inc. – On April 1, 2013, the Company completed the acquisition of 100% of the shares of privately-held Velcera, Inc. ("Velcera") for $156.2 million, net of cash acquired. Velcera, through its FidoPharm subsidiary, is a leading companion pet health product company committed to providing consumers with best-in-class companion pet health products that contain the same active ingredients as branded veterinary products, but at a significantly lower cost. FidoPharm products, including the PetArmor® flea and tick products, are available at major retailers nationwide, offering consumers the benefits of convenience and cost savings to ensure the highest quality care for their pets. The acquisition complemented the Sergeant's business acquisition and further expanded the Company's Consumer Healthcare animal health category.

During fiscal 2013, the Company incurred $1.1 million of acquisition costs, the majority of which were expensed in operations in the third quarter of fiscal 2013. In addition, in conjunction with the acquisition, the Company incurred restructuring and integration-related costs of $2.9 million and $2.7 million, respectively, both of which were expensed in operations in the fourth quarter of fiscal 2013. The Company incurred an additional $1.4 million of restructuring costs during fiscal 2014. See Note 15 for more information on the restructuring costs. The operating results for Velcera were included in the Consumer Healthcare segment of the Company's consolidated results of operations beginning April 1, 2013.

During the first quarter of fiscal 2014, the Company finalized the valuation of identified intangible assets, which resulted in a $3.0 million increase in other intangible assets and a corresponding decrease in goodwill. The measurement period adjustments did not have a material impact on the Company's Consolidated Statements of Operations, Balance Sheets or Cash Flows, and, therefore the Company has not retrospectively adjusted its financial statements.

    

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The following table summarizes the final fair values of the assets acquired and liabilities assumed related to the Velcera acquisition (in millions):
 
Final Valuation
Cash
$
18.9

Accounts receivable
6.3

Inventory
9.7

Property and equipment
0.6

Deferred income tax assets
7.9

Goodwill
62.5

Other intangible assets
135.3

Other assets
0.4

Total assets acquired
241.6

 
 
Accounts payable
6.5

Accrued expenses
4.8

Deferred income tax liabilities
48.2

Other long-term liabilities
7.0

Total liabilities assumed
66.5

Net assets acquired
$
175.1


The $62.5 million of goodwill was assigned to the Consumer Healthcare segment at the time of acquisition. The purchase price in excess of the value of Velcera's net assets reflects the strategic value the Company placed on the business. Similar to the Sergeant's acquisition below, the Company believes it will benefit from the development of the animal health store brand category, an adjacent category to the Company's retail customers of its existing store brand products.

Other intangible assets acquired in the acquisition were valued as follows ($ in millions):
 
Value
 
Useful Life (years)
Distribution and license agreement
$
116.0

 
10
Customer relationships
8.7

 
20
Trade name and trademarks
7.6

 
25
Non-compete agreements
3.0

 
3
        Total intangible assets acquired
$
135.3

 
 

Management assigned fair values to the identifiable intangible assets through a combination of the excess earnings method, the relief from royalty method and the lost income method. The distribution and license agreement is amortized on a proportionate basis consistent with the economic benefits derived therefrom and all other intangible assets are amortized on a straight-line basis.

Rosemont Pharmaceuticals Ltd. – On February 11, 2013, the Company acquired 100% of the shares of privately-held Rosemont Pharmaceuticals Ltd. ("Rosemont") for approximately $282.9 million in cash. Based in Leeds, U.K., Rosemont is a specialty and generic prescription pharmaceutical company focused on the manufacturing and marketing of oral liquid formulations. The acquisition expanded the global presence of the Company's Rx product offering into the U.K. and Europe. During fiscal 2013, the Company incurred $2.0 million of acquisition costs, the majority of which were expensed in operations in the third quarter of fiscal 2013.

The operating results for Rosemont were included in the Rx Pharmaceuticals segment of the Company's Consolidated Results of Operations beginning February 11, 2013.


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The following table summarizes the final fair values of the assets acquired and liabilities assumed related to the Rosemont acquisition (in millions):
 
Final Valuation
Cash
$
2.1

Accounts receivable
10.6

Inventory
9.6

Property and equipment
13.1

Deferred income tax assets
0.2

Goodwill
147.0

Other intangible assets
148.2

Other assets
0.8

Total assets acquired
331.6

 
 
Accounts payable
2.6

Accrued expenses
7.6

Deferred tax liabilities
36.0

Other long-term liabilities
2.5

Total liabilities assumed
48.7

Net assets acquired
$
282.9


The $147.0 million of goodwill was assigned to the Rx Pharmaceuticals segment at the time of acquisition. The purchase price in excess of the value of Rosemont's net assets reflects the strategic value the Company placed on the business. The Company believes it will benefit from the development of Rosemont's Rx product offering in the U.K. and Europe.

Other intangible assets acquired in the acquisition were valued as follows ($ in millions):
 
Value
 
Useful Life (years)
Developed product technology
$
114.6

 
7
Trade name and trademarks
17.3

 
Indefinite
In-process research and development ("IPR&D")
11.2

 
Indefinite
Distribution and license agreements
3.6

 
14
Non-compete agreements
1.5

 
3
        Total intangible assets acquired
$
148.2

 
 

Management assigned fair values to the identifiable intangible assets through a combination of the excess earnings method, the relief from royalty method and the lost income method. The developed product technology assets and non-compete agreement are amortized on a straight-line basis. IPR&D assets initially recognized at fair value will be classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. During the second quarter of fiscal 2014, the Company recognized an impairment charge of $2.0 million related to the IPR&D assets due to changes in the projected development and regulatory timelines for various projects. See Note 6 for further information on the IPR&D impairment. For the trade name and trademarks, the Company concluded that there is no foreseeable limit to the period over which they would be expected to contribute to the entity's cash flows; therefore, they are considered to have an indefinite life. The distribution and license agreements are amortized on a proportionate basis consistent with the economic benefits derived therefrom.

At the time of the acquisition, a step-up in the value of inventory of $3.2 million was recorded in the opening balance sheet as assets acquired and was based on valuation estimates. The step-up in inventory value was charged to cost of sales as the acquired inventory was sold during the third and fourth quarters of fiscal 2013. In addition, fixed assets were written up by $4.9 million to their estimated fair market value based on a valuation method that included both the cost and market approaches. This additional step-up in value is being depreciated over the estimated remaining useful lives of the assets.

Cobrek Pharmaceuticals, Inc. – On December 28, 2012, the Company acquired the remaining 81.5% interest of Cobrek Pharmaceuticals, Inc. ("Cobrek"), a privately-held drug development company, for $42.0 million in cash. In May 2008,

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the Company acquired an 18.5% minority stake in Cobrek for $12.6 million in conjunction with entering into a product development collaborative partnership agreement focused on generic pharmaceutical foam dosage form products. As of the acquisition date, the partnership had successfully yielded two commercialized foam-based products and had an additional two Food and Drug Administration ("FDA") approved foam-based products, both of which were launched in the Company's third quarter of fiscal 2013. Cobrek derives its earnings stream primarily from exclusive technology agreements. The acquisition of Cobrek further strengthened the Company's position in foam-based technologies for existing and future U.S. Rx products.

In conjunction with the acquisition, the Company adjusted the fair value of its 18.5% noncontrolling interest, which was valued at $9.5 million, and recognized a loss of $3.0 million in other expense during the second quarter of fiscal 2013. Also in conjunction with the acquisition, the Company incurred $1.5 million of severance costs in the second quarter of fiscal 2013.

During the measurement period, which ended March 30, 2013, the Company finalized deferred income taxes, which resulted in a $3.6 million increase in deferred tax assets and a corresponding decrease in goodwill. The measurement period adjustments did not have a material impact on the Company's Consolidated Statements of Operations, Balance Sheets or Cash Flows, and, therefore the Company has not retrospectively adjusted its financial statements. The following table summarizes the final fair values of the assets acquired and liabilities assumed related to the Cobrek acquisition (in millions):
 
Final Valuation
Other assets
$
0.3

Deferred income tax assets
3.6

Goodwill
15.3

Other intangible assets - Exclusive technology agreements
51.1

Total assets acquired
70.3

 
 
Deferred tax liabilities
18.8

Total liabilities assumed
18.8

Net assets acquired
$
51.5


The total purchase price above consists of the $42.0 million cash purchase price and the $9.5 million adjusted basis of the Company's existing investment in Cobrek. The $15.3 million of goodwill was assigned to the Rx Pharmaceuticals segment at the time of acquisition.

Management assigned fair values to the identifiable intangible assets by estimating the discounted forecasted cash flows related to the technology agreements. The estimated useful lives of the agreements are 12 years, and they are amortized on a proportionate basis consistent with the economic benefits derived therefrom.

Sergeant's Pet Care Products, Inc. – On October 1, 2012, the Company completed the acquisition of substantially all of the assets of privately-held Sergeant's Pet Care Products, Inc. ("Sergeant's") for $285.0 million in cash. Headquartered in Omaha, Nebraska, Sergeant's is a leading supplier of animal health products, including flea and tick remedies, health and well-being products, natural and formulated treats, and consumable products. The acquisition expanded the Company's Consumer Healthcare product portfolio into the animal health category. During fiscal 2013, the Company incurred approximately $2.0 million of acquisition costs, the majority of which were expensed in the first quarter of fiscal 2013. The operating results for Sergeant's were included in the Consumer Healthcare segment of the Company's consolidated results of operations beginning October 1, 2012.

During the measurement period, which ended March 30, 2013, the Company finalized the valuation of identified intangible assets, which resulted in a $12.0 million decrease in other intangible assets and a corresponding increase in goodwill. The measurement period adjustments did not have a material impact on the Company's Consolidated Statements of Operations, Balance Sheets or Cash Flows, and, therefore the Company has not retrospectively adjusted its financial statements.

    

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The following table summarizes the final fair values of the assets acquired and liabilities assumed related to the Sergeant's acquisition (in millions):
 
Final Valuation
Accounts receivable
$
19.7

Inventory
37.7

Property and equipment
25.4

Deferred income tax assets
1.5

Goodwill
80.2

Other intangible assets
135.4

Other assets
3.0

Total assets acquired
302.9

 
 
Accounts payable
13.7

Accrued expenses
4.2

Total liabilities assumed
17.9

Net assets acquired
$
285.0


The $80.2 million of goodwill was assigned to the Consumer Healthcare segment at the time of acquisition. The purchase price in excess of the value of Sergeant's net assets reflects the strategic value the Company placed on the business. The Company believes it will benefit from the development of the animal health store brand category, an adjacent category to the Company's retail customers of its existing store brand products.

Other intangible assets acquired in the acquisition were valued as follows (in millions):
 
Value
 
Useful Life (years)
Developed product technology
$
66.1

 
10
Trade name and trademarks
33.0

 
Indefinite
Favorable supply agreement
25.0

 
7
Customer relationships
10.0

 
20
Non-compete agreements
1.3

 
1 to 3
        Total intangible assets acquired
$
135.4

 
 

Management assigned fair values to the identifiable intangible assets through a combination of the relief from royalty method, the excess earnings method, the with or without approach and the lost income method. The developed product technology assets and non-compete agreements are amortized on a straight-line basis. For the trade name and trademarks, the Company concluded that there is no foreseeable limit to the period over which they would be expected to contribute to the entity's cash flows; therefore, they are considered to have an indefinite life. The favorable supply agreement and customer relationships are amortized on a proportionate basis consistent with the economic benefits derived therefrom.

At the time of the acquisition, a step-up in the value of inventory of $7.7 million was recorded in the opening balance sheet as assets acquired and was based on valuation estimates, all of which was charged to cost of sales in the second quarter of fiscal 2013 as the acquired inventory was sold. In addition, fixed assets were written up by $6.1 million to their estimated fair market value based on a valuation method that included both the cost and market approaches. This additional step-up in value is being depreciated over the estimated remaining useful lives of the assets.


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NOTE 3 – 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
 
March 29,
2014
 
March 30,
2013
 
March 29,
2014
 
March 30,
2013
Numerator:
 
 
 
 
 
 
 
Net income
$
48.1

 
$
111.9

 
$
73.4

 
$
323.5

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding for basic EPS
133.7

 
94.0

 
108.9

 
93.8

Dilutive effect of share-based awards
0.6

 
0.5

 
0.5

 
0.6

Weighted average shares outstanding for diluted EPS
134.3

 
94.5

 
109.4

 
94.4

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

 
0.2

 
0.1

 
0.2

    
NOTE 4 – FAIR VALUE MEASUREMENTS

Accounting Standards Codification ("ASC") Topic 820 provides a consistent definition of fair value, which focuses on exit price, prioritizes the use of market-based inputs over entity-specific inputs for measuring fair value and establishes a three-level hierarchy for fair value measurements. ASC Topic 820 requires fair value measurements to be classified and disclosed in one of the following three categories:

Level 1:
Quoted prices (unadjusted) in active markets for identical assets and liabilities.
    
Level 2:
Either direct or indirect inputs, other than quoted prices included within Level 1, which are observable for similar assets or liabilities.

Level 3:
Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
The following tables summarize the valuation of the Company’s financial instruments carried at fair value by the above pricing categories as of March 29, 2014 and June 29, 2013 (in millions):
 
 
Fair Value Measurements as of March 29, 2014 Using:
 
Total
 
Quoted Prices
In Active
Markets
(Level 1)
 
Prices With
Other
Observable
Inputs
(Level 2)
 
Prices With
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
284.5

 
$
284.5

 
$
—

 
$
—

Investment securities
25.6

 
25.6

 
—

 
—

Funds associated with Israeli post-employment benefits
18.4

 
—

 
18.4

 
—

Foreign currency forward contracts
3.5

 
—

 
3.5

 
—

Restricted cash
2.8

 
2.8

 
—

 
—

Total
$
334.8

 
$
312.9

 
$
21.9

 
$
—

Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$
23.0

 
$
—

 
$
—

 
$
23.0

Interest rate swap agreements
8.9

 
—

 
8.9

 
—

Foreign currency forward contracts
1.2

 
—

 
1.2

 
—

Total
$
33.1

 
$
—

 
$
10.1

 
$
23.0


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Table of Contents

 
Fair Value Measurements as of June 29, 2013 Using:
 
Total
 
Quoted Prices
In Active
Markets
(Level 1)
 
Prices With
Other
Observable
Inputs
(Level 2)
 
Prices With
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
697.7

 
$
697.7

 
$
—

 
$
—

Funds associated with Israeli post-employment benefits
16.1

 
—

 
16.1

 
—

Foreign currency forward contracts
8.0

 
—

 
8.0

 
—

Total
$
721.8

 
$
697.7

 
$
24.1

 
$
—

Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$
22.2

 
$
—

 
$
—

 
$
22.2

Interest rate swap agreements
10.8

 
—

 
10.8

 
—

Foreign currency forward contracts
0.4

 
—

 
0.4

 
—

Total
$
33.4

 
$
—

 
$
11.2

 
$
22.2


The carrying amounts of the Company’s financial instruments, consisting of cash, accounts receivable, accounts payable, short-term debt and variable rate long-term debt, approximate their fair value. There were no transfers between Level 1, 2, and 3 during the three and nine months ended March 29, 2014. The Company’s policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.

As of March 29, 2014, the carrying value and fair value of the Company’s fixed rate long-term debt were both $2.3 billion. As of June 29, 2013, the carrying value and fair value of the Company’s fixed rate long-term debt were $1.6 billion and $1.5 billion, respectively. At March 29, 2014, the Company's fixed rate long-term debt consisted of private placement senior notes with registration rights. Their fair value was determined by discounting the future cash flows of the financial instruments to their present value, using interest rates currently offered for borrowings and deposits of similar nature and remaining maturities (Level 2). At June 29, 2013, the fixed rate long-term debt consisted of private placement senior notes and public bonds. The private placement senior notes' fair value was calculated similarly to the private placement senior notes with registration rights mentioned above, while the public bonds' fair value was determined by quoted market prices (Level 1).
As of March 29, 2014, the Company had $18.4 million deposited in funds managed by financial institutions that are designated by management to cover post-employment benefits for its Israeli employees. Israeli law generally requires payment of severance upon dismissal of an employee or upon termination of employment in certain other circumstances. These funds are included in the Company’s long-term investments reported in other non-current assets. The Company’s Level 2 securities values 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.

As a result of the acquisition of a product portfolio from Fera completed on June 17, 2013, the Company recorded a contingent consideration liability of $22.2 million on the acquisition date based upon the estimated fair value of contingent payments to the seller.  These estimates included $18.0 million associated with certain contingencies on one product within the portfolio acquired, along with $4.2 million related to a 15-month indemnification period. The fair value measurements for this liability were valued using Level 3 inputs, which included estimates around probability-weighted outcomes and discount rates. The Company updates the estimated fair value of the contingent consideration related to the one product described above quarterly. Due to changes in fair value assumptions during the third quarter of fiscal 2014, the fair value was written up to $18.8 million, from $13.1 million in the second quarter, resulting in an unfavorable adjustment of $5.7 million recorded in administration expense for the three months ended March 29, 2014. Year-to-date, the Company recorded net expense of $0.8 million due to a favorable adjustment of $4.9 million recorded in the second quarter, offset by the $5.7 million unfavorable adjustment recorded in the third quarter, both of which were due to changes in fair value assumptions related to probability weighted outcomes during the respective quarters.

The Company measures certain assets, including equity investments in privately-held companies, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. The Company has not recognized any impairment charges related to these assets during fiscal 2014.
    


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Table of Contents

NOTE 5 – INVENTORIES
Inventories are stated at the lower of cost or market and are summarized as follows (in millions):
 
 
March 29,
2014
 
June 29,
2013
Finished goods
$
348.6

 
$
333.9

Work in process
159.8

 
182.4

Raw materials
185.1

 
187.6

Total inventories
$
693.5

 
$
703.9


NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS

The increase in goodwill in fiscal 2014 was due primarily to goodwill associated with the acquisition of Elan, totaling $2.1 billion. As a result of benefiting from the anticipated synergies of acquiring Elan, $831.3 million of the $2.1 billion of goodwill was allocated to certain segments as follows: $423.7 million to Consumer Healthcare, $316.1 million to Rx Pharmaceuticals and $91.5 million to Nutritionals. Additionally, the Company recorded $4.6 million of goodwill to the Consumer Healthcare segment due to the acquisition of a product portfolio from Aspen. The Company performs its annual testing for goodwill and indefinite-lived intangible asset impairment at the beginning of the fourth fiscal quarter for all reporting units. Changes in the carrying amount of goodwill, by reportable segment, were as follows (in millions):
 
 
Consumer Healthcare
 
Nutritionals
 
Rx Pharma-ceuticals
 
API
 
Specialty Sciences
 
Total
Balance as of June 29, 2013
$
279.9

 
$
331.7

 
$
385.5

 
$
92.2

 
$
—

 
$
1,089.3

Business acquisitions
428.3

 
91.5

 
316.1

 
—

 
1,257.2

 
2,093.1

Purchase accounting adjustments
(1.9
)
 
—

 
1.3

 
—

 
—

 
(0.6
)
Currency translation adjustment
5.7

 
—

 
16.5

 
3.4

 
—

 
25.6

Balance as of March 29, 2014
$
712.0

 
$
423.2

 
$
719.4

 
$
95.6

 
$
1,257.2

 
$
3,207.4


Other intangible assets and related accumulated amortization consisted of the following (in millions): 
 
March 29, 2014
 
June 29, 2013
 
Gross
 
Accumulated
Amortization
 
Gross
 
Accumulated
Amortization
Amortizable intangibles:
 
 
 
 
 
 
 
Distribution, license and supply agreements
$
6,324.3

 
$
120.0

 
$
192.7

 
$
28.9

Developed product technology/formulation and product rights
925.4

 
277.7

 
896.8

 
204.6

Customer relationships
370.9

 
91.0

 
358.2

 
72.4

Trademarks
47.6

 
4.9

 
12.7

 
4.2

Non-compete agreements
15.2

 
8.4

 
13.3

 
6.0

Total
7,683.4

 
502.0

 
1,473.7

 
316.1

Non-amortizable intangibles:
 
 
 
 
 
 
 
Trade names and trademarks
59.0

 
—

 
57.0

 
—

IPR&D
9.8

 
—

 
27.8

 
—

Total other intangible assets
$
7,752.2

 
$
502.0

 
$
1,558.5

 
$
316.1


Certain intangible assets are denominated in currencies other than the U.S. dollar; therefore, their gross and net carrying values are subject to foreign currency movements.


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Table of Contents

At March 29, 2014, gross distribution, license and supply agreements included $6.1 billion of intangible assets attributable to the Elan acquisition. Additions during the third quarter of fiscal 2014 included $46.4 million related to the acquired Aspen products and $17.0 million related to the acquired distribution and license agreement from Fera. See Note 2 for further information on these additions.

During the nine months ended March 29, 2014, the Company recognized impairment charges of $4.0 million and $2.0 million related to the IPR&D assets acquired as part of the Paddock and Rosemont acquisitions, respectively, due to changes in the projected development and regulatory timelines for various projects. Both of the impairment charges were recorded in the Rx Pharmaceuticals segment as write-offs of IPR&D. Additionally, the remaining $13.0 million of IPR&D assets acquired as part of the Paddock acquisition was reclassified to a definite-lived developed product technology asset and is being amortized on a proportionate basis consistent with the economic benefits derived therefrom over an estimated useful life of 12 years.

The Company recorded amortization expense of $181.1 million and $65.0 million for the nine months ended March 29, 2014 and March 30, 2013, respectively, for intangible assets subject to amortization. The increase in amortization expense was due primarily to the incremental amortization expense incurred on the amortizable intangible assets acquired as part of the Elan acquisition.

Estimated future amortization expense includes the additional amortization related to recently acquired intangible assets subject to amortization. The estimated amortization expense for each of the following five years is as follows (in millions): 
 
Fiscal Year
Amount
2014(1)
$
109.0

2015
442.0

2016
452.0

2017
449.0

2018
441.0

 
(1) Reflects remaining three months of fiscal 2014.


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Table of Contents

NOTE 7 – INDEBTEDNESS

Total borrowings outstanding are summarized as follows (in millions):
 
March 29,
2014
 
June 29,
2013
Foreign line of credit
$
—

 
$
5.0

 
 
 
 
Term loans
 
 
 
2011 Term Loan due October 26, 2016
—

 
400.0

2013 Term Loan due December 18, 2015
300.0

 
—

2013 Term Loan due December 18, 2018
665.0

 
—

 
965.0

 
400.0

Senior notes
 
 
 
5.97% Unsecured Senior Notes due May 29, 2015(1) 
—

 
75.0

4.91% Unsecured Senior Notes due April 30, 2017(1)
—

 
115.0

6.37% Unsecured Senior Notes due May 29, 2018(1) 
—

 
125.0

5.45% Unsecured Senior Notes due April 30, 2020(1)
—

 
150.0

4.27% Unsecured Senior Notes due September 30, 2021(1)
—

 
75.0

5.55% Unsecured Senior Notes due April 30, 2022(1)
—

 
150.0

2.95% Unsecured Senior Notes due May 15, 2023,
      net of unamortized discount of $3.1 million
—

 
596.9

4.52% Unsecured Senior Notes due December 15, 2023(1)
—

 
175.0

4.67% Unsecured Senior Notes due September 30, 2026(1)
—

 
100.0

1.30% Unsecured Senior Notes due November 8, 2016,
      net of unamortized discount of $0.4 million(2)
499.6

 
—

2.30% Unsecured Senior Notes due November 8, 2018,
      net of unamortized discount of $0.8 million(2)
599.2

 
—

4.00% Unsecured Senior Notes due November 15, 2023,
      net of unamortized discount of $3.2 million(2)
796.8

 
—

5.30% Unsecured Senior Notes due November 15, 2043,
      net of unamortized discount of $1.7 million(2)
398.3

 
—

 
2,293.9

 
1,561.9

 
 
 
 
Other financing
8.3

 
7.1

 
 
 
 
Total borrowings outstanding
3,267.2

 
1,974.0

Less short-term debt and current portion of long-term debt
(141.7
)
 
(46.2
)
Total long-term debt, less current portion
$
3,125.5

 
$
1,927.8


(1) 
Private placement unsecured senior notes under Master Repurchase Agreement discussed below
collectively as the "Notes"
(2) 
Private placement unsecured senior notes with registration rights discussed below collectively as the "Bonds"

    

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Table of Contents

In conjunction with the Elan acquisition discussed in Note 2, the Company retired its former debt arrangements and issued new debt. As a result of the debt retirements, the Company recorded a loss of $165.8 million during the second quarter of fiscal 2014 as follows (in millions):
Make-whole payments
 
$
133.4

Write-off of financing fees on Bridge Agreements
 
19.0

Write-off of deferred financing fees on old debt
 
10.5

Write-off of unamortized discount
 
2.9

Total loss on extinguishment of debt
 
$
165.8


See below for further details of the transactions.

Bridge Agreements    

On July 28, 2013, the Company entered into a $2.65 billion Debt Bridge Credit Agreement (the "Debt Bridge") and a $1.7 billion Cash Bridge Credit Agreement (the "Cash Bridge") with HSBC Bank USA, N.A. as Syndication Agent, Barclays Bank PLC as Administration Agent and certain other participant banks (together, the "Bridge Credit Agreements"). The termination of commitments under such Bridge Credit Agreements was contingent on various factors, but not to be later than July 29, 2014. The funding commitment under the Debt Bridge was reduced by $1.0 billion on September 6, 2013 upon completion of the Company’s Term Loan Agreement (see below) and by an additional $1.65 billion on November 8, 2013 upon funding into escrow of the Company’s public bond offering (see below), at which time the Debt Bridge was terminated. The commitments under the Cash Bridge were terminated on December 24, 2013. At no time did the Company draw under the Bridge Credit Agreements. The Company incurred commitment fees under the Bridge Credit Agreements at a per annum rate of 0.175% from July 28, 2013 to termination of the Bridge Credit Agreements totaling $0.7 million for the nine months ended March 29, 2014. In addition, fees paid in relation to entering into the Bridge Credit Agreements totaled $19.0 million and were charged to expense in the second quarter of fiscal 2014 and included in the loss on debt extinguishment line on the Company's Consolidated Statements of Operations for the nine months ended March 29, 2014.
Extinguishment of Old Debt

In November 2013, Perrigo Company, a wholly owned subsidiary of the Company, made scheduled payments totaling $40.0 million against its 2011 term loan. On December 18, 2013, the Company repaid the remaining principal balance of $360.0 million, together with accrued interest and fees of $0.4 million, then outstanding under its credit agreement dated as of October 26, 2011 with JPMorgan Chase Bank, N.A., as Administration Agent, Bank of America, N.A. and Morgan Stanley Senior Funding, Inc., as Syndication Agents and certain other participant banks (the "2011 Credit Agreement"). Upon completion of such payment, the 2011 Credit Agreement was terminated in its entirety.
On November 20, 2013, Perrigo Company priced a Tender Offer and Consent Solicitation in regard to the 2.95% Notes which were issued pursuant to the Indenture dated as of May 16, 2013 between Perrigo Company and Wells Fargo Bank, National Association (the “Indenture”). Total tender consideration of $578.3 million was comprised of an aggregate principal amount of $571.6 million, a make-whole premium of $4.9 million, and accrued interest of $1.8 million. On December 26, 2013, pursuant to the Indenture, notice was given to holders that the remaining notes not duly tendered would be redeemed on December 27, 2013 at a redemption price of par plus accrued interest. On December 27, 2013, the redemption was completed for a total payment of $28.5 million comprised of aggregate principal of $28.4 million and accrued interest of $0.1 million. Upon completion of the redemption, the Indenture was terminated.
On December 23, 2013, Perrigo Company completed the prepayment of all obligations under its private placement senior notes (the "Notes"). All of the Notes were outstanding under the Master Note Purchase Agreement dated May 29, 2008 with various institutional investors (the "Note Agreement"). The terms of the Note Agreement provided for prepayment at any time at Perrigo Company’s option together with applicable make-whole premiums and accrued interest. The total payment of $1,099.6 million was comprised of $965.0 million for the face amount of the Notes, $128.5 million for the make-whole premium, and $6.1 million for accrued interest. Upon completion of the prepayment, the Note Agreement was terminated.

24
Table of Contents

Issuance of New Debt

On September 6, 2013, the Company entered into a $1.0 billion Term Loan Agreement (the "Term Loan") and a $600.0 million Revolving Credit Agreement (the "Revolver") with Barclays Bank PLC as Administration Agent, HSBC Bank USA, N.A. as Syndication Agent, Bank of America, N.A., JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. as Documentation Agents and certain other participant banks (together, the "Permanent Credit Agreements"). The Term Loan consists of a $300.0 million tranche maturing December 18, 2015 and a $700.0 million tranche maturing December 18, 2018. Both tranches were drawn in full on December 18, 2013. No drawings were outstanding under the Revolver as of March 29, 2014. Obligations of the Company under the Permanent Credit Facilities are guaranteed by Perrigo Company, certain U.S. subsidiaries of Perrigo Company, Elan, and certain Irish subsidiaries of Elan. Amounts outstanding under each of the Permanent Credit Agreements will bear interest at the Company’s option (a) at the alternative base rate or (b) the eurodollar rate plus, in either case, applicable margins as set forth in the Permanent Credit Agreements.
On November 8, 2013, the Company issued $500.0 million aggregate principal amount of its 1.30% Senior Notes due 2016 (the "2016 Notes"), $600.0 million aggregate principal amount of its 2.30% Senior Notes due 2018 (the "2018 Notes"), $800.0 million aggregate principal amount of its 4.00% Senior Notes due 2023 (the "2023 Notes") and $400.0 million aggregate principal amount of its 5.30% Senior Notes due 2043 (the "2043 Notes" and, together with the 2016 Notes, the 2018 Notes and the 2023 Notes, the "Bonds") in a private placement with registration rights. Interest on the Bonds is payable semiannually in arrears in May and November of each year, beginning in May 2014. The Bonds are governed by a Base Indenture and a First Supplemental Indenture between the Company and Wells Fargo Bank N.A., as trustee (collectively the "2013 Indenture"). The Bonds are the Company’s unsecured and unsubordinated obligations, ranking equally in right of payment to all of the Company’s existing and future unsecured and unsubordinated indebtedness and are guaranteed on an unsubordinated, unsecured basis by the Company's subsidiaries that guarantee the Permanent Credit Agreements. The Company received net proceeds of $2,279.1 million from issuance of the Bonds after deduction of issuance costs of $14.6 million and a market discount of $6.3 million. The Bonds are not entitled to mandatory redemption or sinking fund payments. The Company may redeem the Bonds in whole or in part at any time and from time to time for cash at the redemption prices described in the 2013 Indenture.

NOTE 8 – ACCOUNTS RECEIVABLE SECURITIZATION

On July 23, 2009, the Company entered into an accounts receivable securitization program (the "Securitization Program") with several of its wholly owned subsidiaries and Bank of America Securities, LLC ("Bank of America"). The Company renewed the Securitization Program most recently on June 13, 2011, with Bank of America, as Agent, and Wells Fargo Bank, National Association ("Wells Fargo") and PNC Bank, National Association ("PNC") as Managing Agents (together, the "Committed Investors").

The Securitization Program is a three-year program, expiring June 13, 2014. The Company is currently in the process of renewing this facility for a period of one year. During the second quarter of fiscal 2013, the Company amended the terms of the Securitization Program, effectively increasing the amount the Company can borrow to $200.0 million. Under the terms of the Securitization Program, the subsidiaries sell certain eligible trade accounts receivables to a wholly owned bankruptcy remote special purpose entity ("SPE"), Perrigo Receivables, LLC. The Company has retained servicing responsibility for those receivables. The SPE will then transfer an interest in the receivables to the Committed Investors. Under the terms of the Securitization Program, Bank of America, Wells Fargo and PNC have committed $110.0 million, $60.0 million and $30.0 million, respectively, effectively allowing the Company to borrow up to a total amount of $200.0 million, subject to a Maximum Net Investment calculation as defined in the agreement. At March 29, 2014, $200.0 million was available under this calculation. The interest rate on any borrowings is based on a 30-day LIBOR plus 0.45%. In addition, a facility fee of 0.45% is applied to the $200.0 million commitment whether borrowed or undrawn. Under the terms of the Securitization Program, the Company may elect to have the entire amount or any portion of the facility unutilized.

Any borrowing made pursuant to the Securitization Program will be classified as short-term debt in the Company’s Condensed Consolidated Balance Sheet. The amount of the eligible receivables will vary during the year based on seasonality of the business and could, at times, limit the amount available to the Company from the sale of these interests. The Company had no borrowings outstanding under the Securitization Program as of March 29, 2014 and June 29, 2013.


25
Table of Contents

NOTE 9 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
    
The Company utilizes derivative financial instruments to manage exposure to certain risks related to the Company's ongoing operations. The primary risks managed through the use of derivative instruments include interest rate risk and foreign currency exchange risk. The Company recognizes derivative instruments as either assets or liabilities and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For a derivative instrument designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting gain or loss on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of AOCI and subsequently reclassified into earnings when the hedged exposure affects earnings. Any ineffective portion of the change in fair value is immediately recognized in earnings. For derivative instruments that are not designated as accounting hedges, changes in fair value are recognized in earnings in the period of change.

All derivative instruments are managed on a consolidated basis to efficiently net exposures and thus take advantage of any natural offsets. The absolute value of the notional amounts of derivative contracts for the Company approximated $492.5 million and $494.9 million at March 29, 2014 and June 29, 2013, respectively. Gains and losses related to the derivative instruments are expected to be largely offset by gains and losses on the original underlying asset or liability. The Company does not use derivative financial instruments for speculative purposes.

The Company is exposed to credit loss in the event of nonperformance by the counterparties on derivative contracts. It is the Company’s policy to manage its credit risk on these transactions by dealing only with financial institutions having a long-term credit rating of “A” or better and by distributing the contracts among several financial institutions to diversify credit concentration risk. Should a counterparty default, the Company's maximum exposure to loss is the asset balance of the instrument.

Interest Rate Risk Management - The Company is exposed to the impact of interest rate changes. The Company's objective is to manage the impact of interest rate changes on cash flows and the market value of the Company's borrowings. The Company utilizes a mix of debt maturities along with both fixed-rate and variable-rate debt to manage changes in interest rates. In addition, the Company may enter into treasury-lock agreements ("T-Locks") and interest rate swap agreements on certain investing and borrowing transactions to manage its interest rate changes and to reduce its overall cost of borrowing.

Foreign Currency Exchange Risk Management - The Company conducts business in several major international currencies and is subject to risks associated with changing foreign exchange rates. The Company's objective is to reduce cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on business operations. Accordingly, the Company enters 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 revenue and expenses.

Fair Value Hedges

In anticipation of the acquisition of Elan, during the first quarter of fiscal 2014, the Company entered into three pay-floating interest rate swaps with a total notional amount of $425 million to hedge changes in the fair value of the Company's senior notes from fluctuations in interest rates. These swaps were designated and qualified as fair value hedges of the Company's fixed rate debt. Accordingly, the gain or loss recorded on the pay-floating interest rate swaps was directly offset by the change in fair value of the underlying debt. During the second quarter of fiscal 2014, the fair value hedges reduced the Company's interest expense by $2.2 million. Both the derivative instrument and the underlying debt were adjusted to market value at the end of each period with any resulting gain or loss recorded in other expense, net. As a result, the Company recorded a net hedge loss of $3.2 million in other expense, net during the second quarter of fiscal 2014.

Due to the retirement of the underlying senior notes as described in Note 7, the Company terminated its fair value hedges by settling the swap contracts during the second quarter, resulting in net proceeds of $0.9 million. In addition, a loss of $4.1 million was recognized on the change in the fair value of the underlying debt and was recorded in other expense, net, during the second quarter of fiscal 2014.

    



26
Table of Contents

Cash Flow Hedges

The Company enters into derivative instruments to hedge its exposure to changes in cash flows attributable to interest rate and foreign currency fluctuations associated with certain forecasted transactions. These derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of OCI and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. Any ineffective portion of the change in fair value is immediately recognized in earnings.    

The Company previously entered into forward interest rate swaps to manage variability of expected future cash flows from changing interest rates. Due to the retirement of the underlying private placement senior notes (the Notes as described in Note 7), on December 23, 2013, the Company terminated the cash flow hedges related to the Notes, resulting in a loss of $2.6 million recorded to other expense, net upon repayment of the debt in the second quarter of fiscal 2014.
    
During the first quarter of fiscal 2014, the Company entered into forward interest rate swap agreements to hedge against changes in interest rates that could impact the Company's new senior notes (the Bonds as described in Note 7). These swaps were designated as cash flow hedges of expected future debt issuances with a notional amount totaling $725 million. These agreements hedged the variability in future probable interest payments due to changes in the benchmark interest rate between the date the swap agreements were entered into and the date of future debt issuances. On December 18, 2013, the hedges were settled for $15.1 million, and $0.5 million for the ineffective portion was recorded to other expense, net. The effective portion remains in OCI at March 29, 2014 and is being amortized to earnings over the life of the debt.

The Company’s foreign currency hedging program includes cash flow hedges. The Company enters into foreign currency forward contracts in order to hedge the impact of fluctuations of foreign exchange on expected future purchases and related payables denominated in a foreign currency. These forward contracts have a maximum maturity date of 15 months. In addition, the Company enters into foreign currency forward contracts in order to hedge the impact of fluctuations of foreign exchange on expected future sales and related receivables denominated in a foreign currency. These forward contracts also have a maximum maturity date of 15 months. The Company did not have any foreign currency put or call contracts as of March 29, 2014.

Economic (Non-Designated) Hedges

The Company enters into foreign currency contracts to manage its foreign exchange exposure related to intercompany financing transactions and other balance sheet items subject to revaluation that do not meet the requirements for hedge accounting treatment. Accordingly, these derivative instruments are adjusted to current market value at the end of each period through earnings. The gain or loss on these instruments is substantially offset by the remeasurement adjustment on the foreign currency denominated asset or liability. The settlement of the derivative instrument and the remeasurement adjustment on the foreign currency denominated asset or liability are both recorded in other income (expense), net at the end of each period.

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Table of Contents

The effects of all derivative instruments on the Company’s Condensed Consolidated Balance Sheets as of March 29, 2014 and June 29, 2013, and on the Company’s income and OCI for the three and nine months ended March 29, 2014 and March 30, 2013, were as follows (amounts presented exclude any income tax effects) (in millions):

Fair Values of Derivative Instruments in Condensed Consolidated Balance Sheet
(Designated as (non)hedging instruments)
 
 
Asset Derivatives
 
Balance Sheet Presentation
 
Fair Value
 
 
 
March 29,
2014
 
June 29,
2013
Hedging derivatives:
 
 
 
 
 
Foreign currency forward contracts
Other current assets
 
$
3.3

 
$
7.2

Total hedging derivatives
 
 
$
3.3

 
$
7.2

Non-hedging derivatives:
 
 
 
 
 
Foreign currency forward contracts
Other current assets
 
$
0.2

 
$
0.8

Total non-hedging derivatives
 
 
$
0.2

 
$
0.8

 
 
 
 
 
 
 
Liability Derivatives
 
Balance Sheet Presentation
 
Fair Value
 
 
 
March 29,
2014
 
June 29,
2013
Hedging derivatives:
 
 
 
 
 
Foreign currency forward contracts
Accrued liabilities
 
$
—

 
$
0.2

Interest rate swap agreements
Other non-current liabilities
 
8.9

 
10.8

Total hedging derivatives
 
 
$
8.9

 
$
11.0

Non-hedging derivatives:
 
 
 
 
 
Foreign currency forward contracts
Accrued liabilities
 
$
1.2

 
$
0.2

Total non-hedging derivatives
 
 
$
1.2

 
$
0.2


Effects of Derivative Instruments on Income and OCI for the three months ended March 29, 2014, and March 30, 2013
 
Derivatives in Cash Flow
Hedging Relationships
 
Amount of (Gain)/Loss
Recognized in OCI
on Derivative
(Effective Portion)
 
Location and Amount of (Gain)/Loss Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location and Amount of (Gain)/Loss Recognized in Income on Derivative (Ineffective  Portion and Amount Excluded from Effectiveness Testing)
 
 
March 29, 2014
 
March 30, 2013
 
 
March 29, 2014
 
March 30, 2013
 
 
March 29, 2014
 
March 30, 2013
T-Locks
 
$
—

 
$
—

 
Interest, net
$
—

 
$
(0.1
)
 
Other expense, net
$
—

 
$
—

Interest rate swap agreements
 
2.1

 
(1.0
)
 
Interest, net
(0.9
)
 
1.2

 
Other expense, net
—

 
—

Foreign currency forward contracts
 
(1.0
)
 
(2.5
)
 
Net sales
(0.8
)
 
(0.2
)
 
Net sales
(0.2
)
 
—

 
 
 
 
 
 
Cost of sales
(2.7
)
 
0.3

 
Cost of sales
0.2

 
—

 
 
 
 
 
 
Other expense, net
(0.2
)
 
(0.6
)
 
 
 
 
 
Total
 
$
1.1

 
$
(3.5
)
 
 
$
(4.6
)
 
$
0.6

 
 
$
—

 
$
—



28
Table of Contents

Effects of Derivative Instruments on Income and OCI for the nine months ended March 29, 2014, and March 30, 2013
 
Derivatives in Fair Value
Hedge Relationships
 
Location and Amount of (Gain)/Loss Recognized into Income
 
Hedged Item in Fair Value
Hedge Relationship
 
Location and Amount of (Gain)/Loss Recognized in Income on Related Hedged Item
 
 
 
March 29, 2014
 
March 30, 2013
 
 
 
 
March 29, 2014
 
March 30, 2013
Interest rate swap agreements
 
Other expense, net
$
(0.9
)
 
$
—

 
Fixed-rate debt
 
Other expense, net
$
4.1

 
$
—


Derivatives in Cash Flow
Hedging Relationships
 
Amount of (Gain)/Loss
Recognized in OCI
on Derivative
(Effective Portion)
 
Location and Amount of (Gain)/Loss Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location and Amount of (Gain)/Loss Recognized in Income on Derivative (Ineffective  Portion and Amount Excluded from Effectiveness Testing)
 
 
March 29, 2014
 
March 30, 2013
 
 
March 29, 2014
 
March 30, 2013
 
 
March 29, 2014
 
March 30, 2013
T-Locks
 
$
—

 
$
—

 
Interest, net
$
(0.2
)
 
$
(0.3
)
 
Other expense, net
$
(2.3
)
 
$
—

Interest rate swap agreements
 
(9.0
)
 
(1.9
)
 
Interest, net
(3.0
)
 
3.7

 
Other expense, net
5.4

 
—

Foreign currency forward contracts
 
(6.6
)
 
(9.3
)
 
Net sales
(2.0
)
 
0.1

 
Net sales
(0.1
)
 
—

 
 
 
 
 
 
Cost of sales
(5.5
)
 
2.8

 
Cost of sales
0.3

 
0.1

 
 
 
 
 
 
Interest, net
(0.1
)
 
0.1

 
 
 
 
 
 
 
 
 
 
 
Other expense, net
(1.9
)
 
(1.8
)
 
 
 
 
 
Total
 
$
(15.6
)
 
$
(11.2
)
 
 
$
(12.7
)
 
$
4.6

 
 
$
3.3

 
$
0.1


The Company also has forward foreign currency contracts that are not designated as hedging instruments and recognizes the gain or loss associated with these contracts in other expense, net. The Company recorded losses of $0.9 million and $0.3 million for the three and nine months ended March 29, 2014, respectively, and gains of $1.0 million and $1.4 million for the three and nine months ended March 30, 2013, respectively. The net hedge result offsets the revaluation of the underlying balance sheet exposure, which is also recorded in other expense, net.

NOTE 10 – SHAREHOLDERS’ EQUITY

Perrigo Company plc (formerly known as Perrigo Company Limited, and prior thereto, Blisfont Limited) was incorporated under the laws of Ireland on June 28, 2013 and became the successor registrant to Perrigo Company on December 18, 2013 in connection with the consummation of the acquisition of Elan. Perrigo Company shares were cancelled and exchanged for Perrigo Company plc shares on a one-for-one basis (together with the payment of $0.01 in cash per Perrigo Company share). All the remaining unsold shares of Perrigo Company were deregistered. Perrigo Company plc began trading on the New York Stock Exchange on December 19, 2013 and the Tel Aviv Stock Exchange on December 22, 2013 under the same symbol used by Perrigo Company ("PRGO") prior to December 18, 2013. See Note 2 for additional information about the acquisition of Elan.

The Company issued 40 thousand and 43 thousand shares related to the exercise and vesting of share-based compensation during the third quarter of fiscal 2014 and 2013, respectively. Year-to-date, the Company issued 374 thousand and 648 thousand shares related to the exercise and vesting of share-based compensation during fiscal 2014 and 2013, respectively.

The Company does not currently have an ordinary share repurchase program, but may repurchase shares in private party transactions from time to time. Private party transactions are shares repurchased in connection with the vesting of restricted stock awards to satisfy employees' minimum statutory tax withholding obligations. During the three months ended March 29, 2014 and March 30, 2013, the Company repurchased one thousand shares of its common stock for $0.2 million in

29
Table of Contents

private party transactions. During the nine months ended March 29, 2014, the Company repurchased 62 thousand shares for $7.5 million in private party transactions. During the nine months ended March 30, 2013, the Company repurchased 111 thousand shares for $12.3 million in private party transactions. All ordinary shares repurchased by the Company will either be cancelled or held as treasury shares available for reissuance in the future for general corporate purposes.

NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in the Company's AOCI balances, net of tax, for the three months ended March 29, 2014 were as follows (in millions):
 
Fair value
of derivative
financial
instruments,
net of tax
 
Foreign
currency
translation
adjustments
 
Fair value of
investment
securities,
net of tax
 
Post-
retirement and pension
liability
adjustments,
net of tax
 
Total AOCI
Balance as of December 28, 2013
$
(15.1
)
 
$
133.7

 
$
(4.8
)
 
$
0.8

 
$
114.6

OCI before reclassifications
1.9

 
6.2

 
3.8

 
—

 
11.9

Amounts reclassified from AOCI
(2.9
)
 
—

 
6.7

 
—

 
3.8

Net current-period OCI
(1.0
)
 
6.2

 
10.5

 
—

 
15.7

Balance as of March 29, 2014
$
(16.1
)
 
$
139.9

 
$
5.7

 
$
0.8

 
$
130.3

Changes in the Company's AOCI balances, net of tax, for the nine months ended March 29, 2014 were as follows (in millions):
 
Fair value
of derivative
financial
instruments,
net of tax
 
Foreign
currency
translation
adjustments
 
Fair value of
investment
securities,
net of tax
 
Post-
retirement and pension
liability
adjustments,
net of tax
 
Total AOCI
Balance as of June 29, 2013
$
(4.5
)
 
$
80.6

 
$
—

 
$
0.9

 
$
77.0

OCI before reclassifications
(5.0
)
 
59.3

 
(1.0
)
 
(0.1
)
 
53.2

Amounts reclassified from AOCI
(6.6
)
 
—

 
6.7

 
—

 
0.1

Net current period OCI
(11.6
)
 
59.3

 
5.7

 
(0.1
)
 
53.3

Balance as of March 29, 2014
$
(16.1
)
 
$
139.9

 
$
5.7

 
$
0.8

 
$
130.3

    

30
Table of Contents

The following table provides details about reclassifications out of AOCI for the three and nine months ended March 29, 2014 (in millions):
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
March 29, 2014
 
 
Detail of AOCI Components
 
Amount Reclassified from AOCI
 
Affected Line Item in the Consolidated Statements of Income
Cash Flow Hedges (Note 9):
 
 
 
 
 
 
T-Locks
 
$
—

 
$
(0.2
)
 
Interest, net
T-Locks
 
—

 
(2.3
)
 
Other expense, net
Interest rate swap agreements
 
(0.9
)
 
(3.0
)
 
Interest, net
Interest rate swap agreements
 
—

 
4.9

 
Other expense, net
Foreign currency forward contracts
 
(1.0
)
 
(2.1
)
 
Net sales
Foreign currency forward contracts
 
(2.5
)
 
(5.2
)
 
Cost of sales
Foreign currency forward contracts
 
—

 
(0.1
)
 
Interest, net
Foreign currency forward contracts
 
(0.2
)
 
(1.9
)
 
Other expense, net
Subtotal
 
(4.6
)
 
(9.9
)