# PERRIGO Co plc (PRGO) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from PERRIGO Co plc's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1585364/000158536424000009/prgo-20231231.htm Accession: 0001585364-24-000009 Filing date: 2024-02-27 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/PRGO/ All MD&A years: /company/PRGO/mda/ Previous year: /company/PRGO/mda/fy2022/ (FY 2022) Next year: /company/PRGO/mda/fy2024/ (FY 2024) ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Perrigo Company plc was incorporated under the laws of Ireland on June 28, 2013 and became the successor registrant of Perrigo Company, a Michigan corporation, on December 18, 2013 in connection with the acquisition of Elan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo," the "Company," "we," "our," "us," and similar pronouns used herein refer to Perrigo Company plc, its subsidiaries, and all predecessors of Perrigo Company plc and its subsidiaries. The following Management's Discussion and Analysis ("MD&A") is intended to provide readers with an understanding of our financial condition, results of operations, and cash flows by focusing on changes in certain key measures from year to year. This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying Notes found in Item 8 of this report. See also "Cautionary Note Regarding Forward-Looking Statements." This discussion and analysis compares 2023 results to 2022. For discussion and analysis that compares 2022 results to 2021, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of our Annual Report on Form 10-K for the year ended December 31, 2022. EXECUTIVE OVERVIEW Perrigo is a leading pure-play self-care company with more than a century of innovation and experience serving the health and wellness needs of consumers. As one of the originators of the over-the-counter ("OTC") self-care market, Perrigo has a powerful legacy and vast scale in producing high-quality self-care products through a proven ability to proactively shape its portfolio to meet the evolving needs of consumers and customers. Perrigo provides access to trusted self-care products that can be procured without needing to visit a doctor for a prescription. Guided by our vision and purpose, our strategic goal is to create a sustainable and value accretive growth engine by 1) delivering consumer preferred brands and innovation, 2) driving category growth with our customers, 3) powering our business with our world-class quality and supply chain, including a focus on sustainability with meaningful goals to reduce greenhouse gas emissions, water, and waste, in addition to improving the recyclability of our packaging, and 4) evolving our ways of working to one operating model. Our unique competency is to deliver a blended-branded business model of branded, value and store brand product offerings that provide consumers access to self-care products across the value spectrum. Perrigo's broad offerings are well diversified across several major product categories as well as across geographies, primarily in North America and Europe with no one product representing more than 3% of total revenue. In North America, Perrigo is the leading store brand private label provider of self-care products in many categories, including upper respiratory, nutrition and women's health. In Europe, our portfolio consists primarily of brands, including Compeed®, EllaOne®, Solpadeine®, and ACO®. Several initiatives are anticipated to advance our self-care strategy, including the implementation of our Supply Chain Reinvention Program and Project Energize, a global investment and efficiency program. In addition, we continue to invest in other initiatives, including innovation, information systems and tools, and our people to drive consistent and sustainable results. Our fiscal year begins on January 1 and ends on December 31. We end our quarterly accounting periods on the Saturday closest to the end of the calendar quarter, with the fourth quarter ending on December 31 of each year. Our Segments Our reporting and operating segments reflect the way our chief operating decision maker, who is our CEO, makes operating decisions, allocates resources and manages the growth and profitability of the Company. Our reporting and operating segments are: •Consumer Self-Care Americas ("CSCA") comprises our consumer self-care business in the U.S. and Canada. CSCA previously included our Latin American businesses until they were disposed on March 9, 2022. •Consumer Self-Care International ("CSCI") comprises our consumer self-care business outside of the U.S. and Canada, primarily in Europe and Australia. 36 Perrigo Company plc - Item 7 Executive Overview For information on each segment, our business environment, and competitive landscape, refer to Item 1. Business. For results by segment and geographic locations see below Segment Results and Item 8. Note 2 and Note 20. Recent Highlights Market Factors and Trends Economic Uncertainty Current macroeconomic conditions remain very dynamic, including impacts from rising inflation and interest rates, volatile changes in foreign currency exchange rates, political unrest, COVID-19 and legislative and regulatory changes. Any causes of market size contraction could reduce our sales or erode our operating margin and consequently reduce our net earnings and cash flows. Our interest expense is impacted by the overall global economic and interest rate environment. We manage interest rate risk through our capital structure and the use of interest rate swaps to fix the interest rate on greater than 90% of our outstanding debt. Inflationary Costs and Supply Chain Over the course of 2022 and 2023, supply chain disruptions, including volatility in both cost and availability of agricultural, oil and paper based commodities driven by the war in Ukraine, have led to higher input costs. Additionally, we experienced employment vacancies and attrition as the labor market negatively impacted productivity and drove the need for wage rate increases and other retention benefits. We implemented a series of actions to substantially mitigate these and other inflationary cost pressures such as strategic pricing and our Supply Chain Reinvention Program. Benefits from our actions have begun to substantially offset inflationary pressures, and the global freight constraints in availability of freight containers and truck drivers have normalized. However, future supply chain disruptions and inflationary pressures from the continuation of the war in Ukraine and the more recent events from the war in Israel are uncertain. Infant Formula As part of its efforts to prevent supply interruptions and future Cronobacter spp. illnesses associated with powdered infant formula, in March 2023, the FDA released an “Immediate National Strategy to Increase the Resiliency of the U.S. Infant Formula Market” and issued a letter to the powdered infant formula industry to share information to assist the industry in improving the microbiologic safety of powdered infant formula. In response to those changes, we made considerable investments in all our infant formula manufacturing sites, including enhanced cleaning and sanitation protocols, enhancements to our environmental monitoring programs and added additional quality personnel. These changes resulted in lower manufacturing output and production yields across our infant formula network. As previously disclosed, the Company received a warning letter from the FDA on August 30, 2023 relating to the Perrigo Wisconsin infant formula facility, which was acquired from a third party in November 2022. While the Company worked to resolve the issues raised in the August 30 letter, on November 29, 2023, the Company received notice from the FDA of additional inspection observations relating to Perrigo Wisconsin. Consistent with the Company’s commitment to quality, the Company temporarily paused all production at that facility and conducted an extended site-wide assessment and cleaning. The Company also bolstered its internal resources and brought in additional outside expertise to help revise, enhance and strengthen comprehensive standards and processes across our infant formula network. As part of this plan, each of our infant formula manufacturing facilities are undergoing a site-specific evaluation and a plant wide reset, which may entail a pausing of production for comprehensive cleaning, infrastructure improvements and further enhancements to quality protocols and manufacturing processes. Perrigo Wisconsin has recently completed its plant-wide reset, and is now back in production. Our other two infant formula facilities are under evaluation or set to begin a reset in the first quarter of 2024. We have incurred and expect to incur certain extraordinary non-recurring costs associated with the evolving U.S. infant formula regulatory landscape, including consulting and legal fees relating to the Company’s responses to the FDA and the development and institution of new protocols across our infant formula manufacturing sites, as well as other costs relating to the extended cleaning and sanitization and the pausing and restarting of production. We also expect higher ongoing operating costs at our infant formula manufacturing sites moving forward as we implement 37 Perrigo Company plc - Item 7 Executive Overview our enhanced program with additional internal capabilities. Cash costs in 2024 to achieve this remediation plan are estimated at $35 to $45 million. Due to these costs and the unabsorbed overhead and depressed sales volumes resulting from these actions, infant formula results in 2024 is now expected below 2023 levels. War in Ukraine The invasion of Ukraine by Russia and resulting economic and political sanctions imposed by the United States, United Kingdom, European Union, and other countries on Russia, Belarus, and occupied regions in Ukraine have negatively impacted our results from operations in the region. We currently have 68 employees working in our Ukraine subsidiary. We do not have a subsidiary or employees in Russia. We have no manufacturing facilities in either Russia or Ukraine and we previously sold products into Russia entirely through distributors. In March 2022, we halted all sales to distributors in Russia and sales in Ukraine were severely depressed. Future impacts are difficult to predict due to the high level of uncertainty related to the war’s duration, evolution and resolution. If the conflict spreads or materially escalates, or economic conditions deteriorate, the impact on our business and results of operations could be material. Israel-Hamas War We continue to closely monitor the ongoing Israel/Hamas conflict and the social, political and economic environment in Israel and in the surrounding region to evaluate the impacts on our operations and supply chain. Israel is a global technology research and development center that plays a critical role to the global API market, as a number of key suppliers are located within Israel. The Company sources some raw materials and finished goods from suppliers in Israel for certain self-care products, including Omeprazole. Despite this situation, to date, Perrigo has confirmed that our suppliers in the region have active operations and continue to manufacture materials for us, and we have not received any reports of restrictions on imports or exports in Israel. However, there is potential for some disruption as it relates to in-country logistics, including freight. As a precaution, Perrigo has engaged alternate suppliers to help minimize a potential supply disruption. If the conflict spreads or materially escalates, or if the conflict leads to further volatility and uncertainty in financial markets or economic conditions, the impact on our business and results of operations could be material. Foreign Exchange We have both translation and transaction exposure to the fluctuation of exchange rates. Translation exposures relate to exchange rate impacts of measuring income statements of foreign subsidiaries that do not use the U.S. dollar as their functional currency. Transaction exposures relate to 1) the impact from input costs that are denominated in a currency other than the local reporting currency and 2) the revaluation of transaction-related working capital balances denominated in currencies other than the functional currency. Significant exchange rate fluctuations, especially in the Euro or the British Pound Sterling, have had, and could continue to have, a significant impact on our net sales, net earnings and cash flows, and have significantly impacted our historical net sales, costs and net earnings and could do so in the future. Restructuring Supply Chain Reinvention Program In 2022, we initiated a Supply Chain Reinvention Program to reduce structural costs, improve profitability and our service levels to our retail partners, and strengthen our resiliency by streamlining and simplifying our global supply chain. Through this initiative, we plan to reduce portfolio complexity, invest in advanced planning capabilities, diversify sourcing, and optimize our manufacturing assets and distribution models. We have identified a total annual run-rate potential savings opportunity by the end of fiscal year 2028 of between an estimated $200 million to $300 million (not including related depreciation expense on capital investments) if all facets of the Program are successfully implemented and executed. To obtain these potential benefits, we anticipate incurring costs of between $350 million to $570 million by the end of fiscal year 2028 to complete the program implementation, including capital investments, restructuring expenses, and implementation costs. A significant portion of the annual run-rate potential savings of the Program, between $150 million to $200 million (not including related depreciation expense on capital investments), are anticipated by the end of fiscal year 2025, along with associated potential spend of between $300 38 Perrigo Company plc - Item 7 Executive Overview million and $450 million. During 2023, we achieved approximately $40 million of net savings, partially offset by approximately $28 million of restructuring expense. Refer to Item 8. Note 17. Project Energize Perrigo has successfully transformed into a pure-play consumer self-care company and is now embarking on the next stage of its self-care journey - evolving to One Perrigo. This evolution will create sustainable, value accretive growth through a blended-branded business model that better positions the Company to win in self-care. As part of the Company's sustainable, value accretive growth strategy, the Company is launching Project Energize - a global investment and efficiency program to drive the next evolution of capabilities and organizational agility. This three-year program is expected to produce significant benefits in the Company’s long-term business performance by enabling our One Perrigo growth strategy, increasing organizational agility and mitigating impacts from stabilizing and strengthening the infant formula business. Project Energize will be initiated in the first quarter of 2024, subject to local law and consultation requirements, and is expected to deliver an annualized pre-tax savings in the range of $140 million to $170 million by 2026. The Company expects to reinvest approximately $40 million to $60 million of these savings to drive its blended-branded business model. Restructuring and related charges associated with these actions are estimated to be in the range of $140 million to $160 million, including $20 million to $40 million in investments to enhance capabilities and are expected to be substantially incurred by the end of 2026. Restructuring activities as part of Project Energize are expected to result in the net reduction of approximately 6% of total Perrigo roles. Impairments During the three months ended December 31, 2023, we identified impairment indicators within our Rare Diseases reporting unit within the CSCI Segment as a result of performance and market factors that led to increased discount rates and lower comparable company multiples. We determined the reporting unit was impaired and recorded an impairment charge totaling $90.0 million related to goodwill. Refer to Item 8. Note 9. Indebtedness and Capital In December 2023, we entered into Amendment No. 1, an Incremental Assumption Agreement to our Term Loan and Revolving Credit Agreement that provides for a fungible add on to the Term B Loans in an aggregate principal amount of $300 million. The funds were used to settle the cash tender offer by Perrigo Finance Unlimited Company ("Perrigo Finance") for $300.0 million in aggregate principal amount of 3.900% Senior Notes due 2024 ("2024 Notes"). The tender offer was settled on December 15, 2023, and Perrigo Finance accepted for purchase $300.0 million of the 2024 Notes and paid approximately $295.1 million in aggregate cash consideration (excluding accrued interest). Refer to Item 8. Note 12. Tax Updates On January 13, 2021, the IRS issued a 30-day letter and Revenue Agent's Report with respect to its audit of our 2013 to 2015 fiscal tax years. The 30-day letter proposed, among other modifications, to reduce Perrigo U.S.'s deductible interest expense for certain intercompany debts owed in connection with the 2013 Elan merger transaction. On May 5, 2023, we finalized an agreement with IRS Appeals providing for settlement of the May 7, 2020 NOPA. In addition, based on the agreement with IRS Appeals, we will apply similar adjustments for all remaining tax years through 2018. In the second quarter of fiscal year 2023 we adjusted previously established reserves related to this and other matters in the same audit period. Refer to Item 1. Note 18 for additional information. On December 20, 2023 the IRS Examination Team confirmed its application of interest rates agreed with IRS Appeals to all remaining tax years with deductible interest expense relating to such intercompany debt. RESULTS OF OPERATIONS Currency Translation Currency translation effects described below represent estimates of the net differences between translation of foreign currency transactions into U.S. dollars for the year ended December 31, 2023 at the average exchange rates for the reporting period and average exchange rates for the year ended December 31, 2022. 39 Perrigo Company plc - Item 7 Consolidated CONSOLIDATED Consolidated Financial Results [[GREPCENT_TABLE]] [["","Year Ended"],["(in millions, except percentages)","December 31, 2023","","December 31, 2022"],["Net sales","$","4,655.6","","","$","4,451.6"],["Gross profit","$","1,680.4","","","$","1,455.4"],["Gross profit %","36.1","%","","32.7","%"],["Operating income","$","151.9","","","$","78.9"],["Operating income %","3.3","%","","1.8","%"]] [[/GREPCENT_TABLE]] Net sales increased $204.0 million, or 4.6%, primarily due to: •$195.9 million increase from our acquisitions, comprised of ten additional months of Gateway (acquired on November 1, 2022) inclusive of an unfavorable impact of $9.2 million from a voluntary product recall and four additional months of HRA Pharma (acquired on April 29, 2022) inclusive of an unfavorable impact of $19.8 million due to distributor transitions as part of the integration strategy to capture synergies from the acquisition of HRA Pharma; and •$73.8 million increase, or 1.7%, due primarily to approximately $209 million in strategic pricing actions and higher sales volume in the Skin Care, Healthy Lifestyle and Upper Respiratory product categories. E-commerce and new products also contributed to category growth. The increase was partially offset by lower net sales stemming from the evolving FDA regulatory expectations for infant formula manufacturing, declines in legacy nutrition in the CSCA segment due primarily to purposeful SKU prioritization actions to focus capacity on higher margin products and $9.4 million due to distributor transition in addition to the impacts noted above; partially offset by •$49.9 million decrease from exited product lines and $19.3 million decrease from the divestitures of the Latin American businesses and ScarAway® brand asset in the prior year. Operating income increased $73.0 million, or 92.5%, due to: •$225.0 million increase in gross profit driven by higher net sales flow through and the benefits from our supply chain reinvention program primarily within CSCA. These were partially offset by lower infant formula productivity within U.S. nutrition stemming from the evolving FDA regulatory expectations for infant formula manufacturing and unfavorable cost of goods sold inflation primarily in Europe. Gross profit as a percentage of net sales increased 340 basis points compared to the prior year driven by strategic pricing actions, benefits from purposeful SKU prioritization actions and higher margin new products. These positive initiatives were partially offset by higher cost of goods sold inflation in the E.U. and lower manufacturing productivity in U.S. nutrition. •$152.0 million increase in operating expenses due primarily to $90.0 million in goodwill impairment charges related to the Rare Diseases reporting unit in the CSCI segment, the acquisition of HRA Pharma and Gateway, and higher employee expenses, partially offset by decreased acquisition and integration expenses compared to the prior year period. 40 Perrigo Company plc - Item 7 CSCA CONSUMER SELF-CARE AMERICAS Segment Financial Results [[GREPCENT_TABLE]] [["","Year Ended"],["(in millions, except percentages)","December 31, 2023","","December 31, 2022"],["Net sales","$","2,962.3","","","$","2,925.9"],["Gross profit","$","908.4","","","$","787.2"],["Gross profit %","30.7","%","","26.9","%"],["Operating income","$","389.6","","","$","366.1"],["Operating income %","13.2","%","","12.5","%"]] [[/GREPCENT_TABLE]] Net sales increased $36.4 million, or 1.2% primarily due to: •$127.6 million increase from our acquisitions, comprised of ten additional months of Gateway (acquired on November 1, 2022) inclusive of an unfavorable impact of $9.2 million from a voluntary product recall and four additional months of HRA Pharma (acquired on April 29, 2022); partially offset by •$38.1 million decrease, or 1.3%, due primarily to lower net sales stemming from the evolving FDA regulatory expectations for infant formula manufacturing and declines in legacy nutrition due primarily to purposeful SKU prioritization actions to focus capacity on higher margin products, partially offset by approximately $100 million of strategic pricing actions in addition to new products; and •$32.5 million decrease from exited product lines and $19.3 million decrease from the divestitures of the Latin American businesses and the ScarAway® brand asset in the prior year. CSCA net sales by product category were as follows: [[GREPCENT_TABLE]] [["Sales","Year Ended"],["(in millions, except percentages)","December 31, 2023","","December 31, 2022","","$ Change","","% Change"],["Nutrition","$","563.2","","","$","564.6","","","$","(5.4)","","","(1.0)","%"],["Upper Respiratory","559.2","","","520.4","","","42.8","","","8.2","%"],["Digestive Health","505.3","","","495.5","","","9.8","","","2.0","%"],["Pain and Sleep-Aids","396.4","","","412.2","","","(15.8)","","","(3.8)","%"],["Oral Care","313.9","","","312.9","","","1.0","","","0.3","%"],["Healthy Lifestyle","311.7","","","288.9","","","22.8","","","7.9","%"],["Skin Care","196.2","","","187.8","","","8.4","","","4.5","%"],["Women's Health","46.9","","","45.2","","","1.7","","","3.8","%"],["Vitamins, Minerals, and Supplements (\"VMS\")","17.5","","","27.9","","","(10.4)","","","(37.3)","%"],["Other CSCA","52.0","","","70.5","","","(18.5)","","","(26.2)","%"],["Total CSCA","$","2,962.3","","","$","2,925.9","","","$","36.4","","","1.2%"]] [[/GREPCENT_TABLE]] Sales in each category were driven primarily by: •Nutrition: Net sales of $563.2 million increased 8.2% driven by the Gateway acquisition and strong growth in contract infant formula, partially offset by lower net sales in legacy infant formula and lower manufacturing productivity stemming from the FDA's evolving industry guidelines on infant formula manufacturing; •Upper Respiratory: Net sales of $559.2 million decreased 1.0% due primarily to lower net sales of allergy products driven by a weaker and later start to the allergy season compared to the prior year, a voluntary OTC product recall, the divested Latin American businesses and exited product lines. These factors were partially offset by higher net sales of cough cold products, led by store brand Guaifenesin-based offerings, and the new product launch of store brand Cough Relief Liquid Honey; 41 Perrigo Company plc - Item 7 CSCA •Digestive Health: Net sales of $505.3 million increased 2.0% due primarily to increased manufacturing capacity and demand for Polyethylene Glycol 3350 as well as new products, including Omeprazole Mini Capsules and Polyethylene Glycol 3350 Orange; partially offset by the divested Latin American businesses; •Pain and Sleep-Aids: Net sales of $396.4 million decreased 3.8% due primarily to purposeful SKU prioritization actions in adult analgesic offerings to focus capacity on higher margin products as well as the divested Latin American businesses, partially offset by new products, including store brand Dual Action Acetaminophen 250mg and Ibuprofen 125mg Tablets, and higher demand for children's analgesics products; •Oral Care: Net sales of $313.9 million increased 0.3% due primarily to the normalization of supply chain disruptions that impacted net sales in the prior year and strong consumer demand for oral care products, partially offset by purposeful SKU prioritization actions; •Healthy Lifestyle: Net sales of $311.7 million increased 7.9% due primarily to higher volumes and market share gains in smoking cessation products; •Skin Care: Net sales of $196.2 million increased 4.5% due primarily to the addition of HRA Pharma brands, including Mederma® and Compeed®, partially offset by the divested Latin American businesses and ScarAway® brand, and exited product lines; •Women's Health: Net sales of $46.9 million increased 3.8% due primarily to the addition of HRA Pharma brands, including ella®, partially offset by purposeful SKU prioritization actions in feminine hygiene; •VMS and Other: Net sales of $69.5 million decreased 29.4% due primarily to the divested Latin American businesses and purposeful SKU prioritization actions. Operating income increased $23.5 million, or 6.4%, due primarily to: •$121.2 million increase in gross profit driven by higher net sales flow through and the benefits from our supply chain reinvention program; partially offset by lower infant formula manufacturing productivity in U.S. nutrition stemming from the evolving FDA regulatory expectations for infant formula manufacturing. Gross profit as a percentage of net sales increased 380 basis points compared to the prior year driven by strategic pricing actions and benefits from purposeful SKU prioritization actions to focus capacity on higher margin products, partially offset by lower manufacturing productivity in U.S. nutrition. •$97.7 million increase in operating expenses due primarily to the addition of HRA Pharma and Gateway as well as higher advertising and promotion costs on branded business, and higher administration costs, partially offset by reduced distribution costs compared to the prior year. CONSUMER SELF-CARE INTERNATIONAL Segment Financial Results [[GREPCENT_TABLE]] [["","Year Ended"],["(in millions, except percentages)","December 31, 2023","","December 31, 2022"],["Net sales","$","1,693.3","","","$","1,525.7"],["Gross profit","$","772.0","","","$","668.2"],["Gross profit %","45.6","%","","43.8","%"],["Operating income (loss)","$","(35.2)","","","$","(30.0)"],["Operating income %","(2.1)","%","","(2.0)","%"]] [[/GREPCENT_TABLE]] Net sales increased $167.6 million, or 11.0% primarily due to: •$111.9 million, or 7.4%, net increase due primarily to approximately $108 million of strategic pricing actions, and higher sales volume in certain product categories driven by new products, partially offset by an unfavorable impact of $9.4 million due to distributor transitions as part of the integration strategy to capture synergies after the twelve month anniversary of the HRA Pharma acquisition; and 42 Perrigo Company plc - Item 7 CSCI •$68.3 million increase from twelve months HRA Pharma in the current year versus eight months in the prior year, inclusive of an unfavorable impact of $19.8 million due to distributor transitions as part of the integration strategy to capture synergies from the acquisition of HRA Pharma in addition to the impacts noted above; partially offset by •$17.5 million decrease from exited product lines. CSCI net sales by product category were as follows: [[GREPCENT_TABLE]] [["Sales","Year Ended"],["(in millions, except percentages)","December 31, 2023","","December 31, 2022 (1)","","$ Change","","% Change"],["Skin Care","$","372.5","","","$","334.6","","","$","37.9","","","11.3","%"],["Upper Respiratory","299.1","","","268.7","","","30.4","","","11.3","%"],["Healthy Lifestyle","225.7","","","209.7","","","16.0","","","7.6","%"],["Pain and Sleep-Aids","222.9","","","200.2","","","22.7","","","11.3","%"],["VMS","185.5","","","183.9","","","1.6","","","0.9","%"],["Women's Health","119.7","","","96.1","","","23.6","","","24.6","%"],["Oral Care","101.5","","","94.8","","","6.7","","","7.1","%"],["Digestive Health","41.0","","","35.5","","","5.5","","","15.5","%"],["Other CSCI","125.4","","","102.2","","","23.2","","","22.7","%"],["Total CSCI","$","1,693.3","","","$","1,525.7","","","$","167.6","","","11.0%"]] [[/GREPCENT_TABLE]] (1) We updated our global reporting product categories as a result of our product portfolio reconfiguration. These product category updates have been adjusted retroactively to reflect the changes and have no impact on historical financial position, results of operations, or cash flows. Refer to Item 8. Note 2. Sales in each category were driven primarily by: •Skin Care: Net sales of $372.5 million increased 11.3%, inclusive of a 3.0% unfavorable effect of currency translation, driven primarily by the addition of HRA brands, including Compeed®, and strong sales within the Sebamed and ACO brand lines; •Upper Respiratory: Net sales of $299.1 million increased 11.3%, inclusive of a 1.5% favorable effect of currency translation, due primarily to increased demand for cough/cold products, including Bronchostop and Coldrex stemming from a 2022/2023 strong cough/cold and flu season, and higher net sales of allergy products, including Beconase; •Healthy Lifestyle: Net sales of $225.7 million increased 7.6%, inclusive of a 1.1% favorable effect of currency translation, due primarily to higher net sales of anti-parasite offerings, including Paranix and Jungle Formula, and higher demand for smoking cessation products, partially offset by lower category consumption in weight loss, impacting XLS Medical; •Pain & Sleep-Aids: Net sales of $222.9 million increased 11.3%, inclusive of a 1.8% favorable effect of currency translation, due primarily to higher demand for Solpadeine, U.K. store brand products and higher net sales for Nytol; •VMS: Net sales of $185.5 million increased 0.9%, inclusive of a 2.2% favorable effect of currency translation, due primarily to increased net sales of Davitamon and Abtei, partially offset by lower category consumption; •Women's Health: Net sales of $119.7 million increased 24.6%, inclusive of a 2.0% favorable effect of currency translation, due primarily to the addition of HRA brands, including ellaOne® and NorLevo®; •Oral Care: Net sales of $101.5 million increased 7.1% inclusive of a 1.4% favorable effect of currency translation, due primarily to strong growth of store brand oral care products; •Digestive Health and Other: Net sales of $166.4 million increased 20.8%, inclusive of a 1.9% unfavorable effect of currency translation, due primarily to the addition of the HRA Pharma Rare Diseases portfolio in the Other category and higher net sales of store brand digestive health products and distribution brands. 43 Perrigo Company plc - Item 7 CSCI Operating income decreased $5.2 million, or 17.3%, due to: •$103.8 million increase in gross profit driven by higher net sales flow through and the addition of HRA Pharma, partially offset by cost of goods sold inflation. Gross profit as a percentage of net sales increased 180 basis points due primarily to strategic pricing actions and the acquisition of higher margin HRA products partially offset by less favorable product mix and higher cost of goods sold inflation; and •$109.0 million increase in operating expenses due primarily to $90.0 million in goodwill impairment charges related to the Rare Diseases reporting unit in the CSCI segment and higher selling and administrative expenses as a result of twelve months of HRA Pharma expenses in the current year versus eight months in the prior year, partially offset by lower operating expenses driven by HRA cost synergies realized as part of the integration actions and lower restructuring expenses compared to the prior year. Unallocated Expenses Unallocated expenses are comprised of certain corporate services not allocated to our reporting segments and are recorded above Operating income on the Consolidated Statements of Operations. Unallocated expenses were as follows (in millions): [[GREPCENT_TABLE]] [["Year Ended"],["December 31, 2023","","December 31, 2022"],["$","202.4","","","$","257.2"]] [[/GREPCENT_TABLE]] The decrease of $54.8 million in unallocated expenses during the year ended December 31, 2023 compared to the prior year period was due primarily to a decrease in acquisition and integration expenses associated with the HRA Pharma and Gateway acquisitions. Interest expense, net, Other (income) expense, net and (Gain) Loss on extinguishment of debt (Consolidated) [[GREPCENT_TABLE]] [["","Year Ended"],["(in millions)","December 31, 2023","","December 31, 2022"],["Interest expense, net","$","173.8","","","$","156.0"],["Other (income) expense, net","$","(10.4)","","","$","53.1"],["(Gain) loss on extinguishment of debt","$","(3.2)","","","$","8.9"]] [[/GREPCENT_TABLE]] Interest Expense, net     The $17.8 million increase during the year ended December 31, 2023 compared to the prior year was due primarily to an increase in interest expense associated with an increase in outstanding borrowings under our Senior Secured Credit Facilities. Other (Income) Expense, Net The $63.5 million decrease in expense during the year ended December 31, 2023 compared to the prior year was due primarily to unfavorable changes in revaluation of foreign currency expense associated with the acquisition of HRA Pharma and termination expense of the forward currency options related to the acquisition of HRA Pharma in the prior year. (Gain) Loss on extinguishment of debt The $3.2 million gain on extinguishment of debt during the year ended December 31, 2023 is related to the debt refinancing and tender offer activity during the fourth quarter of 2023. The $8.9 million loss on extinguishment of debt during the year ended December 31, 2022 is related to the write-off of certain new and previously deferred financing fees and make whole payments due in connection with repaying outstanding borrowings prior to maturity (refer to Item 8. Note 12). 44 Perrigo Company plc - Item 7 Unallocated, Interest, Other, and Taxes Income Taxes (Consolidated) The effective tax rates were as follows: [[GREPCENT_TABLE]] [["Year Ended"],["December 31, 2023","","December 31, 2022"],["47.2","%","","5.9","%"]] [[/GREPCENT_TABLE]] The effective tax rate on the pre-tax loss for the year ended December 31, 2023, increased when compared to the effective tax rate on the pre-tax loss for the year ended December 31, 2022, primarily due to audit settlements in the current year and changes in the jurisdictional mix of earnings, offset by the non-deductibility of certain charges and expenses in 2023. FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES Overview We finance our operations with internally generated funds, supplemented by credit arrangements with third parties and capital market financing. We routinely monitor current and expected operational requirements and financial market conditions to evaluate other available financing sources including term and revolving bank credit and securities offerings. In determining our future capital requirements, we regularly consider, among other factors, known trends and uncertainties, such as the wars in Ukraine and Israel, inflation and interest rates, the status of material contingent liabilities, recent financial market volatility, the COVID-19 pandemic and other uncertainties. Subject to relevant restrictions under our debt agreements, our cash requirements for other purposes and other factors management deems relevant, we may from time to time use available funds to redeem, repurchase or refinance our debt in privately negotiated or open market transactions, by tender offer or otherwise, in compliance with applicable laws, rules and regulations, at prices and on terms we deem appropriate (which may be below par). Based on the foregoing, management believes that our operations and borrowing resources are sufficient to provide for our short-term and long-term capital requirements, as described below. However, an adverse result with respect to our appeal of any material outstanding tax assessments or litigation, including securities or drug pricing matters and product liability cases, damages resulting from third-party claims, and related interest and/or penalties, could ultimately require the use of corporate assets to pay such assessments, and any such use of corporate assets would limit the assets available for other corporate purposes. As such, we continue to evaluate the impact of the above factors on liquidity and may determine that modifications to our capital structure are appropriate if market conditions deteriorate, favorable capital market opportunities become available, or any change in conditions relating to the wars in Ukraine and Israel, inflation and interest rates, the status of material contingent liabilities, financial market volatility, the COVID-19 pandemic or other uncertainties have a material impact on our capital requirements. Cash, Cash Equivalents and Restricted Cash [[GREPCENT_TABLE]] [["","Year Ended"],["(in millions)","December 31, 2023","","December 31, 2022"],["Cash, cash equivalents and restricted cash","$","751.3","","","$","600.7"],["Working capital(1)","$","935.9","","","$","1,041.8"]] [[/GREPCENT_TABLE]] (1) Working capital represents current assets less current liabilities, excluding cash, cash equivalents and restricted cash, assets and liabilities held for sale, and excluding current indebtedness. Cash, cash equivalents, restricted cash, cash flows from operations, and borrowings available under our credit facilities are expected to be sufficient to finance our liquidity and capital expenditures in both the short and long term. Although our lenders have made commitments to make funds available to us in a timely fashion under our revolving credit agreements and overdraft facilities, if economic conditions worsen or new information becomes publicly available impacting the institutions’ credit rating or capital ratios, these lenders may be unable or unwilling to lend money pursuant to our existing credit facilities. Should our outlook on liquidity requirements change substantially from current projections, we may seek additional sources of liquidity in the future. 45 Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources Cash Flows The following table includes summarized cash flow activities: [[GREPCENT_TABLE]] [["","Year Ended"],["(in millions)","December 31, 2023","","December 31, 2022","","$ Change"],["Net cash from operating activities","$","405.5","","","$","307.3","","","$","98.2"],["Net cash (for) from investing activities","(77.5)","","","(1,958.6)","","","1,881.1"],["Net cash (for) from financing activities","(187.2)","","","421.6","","","(608.8)"],["Effect of exchange rate changes on cash and cash equivalents","9.8","","","(48.9)","","","58.7"],["Net increase (decrease) in cash and cash equivalents","$","150.6","","","$","(1,278.6)","","","$","1,429.2"]] [[/GREPCENT_TABLE]] Net cash from Operating Activities The $98.2 million increase in operating cash inflow was primarily driven by an increase in cash flow from the change in net earnings after adjustments, partially offset by higher working capital needs, primarily related to timing of sales and payments received and made. Net cash (for) from Investing Activities The $1.9 billion increase in cash from investing cash flow was due primarily to the absence of $1.9 billion cash paid in the prior year for the acquisitions of HRA Pharma and a $16.5 million increase in proceeds from royalty rights primarily driven by higher milestone income related to legacy royalty rights in the current year. Capital expenditures totaled approximately $101.7 million in 2023. We anticipate 2024 capital expenditures to be between $130 million and $180 million, depending on the progression of infant formula plant investments, our Supply Chain Reinvention Program, Project Energize, and project timelines related to manufacturing productivity and efficiency upgrades, software and technology initiatives, and general plant maintenance. We expect to fund these estimated capital expenditures with funds from operating cash flows. Net cash (for) from Financing Activities The $608.8 million decrease in financing cash flow was due primarily to a decrease in cash of $1.6 billion from the issuance of our Senior Secured Credit Facilities and related financing fees in the prior year. We refinanced a portion of the 3.900% Notes due in 2024 with a $300 million fungible add on to the existing 2022 Term B Loan in December 2023 (refer to Item 8. Note 12). Long term debt payments and payments for debt issuance costs decreased $666.2 million compared to the prior year. Additionally, we increased our dividend payment by $7.3 million compared to the prior year. Share Repurchases In October 2018, our Board of Directors authorized up to $1.0 billion of share repurchases with no expiration date, subject to the Board of Directors’ approval of the pricing parameters and amount that may be repurchased under each specific share repurchase program. We did not repurchase any shares during the year ended December 31, 2023 or December 31, 2022. The future repurchase of shares, if any, is subject to the discretion of our Board of Directors. Dividends In January 2003, the Board of Directors adopted a policy of paying quarterly dividends. We paid dividends as follows: [[GREPCENT_TABLE]] [["","Year Ended"],["","December 31, 2023","","December 31, 2022"],["Dividends paid (in millions)","$","149.7","","","$","142.4"],["Dividends paid per share","$","1.09","","","$","1.04"]] [[/GREPCENT_TABLE]] 46 Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources The declaration and payment of dividends, if any, is subject to the discretion of our Board of Directors and will depend on our earnings, financial condition, availability of distributable reserves, capital and surplus requirements, and other factors our Board of Directors may consider relevant. Borrowings and Capital Resources On April 20, 2022, we and our indirect wholly-owned subsidiary, Perrigo Investments, LLC (the "Borrower") entered into the senior secured credit facilities, which consisted of (i) a $1.0 billion five-year revolving credit facility (the "Revolver"), (ii) a $500.0 million five-year Term Loan A facility (the "Term Loan A Facility" and the Term A Loans thereunder, the "Term A Loans"), and (iii) a $1.1 billion seven-year Term Loan B facility (the "Term Loan B Facility" and the Term B loans thereunder borrowed on April 20, 2022 , the "2022 Term B Loans"), all pursuant to a Term Loan and Revolving Credit Agreement (the "Credit Agreement"). On December 15, 2023, we and the Borrower entered into Amendment No. 1, an Incremental Assumption Agreement (the "Amendment") to the Credit Agreement. The Amendment provides for a fungible add on to the 2022 Term B Loans in an aggregate principal amount of $300.0 million (the "Incremental Term B Loans" and together with the 2022 Term B Loans, the “Term B Loans”). The terms of the Incremental Term B Loans, including pricing and maturity, are identical to the 2022 Term B Loans. The Term B Loans will mature on April 20, 2029. The net proceeds from the Incremental Term B Loans were used to settle the cash tender offer by Perrigo Finance for $300.0 million in aggregate principal amount of 3.900% Senior Notes due 2024 ("2024 Notes"). The tender offer was settled on December 15, 2023, and Perrigo Finance accepted for purchase $300.0 million of the 2024 Notes and paid approximately $295.1 million in aggregate cash consideration (excluding accrued interest). Refer to Item 8. Note 12. Our short term debt as of December 31, 2023 of $440.6 million is comprised of (i) the remaining portion of the 3.900% Senior Notes due 2024, (ii) amortization payments for the Term A Loans and the Term B Loans and (iii) lease payments. Term Loans and Notes As of December 31, 2023 and December 31, 2022, we had $1,858.1 million and $1,588.3 million, respectively, outstanding under our Term Loan A Facility and Term Loan B Facility. Loans under the Credit Agreement bear interest at a rate equal to, at the Borrower’s option and depending on the currency borrowed, either the adjusted Term SOFR Rate, EURIBOR Rate, the prime lending rate or the daily simple RFR rate (each as defined in the Credit Agreement), in each case, plus an applicable margin. Applicable margins and fees are outlined below; [[GREPCENT_TABLE]] [["","Applicable Margins"],["","Term SOFR and EURIBOR Rates","","Prime Lending and Daily Simple RFR Rates","","Per Annum Commitment Fee(2)"],["Term A Loans(1)","2.000% - 1.750%","","1.000% - 0.750%","","\u2014"],["Term B Loans(1)","2.500% - 2.250%","","1.500% - 1.250%","","\u2014"],["Revolver(1)","2.000% - 1.375%","","1.000% - 0.375%","","0.250% - 0.175%"]] [[/GREPCENT_TABLE]] (1) Applicable margins are dependent upon our total net leverage ratio (2) Payable on the undrawn amount The Credit Agreement is guaranteed by us and certain of our wholly-owned subsidiaries organized in the U.S., Ireland, Belgium, England and Wales (subject to certain exceptions) (the “Guarantor Subsidiaries” and together with the Company, the “Guarantors” and together with the Borrower, the "Loan Parties"). The Loan Parties’ obligations under the Credit Agreement are secured, subject to customary permitted liens and other exceptions, by a security interest in all tangible and intangible assets of the Loan Parties, except for certain excluded assets. We may make voluntary prepayments at any time without payment of a premium or penalty, subject to certain exceptions, and are required to make certain mandatory prepayments of outstanding indebtedness under the Credit Agreement in certain circumstances. Principal repayments of the Term Loan B Facility, which are due quarterly, are equal to 1.0% per annum (adjusted, in the case of incremental loans, to enable fungibility), with any remaining balance payable on the maturity date. Principal repayments of the Term Loan A Facility, which are due quarterly, began in September 2022 and are equal to (i) for the first year anniversary of the Closing Date (as defined in the Credit Agreement), 2.5% per annum of the original principal amount of the Term Loan A Facility incurred and (ii) after the first year anniversary of the Closing Date, 5.0% per annum of the original principal amount of the Term Loan A Facility 47 Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources incurred, with any remaining balance payable on the maturity date. The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Borrower and its restricted subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of junior indebtedness and dividends and other distributions. The Credit Agreement contains financial covenants that require the Borrower and its restricted subsidiaries to (a) not exceed a maximum first lien secured net leverage ratio of 3.00 to 1.00 at the end of each fiscal quarter and (b) not fall below a minimum interest coverage ratio of 3.00 to 1.00 at the end of each fiscal quarter, provided that such covenants apply only to the Revolver and the Term Loan A Facility. The Credit Agreement also contains customary events of default relating to, among other things, failure to make payments, breach of covenants and breach of representations. If we consummate certain qualifying acquisitions during the term of the loan, the maximum first lien secured net leverage ratio covenant would increase to 3.25 to 1.00 for such quarter and the three following fiscal quarters thereafter. Leases We had $202.2 million and $238.6 million of lease liabilities and $197.3 million and $239.1 million of lease assets as of December 31, 2023 and December 31, 2022, respectively. Available Resources We have overdraft facilities available that we use to support our cash management operations. We report any balances outstanding in "Other Financing" in Item 8. Note 12. There were no borrowings outstanding under the overdraft facilities as of December 31, 2023 and December 31, 2022. During 2022, we terminated the 2018 Revolver and entered into the 2022 Revolver (the "Revolver"). There were no borrowings outstanding under the Revolver as of December 31, 2023 or December 31, 2022. We are subject to certain financial covenants in the Revolver and Credit Agreement. As of December 31, 2023, we were in compliance with all such covenants under our debt agreements. Credit Ratings On December 31, 2023, our credit rating was Ba2 (negative), BB (stable), and BB+ (negative), by Moody's Investor Services, S&P Global Ratings, and Fitch Ratings Inc., respectively. On March 15, 2023, Moody's downgraded our Corporate Family Rating to Ba2 from Ba1 and senior unsecured notes ratings to Ba3 from Ba2 and the rating outlooks remained negative. Due to the downgrade, the interest of the 3.150% Senior Notes due 2030 stepped up from 4.400% to 4.650% on payments made after June 15, 2023. Credit rating agencies review their ratings periodically and, therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether current credit ratings will remain as disclosed above. Factors that can affect our credit ratings include changes in operating performance, the economic environment, our financial position, and changes in business strategy. If changes in our credit ratings were to occur, they could impact, among other things, future borrowing costs, access to capital markets, and vendor financing terms. A credit rating is not a recommendation to buy, sell or hold securities. Guarantor Financial Information The Guarantor Subsidiaries and the Borrower provide full and unconditional guarantees, jointly and severally, on a senior unsecured basis, of the 5.300% Notes due 2043 issued by the Company, and the Loan Parties provide full and unconditional guarantees, jointly and severally, on a senior unsecured basis, of the 3.900% Notes due 2024, the 4.375% Notes due 2026, the 4.650% Notes due 2030 and the 4.900% Notes due 2044 issued by Perrigo Finance. The guarantees of the Guarantor Subsidiaries, the Company and the Borrower are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The guarantees of the Guarantor Subsidiaries, the Company and the Borrower rank senior in right of payment to any future subordinated indebtedness of the Company, equal in right of payment with all of the Company’s existing and future senior indebtedness and effectively subordinated to any of the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing such indebtedness. 48 Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources Basis of Presentation The following tables include summarized financial information of the obligor groups of debt issued by Perrigo Finance and the Company. The summarized financial information of each obligor group is presented on a combined basis with balances and transactions within the obligor group eliminated. Investments in and the equity in earnings of non-guarantor subsidiaries, which would otherwise be consolidated in accordance with U.S. GAAP, are excluded from the below summarized financial information pursuant to SEC Regulation S-X Rule 13-01. The summarized balance sheet information for the consolidated obligor group of debt issued by Perrigo Finance and the Company is presented in the table below: [[GREPCENT_TABLE]] [["","Year Ended"],["(in millions)","December 31, 2023","","December 31, 2022"],["Current Assets","$","1,999.9","","","$","1,975.7"],["Non-current Assets","$","4,596.2","","","$","4,819.1"],["Current liabilities","$","1,888.8","","","$","734.9"],["Non-current liabilities","$","11,498.4","","","$","11,036.2"],["Due to non-guarantors","$","7,355.3","","","$","6,346.4"]] [[/GREPCENT_TABLE]] The summarized results of operations information for the consolidated obligor group of debt issued by Perrigo Finance and the Company is presented in the table below: [[GREPCENT_TABLE]] [["","Year Ended"],["(in millions)","December 31, 2023","","December 31, 2022"],["Total Revenues","$","3,308.8","","","$","3,273.0"],["Gross Profit","$","979.2","","","$","858.6"],["Operating Income (loss)","$","62.1","","","$","(36.9)"],["Net Income (loss)","$","(10.9)","","","$","(316.3)"],["Revenue from non-guarantors","$","186.1","","","$","274.7"],["Operating Expenses to non-guarantors","$","(1.1)","","","$","(0.7)"],["Other (income) expense to non-guarantors","$","(97.7)","","","$","105.8"]] [[/GREPCENT_TABLE]] Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, net sales or expenses, results of operations, liquidity, capital expenditures, or capital resources. Contractual Obligations Our enforceable and legally binding obligations as of December 31, 2023 are set forth in the following table. Some of the amounts included in this table are based on management’s estimates and assumptions about these obligations, including the duration, the possibility of renewal, anticipated actions by third parties and other factors. Because these estimates and assumptions are necessarily subjective, the enforceable and legally binding obligations actually paid in future periods may vary from the amounts reflected in the table (in millions): 49 Perrigo Company plc - Item 7 Financial Condition, Liquidity and Capital Resources [[GREPCENT_TABLE]] [["","Payment Due"],["","2024","","2025-2026","","2027-2028","","After 2028","","Total"],["Short and long-term debt (1)","$","658.3","","","$","1,161.1","","","$","703.8","","","$","2,843.0","","","$","5,366.2"],["Finance lease obligations","2.3","","","3.4","","","3.1","","","8.9","","","17.7"],["Purchase obligations (2)","355.3","","","\u2014","","","\u2014","","","\u2014","","","355.3"],["Operating leases (3)","32.6","","","53.6","","","38.7","","","90.7","","","215.6"],["Other contractual liabilities reflected on the consolidated balance sheets:"],["Deferred compensation and benefits (4)","\u2014","","","\u2014","","","\u2014","","","47.4","","","47.4"],["Other (5)","51.3","","","42.4","","","42.4","","","21.2","","","157.3"],["Total","$","1,099.8","","","$","1,260.5","","","$","788.0","","","$","3,011.2","","","$","6,159.5"]] [[/GREPCENT_TABLE]] (1)Short-term and long-term debt includes interest payments, which were calculated using the effective interest rate at December 31, 2023. (2)Consists of commitments for both materials and services. (3)Used in normal course of business, principally for warehouse facilities and computer equipment. (4)Includes amounts associated with non-qualified plans related to deferred compensation, executive retention and post-employment benefits. Of this amount, we have funded $37.1 million, which is recorded in Other non-current assets on the balance sheet. These amounts are assumed payable after five years, although certain circumstances, such as termination, would require earlier payment. (5)Primarily includes consulting fees, legal settlements, restructuring accruals, insurance obligations, and electrical and gas purchase contracts, which were accrued in Other current liabilities and Other non-current liabilities at December 31, 2023 for all years. We fund our U.S. qualified profit-sharing and investment plan in accordance with the Employee Retirement Income Security Act of 1974 regulations for the minimum annual required contribution and Internal Revenue Service regulations for the maximum annual allowable tax deduction. We are committed to making the required minimum contributions, which we expect to be approximately $39.9 million over the next 12 months. Future contributions are dependent upon various factors, including employees’ eligible compensation, plan participation and changes, if any, to current funding requirements. Therefore, no amounts were included in the Contractual Obligations table above. We generally expect to fund all future contributions with cash flows from operating activities. As of December 31, 2023, we had approximately $314.2 million of liabilities for uncertain tax positions, including interest and penalties. These liabilities have been excluded from the Contractual Obligations table above, and the related tax benefits have not been recognized, due to uncertainty as to the amounts and timing of settlement with taxing authorities. Critical Accounting Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions, which affect the reported earnings, financial position and various disclosures. Critical accounting estimates involve a significant level of uncertainty and could have a material impact on results. These estimates are based on judgment and available information. Actual results could differ materially from the estimates. Income Taxes The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgement is required in determining our worldwide effective tax rate, provision for income taxes and recording the related deferred tax assets and liabilities. Our annual effective tax rate is determined based on our income, statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Also inherent in determining our annual effective tax rate are judgements and assumptions related to, among other things, the recoverability of certain deferred tax balances, primarily net operating loss and other carryforwards; our ability to uphold certain tax positions; adjustments to estimated taxes upon finalization of various tax returns; changes in available tax credits, grants and other incentives; changes in stock-based compensation expense; changes in U.S. GAAP; expiration of or the inability to renew tax rulings or tax holiday incentives; and the repatriation of earnings with respect to which we have not previously provided taxes. There are inherent uncertainties related to the interpretations of tax regulations in the jurisdictions in which we operate and our interpretation of transfer pricing standards. These judgments and estimates made at a point in time may change based on the outcome of tax audits and changes to, or further interpretations of, regulations. If such changes take place, there is a risk that our tax rate may increase or decrease in any period, which would impact our earnings. Future business results may affect deferred tax liabilities or the valuation of deferred tax assets over time. For the year ended December 31, 2023, we recorded a net increase in valuation allowances of $46.4 million comprised 50 Perrigo Company plc - Item 7 Critical Accounting Estimates primarily of additional valuation allowance on certain operating losses being carried forward which are no longer realizable. Additionally, the final determination with respect to any tax audit, and any related litigation, could be materially different from our estimates or from our historical income tax provisions and accruals. Future period earnings may also be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments. Refer to Item 8. Note 18 for additional details on the Company's income taxes. Legal Contingencies We are involved in product liability, patent, commercial, regulatory and other legal proceedings that arise in the normal course of business. Other than loss contingencies that are assumed in business combinations for which we can reliably estimate the fair value, we record a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range and no amount within that range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. We evaluate our exposure to loss based on the progress of each contingency, experience in similar contingencies and consultation with our legal counsel and have established reserves for certain of our legal matters. We re-evaluate all contingencies as additional information becomes available and adjustments are made to ensure estimates reflect an accurate liability until the contingency in question is ultimately settled. We do not incorporate insurance recoveries into our reserves for legal contingencies. We separately record receivables for amounts due under insurance policies when we consider the realization of recoveries for claims to be probable, which may be different than the timing in which we establish the loss reserves. Given the uncertainties inherent in complex litigation and other contingencies, these evaluations can involve significant judgement about future events. The ultimate outcome of any litigation or other contingency may be material to our results of operations, financial condition and cash flows. At December 31, 2023 and 2022, the loss accrual for litigation contingencies reflected on the balance sheet in Other accrued liabilities was $66.9 million and $67.4 million, respectively. Refer to Item 8. Note 19 for additional details on the Company's contingencies. Acquisition Accounting We account for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at fair value, with limited exceptions. Any excess of the purchase price over the fair value of the specifically identified assets is recorded as goodwill. If the acquired net assets do not constitute a business, or substantially all of the fair value is in a single asset or group of similar assets, the transaction is accounted for as an asset acquisition and no goodwill is recognized. In an asset acquisition, acquired IPR&D with no alternative future use is charged to expense at the acquisition date. Significant judgment is required in estimating the fair value of intangible assets and in assigning their respective useful lives. The acquired intangible assets can include customer relationships, trademarks, trade names, brands, developed product technology and IPR&D assets. For acquisitions accounted for as business combinations, IPR&D is considered to be an indefinite-lived intangible asset until the research is completed, at which point it then becomes a definite-lived intangible asset, or is determined to have no future use and is then impaired and charged to expense. There are several methods that can be used to determine the fair value of our intangible assets. We typically use an income approach to value the specifically identifiable intangible assets which is based on forecasts of the expected future cash flows. We have historically used a relief from royalty or multi-period excess earnings methodology. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management. We typically consult with an independent advisor to assist in the valuation of these intangible assets. Significant estimates and assumptions inherent in the valuations include discount rates, revenue growth assumptions and expected profit margins. We consider marketplace participant assumptions in determining the amount and timing of future cash flows along with the length of our customer relationships, attrition, product or technology life cycles, barriers to entry and the risk associated with the cash flows in concluding upon our discount rate. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement.  As a result, during the measurement period, we may record adjustments to the purchase accounting. In addition, unanticipated market or macroeconomic events and circumstances may occur that could affect the accuracy or validity of the estimates and assumptions used at the time of the acquisition. Our assessment as to the useful lives of intangible assets is based on a number of factors including competitive environment, market share, trademark, brand history, underlying product life cycles, operating plans and the 51 Perrigo Company plc - Item 7 Critical Accounting Estimates macroeconomic environment of the countries in which the trademarked or branded products are sold. Determining the useful life of an intangible asset requires judgement, as different assets will have different useful lives or may even have an indefinite life. Definite-lived intangible assets are amortized to expense over their estimated useful life. Goodwill Goodwill represents amounts paid for an acquisition of a business in excess of the fair value of net assets received. We perform annual goodwill impairment testing on the first day of the fourth quarter. As of December 31, 2023, we have three reporting units. Our CSCA operating segment is equivalent to our CSCA reporting unit. Our CSCI operating segment includes two reporting units, CSCI and Rare Diseases. The test for impairment requires us to make several significant assumptions that impact our estimate of the fair value of a reporting unit, including the perpetual growth rate and discount rate. These assumptions are considered critical due to the sensitivity of changes in these assumptions to the related estimate of fair value. The discount rates used in testing each of our reporting units’ goodwill for impairment during our testing were based on the weighted average cost of capital determined for each of our reporting units. In our annual impairment test as of October 1, 2023, discount rates ranged from 10.75% to 12.00%, and perpetual growth rates were 2.50%. In our annual impairment test as of October 2, 2022, discount rates ranged from 10.25% to 11.00%, and perpetual growth rates were 2.50%. The cash flow forecasts used for our reporting units include assumptions about future activity levels in the near term and longer-term. If growth in our reporting units is lower than expected, we may experience deterioration in our cash flow forecasts that may indicate goodwill in one or more reporting units is impaired in future impairment tests. An increase in the discount rate could negatively impact the estimated fair value of the reporting units and lead to future impairment. Certain macroeconomic factors which are not controlled by the reporting units, such as rising inflation or interest rates, could cause an increase in the discount rate to occur. Deterioration in performance of our reporting units, such as lower than expected revenue or profitability that has a sustained impact on future periods, could also represent potential indicators of impairment requiring further analysis. We performed sensitivity analyses on the discounted cash flow valuations that were prepared to estimate the fair value of each reporting unit. Discount rates and perpetual revenue growth rates were increased and decreased by increments of 25 or 50 basis points. For the CSCI reporting unit, the fair value exceeded our carrying amount by less than 10% as of the annual testing date. Therefore, a 25 basis point increase in the discount rate, or a 0 basis point increase in the discount rate combined with a 25 basis point decrease in the perpetual growth rate, would indicate potential impairment for this reporting unit. The CSCI reporting unit's fair value includes material benefits from the Supply Chain Reinvention program and synergies from integrating HRA Pharma, and, as a result, the reporting unit is sensitive to changes in estimates related to the Supply Chain Reinvention Program and the forecasted HRA synergies. Reductions in the net projected benefits could represent a potential indicator of impairment requiring further impairment analysis. For the Rare Diseases reporting unit, the fair value exceeded our carrying amount by less than 10% as of the annual testing date. During the three months ended December 31, 2023, the reporting unit experienced impairment indicators related to market factors that led us to increase discount rates and to lower comparable company multiples. We determined the reporting unit was impaired and recorded an impairment charge of $90.0 million to the unit's goodwill. Based on the sensitivity of the discount rate assumptions on these analyses, an increase in the discount rate over the next twelve months could negatively impact the estimated fair value of the reporting units and lead to a future impairment. Certain macroeconomic factors which are not controlled by the reporting units, such as rising inflation or interest rates, could cause an increase in the discount rate to occur. Deterioration in performance of our reporting units over the next twelve months, such as lower than expected revenue or profitability that has a sustained impact on future periods, could also represent potential indicators of impairment requiring further impairment analysis. During 2023, we recorded goodwill impairment charges of $90.0 million. We did not record an impairment charge during 2022. We continue to monitor the progress of our reporting units and assess them for potential impairment should impairment indicators arise, as applicable, and at least annually during our fourth quarter impairment testing. See Item 8. Note 9 and Note 10 for further information. 52 Perrigo Company plc - Item 7 Critical Accounting Estimates Recently Issued Accounting Standards Pronouncements See Item 8. Note 1 for information regarding recently issued accounting standards.