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UNITED STATES OF AMERICA
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: DECEMBER 28, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19725
PERRIGO COMPANY
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 38-2799573
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
515 EASTERN AVENUE
ALLEGAN, MICHIGAN 49010
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(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
(269) 673-8451
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
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(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 X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) . YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS OF COMMON STOCK JANUARY 20, 2003
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WITHOUT PAR 69,493,946 SHARES
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PERRIGO COMPANY
FORM 10-Q
INDEX
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated statements of income -- For the quarter and the
year-to-date ended December 28, 2002 and December 29, 2001 1
Condensed consolidated balance sheets -- December 28, 2002, June 29,
2002 and December 29, 2001 2
Condensed consolidated statements of cash flows -- For the year-to-date
ended December 28, 2002 and December 29, 2001 3
Notes to condensed consolidated financial statements -- December 28, 2002 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks 13
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
CERTIFICATIONS 17
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Second Quarter Year-To-Date
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(as restated) (as restated)
Net sales $ 227,521 $ 228,694 $ 440,736 $ 445,810
Cost of sales 163,225 165,990 314,761 330,767
---------- ---------- ---------- ----------
Gross profit 64,296 62,704 125,975 115,043
Operating expenses
Distribution 4,083 4,265 8,110 8,282
Research and development 5,321 6,407 10,769 11,703
Selling and administration 28,547 25,732 54,150 49,825
---------- ---------- ---------- ----------
Subtotal 37,951 36,404 73,029 69,810
Restructuring -- 2,046 -- 2,046
Unusual litigation -- -- (3,128) --
---------- ---------- ---------- ----------
Total 37,951 38,450 69,901 71,856
---------- ---------- ---------- ----------
Operating income 26,345 24,254 56,074 43,187
Interest and other, net (514) (113) (722) (276)
---------- ---------- ---------- ----------
Income before income taxes 26,859 24,367 56,796 43,463
Income tax expense 10,045 9,153 21,204 16,512
---------- ---------- ---------- ----------
Net income $ 16,814 $ 15,214 $ 35,592 $ 26,951
========== ========== ========== ==========
Earnings per share
Basic $ 0.24 $ 0.21 $ 0.51 $ 0.36
Diluted $ 0.24 $ 0.20 $ 0.50 $ 0.36
Weighted average shares outstanding:
Basic 69,273 73,343 70,000 73,842
Diluted 70,394 74,560 71,003 75,369
See accompanying notes to condensed consolidated financial statements
-1-
PERRIGO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
December 28, June 29, December 29,
2002 2002 2001
------------- ------------- -------------
Assets (unaudited) (as restated) (unaudited)
Current assets (as restated)
Cash and cash equivalents $ 71,773 $ 76,824 $ 814
Accounts receivable, net of allowances 102,722 82,560 112,214
Inventories, net of allowances 153,477 155,611 161,677
Prepaid expenses and other current assets 6,907 6,896 10,613
Current deferred income taxes 21,657 19,860 23,463
------------- ------------- -------------
Total current assets 356,536 341,751 308,781
Property and equipment 411,858 399,461 388,102
Less accumulated depreciation 201,759 188,417 178,593
------------- ------------- -------------
210,099 211,044 209,509
Goodwill, net 35,919 35,919 47,471
Other 4,678 5,073 3,258
------------- ------------- -------------
$ 607,232 $ 593,787 $ 569,019
============= ============= =============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 68,970 $ 74,449 $ 68,429
Notes payable 9,469 8,338 6,631
Payrolls and related taxes 27,884 31,338 22,531
Accrued expenses 41,931 32,721 33,847
Income taxes 9,872 8,088 10,680
------------- ------------- -------------
Total current liabilities 158,126 154,934 142,118
Deferred income taxes 20,428 18,295 15,770
Long-term debt -- -- 1,600
Other long-term liabilities 3,212 2,396 2,426
Shareholders' equity
Preferred stock, without par value, 10,000 shares authorized -- -- --
Common stock, without par value, 200,000 shares authorized 81,699 110,698 117,727
Unearned compensation (414) (608) (903)
Accumulated other comprehensive income 890 373 420
Retained earnings 343,291 307,699 289,861
------------- ------------- -------------
Total shareholders' equity 425,466 418,162 407,105
------------- ------------- -------------
$ 607,232 $ 593,787 $ 569,019
============= ============= =============
Supplemental Disclosures of Balance Sheet Information
Allowance for doubtful accounts $ 9,465 $ 7,569 $ 8,825
Allowance for inventory $ 20,855 $ 21,360 $ 27,056
Working capital $ 198,410 $ 186,817 $ 166,663
Preferred stock, shares issued -- -- --
Common stock, shares issued 69,479 72,550 73,372
See accompanying notes to condensed consolidated financial statements
-2-
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Year-To-Date
--------------------------------
2003 2002
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Cash Flows From (For) Operating Activities: (as restated)
Net income $ 35,592 $ 26,951
Depreciation and amortization 13,505 12,312
Compensation - stock options 2,667 3,033
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51,764 42,296
Accounts receivable (20,162) (18,627)
Inventories 2,134 (568)
Current and deferred income taxes 2,120 (14,317)
Accounts payable (5,479) (15,958)
Restructuring, net of cash -- 2,046
Other 7,082 3,617
-------------- --------------
Net cash from (for) operating activities 37,459 (1,511)
-------------- --------------
Cash Flows (For) From Investing Activities:
Additions to property and equipment (11,975) (9,731)
Proceeds from sale of assets held for sale -- 14,161
Other -- (426)
-------------- --------------
Net cash (for) from investing activities (11,975) 4,004
-------------- --------------
Cash Flows From (For) Financing Activities:
Borrowings (repayments) of short-term debt, net 1,131 (4,541)
Tax benefit of stock transactions -- 1,603
Issuance of common stock 1,059 10,036
Repurchase of common stock (32,667) (21,454)
Other (58) 1,661
-------------- --------------
Net cash for financing activities (30,535) (12,695)
-------------- --------------
Net Decrease in Cash and Cash Equivalents (5,051) (10,202)
Cash and Cash Equivalents, at Beginning of Period 76,824 11,016
-------------- --------------
Cash and Cash Equivalents, at End of Period $ 71,773 $ 814
============== ==============
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 467 $ 1,051
Income taxes paid $ 18,922 $ 29,970
See accompanying notes to condensed consolidated financial statements.
-3-
PERRIGO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2002
(in thousands)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 has reclassified certain amounts in the prior
year to conform with the current year presentation.
Operating results for the quarter and year-to-date ended December 28, 2002 are
not necessarily indicative of the results that may be expected for a full year.
The unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes included in
the Company's annual report on Form 10-K for the year ended June 29, 2002.
In June 2002, the Financial Accounting Standard Boards (FASB) issued Statement
of Financial Accounting Standards (SFAS) 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This statement
supercedes the guidance provided by Emerging Issues Task Force 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146 is
required to be adopted for exit or disposal activities initiated after December
31, 2002. Because SFAS 146 only affects the timing of the recognition of the
liabilities to be incurred if an entity makes a decision to exit or dispose of a
particular activity, the Company does not expect the adoption of SFAS 146 to
have a material impact on the Company's financial statements. Accordingly, the
application of SFAS 146 to the restructuring recorded in fiscal 2002 would have
resulted in no material difference in the Company's financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", which amends SFAS 123, "Accounting for
Stock-Based Compensation". SFAS 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require more prominent and more frequent disclosures
in financial statements about the effects of stock-based compensation. SFAS 148
is effective for fiscal years ending after December 15, 2002.
The Company began expensing the cost of employee stock options in the second
quarter of fiscal 2003 and has elected to use the retroactive restatement
method. All prior periods presented have been restated to reflect compensation
costs that would have been recognized
-4-
had the recognition provisions of SFAS 123, as amended by SFAS 148, been applied
to all awards granted to employees after July 1, 1995. (See Note C).
NOTE B - INVENTORIES
December 28, June 29, December 29,
2002 2002 2001
----------- ----------- -----------
Finished Goods $ 57,370 $ 62,360 $ 64,832
Work in process 58,801 57,870 58,563
Raw materials 37,306 35,381 38,282
----------- ----------- -----------
$ 153,477 $ 155,611 $ 161,677
=========== =========== ===========
NOTE C - SHAREHOLDERS' EQUITY
In fiscal 2003, the Company continued its common stock repurchase program.
Purchases are made on the open market, subject to market conditions, and are
funded by cash from operations. During the first half of fiscal 2003, the
Company purchased 3,204 shares of common stock for $32,667. The Company
purchased 61 shares for $642 in the second quarter of fiscal 2003. The Company
also purchased 2,533 shares for $31,923 during fiscal 2002 and 137 shares for
$1,089 during fiscal 2001. Since November 2000, the Board of Directors has
approved a total expenditure of $80,000 with a remaining balance of $14,321
available to purchase additional shares. The common stock repurchased was
retired upon purchase for all years.
The Company has two stock option compensation plans for employees and directors.
Prior to the second quarter of fiscal 2003, the Company accounted for those
plans under the recognition and measurement provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. No
stock-based employee compensation cost was reflected in previously reported
results, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. Effective
beginning with the second quarter of fiscal 2003, the Company adopted the fair
value recognition provisions of SFAS 123, as amended by SFAS 148, for
stock-based employee compensation. All prior periods presented have been
restated to reflect the compensation cost that would have been recognized had
the recognition provisions of SFAS 123, as amended by SFAS 148, been applied to
all awards granted to employees after July 1, 1995. Compensation costs are
included in selling and administration operating expenses.
The adoption of the fair value method and the retroactive restatement method
selected by the Company resulted in a reduction of retained earnings at July 1,
2001 of $14,051, representing the cumulative stock option compensation recorded
for prior years net of the tax effect.
-5-
The Company's net income and earnings per share (EPS) were reduced as follows:
Second Quarter Year-to-Date
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income before adoption $ 18,047 $ 16,565 $ 38,058 $ 29,655
Compensation expense (net of tax benefit) 1,233 1,351 2,466 2,704
------------- ------------- ------------- -------------
Net income after adoption $ 16,814 $ 15,214 $ 35,592 $ 26,951
============= ============= ============= =============
Weighted average shares outstanding
Basic 69,273 73,343 70,000 73,842
Diluted
Before adoption 71,017 75,227 71,572 76,064
After adoption 70,394 74,560 71,003 75,369
Basic EPS
Before adoption $ 0.26 $ 0.23 $ 0.54 $ 0.40
After adoption $ 0.24 $ 0.21 $ 0.51 $ 0.36
Diluted EPS
Before adoption $ 0.25 $ 0.22 $ 0.53 $ 0.39
After adoption $ 0.24 $ 0.20 $ 0.50 $ 0.36
NOTE D - COMPREHENSIVE INCOME
Comprehensive income is comprised of all changes in shareholders' equity during
the period other than from transactions with shareholders. Comprehensive income
consists of the following:
Second Quarter Year-to-Date
------------------------------ -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income $ 16,814 $ 15,214 $ 35,592 $ 26,951
Other comprehensive income:
Foreign currency translation adjustments (62) (337) 517 (8)
------------- ------------- ------------- -------------
Comprehensive income $ 16,752 $ 14,877 $ 36,109 $ 26,943
============= ============= ============= =============
NOTE E - EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the basic and
diluted EPS calculation follows:
Second Quarter Year-to-Date
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Numerator
Net income used for both basic and diluted EPS $ 16,814 $ 15,214 $ 35,592 $ 26,951
============= ============= ============= =============
Denominator
Weighted average shares outstanding for basic EPS 69,273 73,343 70,000 73,842
Dilutive effect of stock options 1,121 1,217 1,003 1,527
------------- ------------- ------------- -------------
Weighted average shares outstanding for diluted EPS 70,394 74,560 71,003 75,369
============= ============= ============= =============
Options outstanding that are anti-dilutive were 3,469 and 1,596 for the first
half of fiscal 2003 and 2002, respectively. These options are excluded from the
diluted EPS calculation.
-6-
NOTE F - COMMITMENTS AND CONTINGENCIES
The Company is currently defending numerous individual lawsuits pending in
various state and federal courts involving Phenylpropanolamine (PPA), an
ingredient formerly used in the manufacture of certain OTC cough/cold and diet
products. The Company discontinued using PPA in November 2000 at the request of
the FDA. These cases allege that the plaintiffs suffered injury, generally some
type of stroke, from ingesting PPA-containing products. Many of these suits also
name other manufacturers or retailers of PPA-containing products. These personal
injury suits seek an unspecified amount of compensatory, exemplary and statutory
damages. The Company maintains product liability insurance coverage for the
claims asserted in these lawsuits.
The Company believes that it has meritorious defenses to these lawsuits and
intends to vigorously defend them. At this time, the Company cannot determine
whether it will be named in additional PPA-related suits, the outcome of
existing suits or the effect that PPA-related suits may have on its financial
condition or operating results.
In August 1999, the Company filed a civil antitrust lawsuit in the U.S. District
Court for the Western District of Michigan against a group of vitamin raw
material suppliers alleging the defendants conspired to fix the prices of
vitamin raw materials sold to the Company. The relief sought includes money
damages and a permanent injunction enjoining defendants from future violations
of antitrust laws. The Company has entered into settlement agreements with the
remaining defendants. The Company received settlement payments of $3,128 in the
first quarter of fiscal 2003, net of attorney fees and expenses, that were
withheld prior to the disbursement of the funds to the Company.
Guarantees of debt obligations are primarily issued to support borrowing
arrangements entered into by two of the Company's foreign subsidiaries. The
Company has guarantees of approximately $10,800 as of December 28, 2002.
Although this amount represents the maximum exposure to loss, the Company
believes the actual risk of loss is insignificant. Of this amount, $9,469 was
recorded in the financial statements as notes payable as of December 28, 2002.
NOTE G - SEGMENT INFORMATION
The Company has one reportable segment, store brand health care that encompasses
two operating segments, OTC pharmaceuticals and nutritional products. All other
consists of the operating segments Quimica y Farmacia S.A. de C.V. (Quifa), the
Company's Mexican operating subsidiary; and Wrafton Laboratories Limited
(Wrafton), the Company's United Kingdom operating subsidiary, neither of which
meet the quantitative thresholds for separate disclosure. The accounting
policies of all of the operating segments are the same as those described in the
summary of significant accounting policies in Note A.
-7-
Store Brand All
Health Care Other Total
------------- ------------- -------------
Second Quarter 2003
Net sales $ 205,284 $ 22,237 $ 227,521
Operating income $ 24,191 $ 2,154 $ 26,345
Operating income % 11.8% 9.7% 11.6%
Second Quarter 2002
Net sales $ 208,448 $ 20,246 $ 228,694
Operating income $ 22,238 $ 2,016 $ 24,254
Operating income % 10.7% 10.0% 10.6%
Year-to-date 2003
Net sales $ 400,353 $ 40,383 $ 440,736
Operating income $ 53,340 $ 2,734 $ 56,074
Operating income % 13.3% 6.8% 12.7%
Year-to-date 2002
Net sales $ 411,336 $ 34,474 $ 445,810
Operating income $ 40,608 $ 2,579 $ 43,187
Operating income % 9.9% 7.5% 9.7%
NOTE H - RESTRUCTURING
In the fourth quarter of fiscal 2002, the Company approved a restructuring plan
related to Quifa. The implementation of the plan began in June 2002 and is
expected to be completed by June 2003. No additional charges related to this
restructuring plan were recorded or are expected to be recorded in fiscal 2003.
In the first half of fiscal 2003, $911 was paid, primarily related to severance
costs and professional fees. One hundred twenty-six administrative employees
have been terminated in fiscal 2003.
The activity of the restructuring reserve is detailed in the following table:
Fiscal 2003 Restructuring
Severance and Other Costs
-------------------------
Balance at June 29, 2002 $ 2,500
Reductions (328)
-------------
Balance at September 28, 2002 2,172
Reductions (583)
-------------
Balance at December 28, 2002 $ 1,589
=============
In the second quarter of fiscal 2002, the Company sold its logistics facility in
LaVergne, Tennessee. The proceeds from the sale were $14,161. The Company
recorded a restructuring charge of $2,046 in connection with the sale of this
facility.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER AND FIRST HALF OF FISCAL YEARS 2003 AND 2002
(in thousands)
RESULTS OF OPERATIONS
STORE BRAND HEALTH CARE
Second Quarter Year-to Date
------------------------------ ------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net sales $ 205,284 $ 208,448 $ 400,353 $ 411,336
Gross profit $ 58,354 $ 56,636 $ 115,371 $ 104,991
Gross profit % 28.4% 27.2% 28.8% 25.5%
Operating expenses $ 34,163 $ 34,398 $ 62,031 $ 64,383
Operating expenses % 16.6% 16.5% 15.5% 15.7%
Operating income $ 24,191 $ 22,238 $ 53,340 $ 40,608
Operating income % 11.8% 10.7% 13.3% 9.9%
Net Sales
Second quarter net sales for fiscal 2003 decreased 2% or $3,164 to $205,284 from
$208,448 during fiscal 2002. Net sales decreased approximately $9,000 primarily
due to lower unit sales of existing analgesic, cough/cold, laxative and contract
manufactured products, partially offset by higher unit sales of existing
nutrition products. The sales decline in these categories resulted from
discontinuing lower margin products at certain customers and exiting sales of
low volume products. The net sales decrease was partially offset by a favorable
mix of products sold and improved net realized pricing.
Year-to-date net sales for fiscal 2003 decreased 3% or $10,983 to $400,353 from
$411,336 during fiscal 2002. Net sales decreased approximately $25,000 primarily
due to lower unit sales of analgesic, antacid, laxative and contract
manufactured products, partially offset by sales of new feminine hygiene
products. The sales decline in these categories resulted from discontinuing
lower margin products at certain customers and exiting sales of low volume
products. The net sales decrease was partially offset by a favorable mix of
products sold and improved net realized pricing. Sales of antacid products were
enhanced in fiscal 2002 by famotidine 10 mg tablets, then recently introduced.
In December 2002, a supplier of tablet/caplet gelatin coating processing
confirmed its intention to discontinue selling its services to the Company after
March 31, 2003. The products affected by this process accounted for
approximately $36,000 of net sales during the last twelve months. The Company is
working to arrange alternative sources of this coating, including development of
in-house coating manufacturing to service customer requirements. Because of the
difficulty of putting alternative plans in place, the Company estimates that up
to one-half of this sales volume could be lost in fiscal 2004.
-9-
Gross Profit
Second quarter gross profit increased $1,718 or 3% during fiscal 2003 compared
to fiscal 2002. The gross profit percent to net sales was 28.4% in fiscal 2003
compared to 27.2% in fiscal 2002. Approximately one-third of the increase in
gross profit percentage was due to lower obsolescence expenses resulting from
lower finished goods inventory when compared to fiscal 2002 and improved aging
of that inventory. The remaining increase in gross profit percentage resulted
from a favorable mix of products sold and improved net realized pricing.
Year-to-date gross profit increased $10,380 or 10% during fiscal 2003 compared
to fiscal 2002. The gross profit percent to net sales was 28.8% in fiscal 2003
compared to 25.5% in fiscal 2002. The increase in gross profit percentage was
due to lower obsolescence expenses resulting from lower finished goods inventory
when compared to fiscal 2002 and improved aging of that inventory, improved
operating efficiencies and a favorable mix of products sold and improved net
realized pricing. The increase was split approximately equally among
obsolescence expense, operating efficiencies, and product mix and pricing.
Operating Expenses
Second quarter operating expenses decreased $235 during fiscal 2003 compared to
fiscal 2002. Selling and administration increased $3,347 primarily due to rising
insurance costs, employee benefit expenses and consulting expenses related to
strategic initiatives. The increase was partially offset by a decline in bad
debt expense. The Company expects insurance costs to continue to be higher in
fiscal 2003 than fiscal 2002. Research and development decreased $1,151 due to
the timing of projects. Fiscal 2002 was unfavorably impacted by a restructuring
charge of $2,046 related to the sale of the LaVergne, Tennessee logistics
facility.
Year-to-date operating expenses decreased $2,352 during fiscal 2003 as compared
to fiscal 2002. Operating expenses were favorably impacted by unusual litigation
income of $3,128 in fiscal 2003. Selling and administration increased $4,549
primarily due to rising insurance costs, employee benefit expenses and
consulting expenses related to strategic initiatives, partially offset by lower
bad debt expense. Research and development decreased $1,066 due to the timing of
projects. Fiscal 2002 was unfavorably impacted by bad debt expense related to
the bankruptcy of a large customer and a restructuring charge related to the
sale of the logistics facility.
ALL OTHER
Second Quarter Year-to Date
------------------------------ ------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net sales $ 22,237 $ 20,246 $ 40,383 $ 34,474
Gross profit $ 5,942 $ 6,068 $ 10,604 $ 10,052
Gross profit % 26.7% 30.0% 26.3% 29.2%
Operating expenses $ 3,788 $ 4,052 $ 7,870 $ 7,473
Operating expenses % 17.0% 20.0% 19.5% 21.7%
Operating income $ 2,154 $ 2,016 $ 2,734 $ 2,579
Operating income % 9.7% 10.0% 6.8% 7.5%
-10-
Net Sales
Second quarter net sales for fiscal 2003 increased by 10% or $1,991 to $22,237
from $20,246 during fiscal 2002. The increase in sales was primarily due to
increased volume at Wrafton.
Year-to-date net sales for fiscal 2003 increased 17% or $5,909 to $40,383 from
$34,474 during fiscal 2002 primarily due to increased volume at Wrafton. Because
fiscal 2002 was a transitional year for Wrafton, the first half of fiscal 2002
included five months of results compared to the first half of fiscal 2003, which
included six months of results.
Gross Profit
Second quarter gross profit decreased by $126 or 2% during fiscal 2003 compared
to fiscal 2002. The gross profit percent to net sales was 26.7% in fiscal 2003
compared to 30.0% in fiscal 2002. The decrease was primarily due to lower margin
contract sales in the mix of products sold by Wrafton.
Year-to-date gross profit increased $552 or 5% during fiscal 2003 compared to
fiscal 2002. The gross profit percent to net sales was 26.3% in fiscal 2003
compared to 29.2% in fiscal 2002. The decrease was primarily due to lower margin
contract sales in the mix of products sold by Wrafton.
INTEREST AND OTHER (CONSOLIDATED)
Second quarter interest and other, net, decreased $401 for fiscal 2003. Interest
expense for fiscal 2003 was $116 compared to $439 for fiscal 2002.
Year-to-date interest and other, net, decreased $446 for fiscal 2003. Interest
expense for fiscal 2003 was $162 compared to $819 for fiscal 2002.
For both the quarter and first half of fiscal 2003, the difference in interest
expense was primarily due to invested cash in fiscal 2003 versus borrowings in
fiscal 2002.
INCOME TAXES (CONSOLIDATED)
For the second quarter of fiscal 2003, the effective tax rate was 37.4% compared
to 37.6% for fiscal 2002. The effective tax rate before stock options was 36.0%
for both quarters.
For the first half of fiscal 2003, the effective tax rate was 37.3% compared to
38.0% for fiscal 2002. The effective tax rate before stock options was 36.0% and
36.2% for fiscal 2003 and 2002, respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
In the first half of fiscal 2003, cash and cash equivalents decreased $5,051
from $76,824 to $71,773. Working capital, including cash, increased $11,593 from
$186,817 to $198,410.
-11-
Cash flow from operating activities was $37,459 in the first half of 2003. Cash
flow was favorably impacted by net income of $35,592 that included $2,000
after-tax income related to vitamin litigation settlements. Cash flow was
negatively impacted by an increase in accounts receivable of $20,162, primarily
due to seasonal sales and a decrease in accounts payable of $5,479, primarily
due to seasonal production levels.
Capital expenditures for facilities and equipment of $11,975 for the first half
of fiscal 2003 were for normal equipment replacement and productivity
enhancements. Capital expenditures are anticipated to be $11,000 to $16,000 for
the remainder of fiscal 2003.
In fiscal 2003, the Company continued its common stock repurchase program.
Purchases are made on the open market, subject to market conditions, and are
funded by cash from operations. During the first half of fiscal 2003, the
Company purchased 3,204 shares of common stock for $32,667. The Company
purchased 61 shares for $642 in the second quarter of fiscal 2003. The Company
also purchased 2,533 shares for $31,923 during fiscal 2002 and 137 shares for
$1,089 during fiscal 2001. Since November 2000, the Board of Directors has
approved a total expenditure of $80,000 with a remaining balance of $14,321
available to purchase additional shares. The common stock repurchased was
retired upon purchase for all years.
During the first half of fiscal 2003, 123 options valued at $942 were exercised
and the Company granted 10 shares of restricted common stock valued at $117.
On January 23, 2003, the Board of Directors adopted a policy of paying regular
quarterly dividends and declared a quarterly dividend of $0.025 per share,
payable on March 21, 2003, to shareholders of record on February 28, 2003.
The Company had no long-term debt at December 28, 2002 and had $175,000
available on its unsecured credit facility. Cash flows from operations and
borrowings from its credit facility are expected to be sufficient to finance the
known and/or foreseeable liquidity and capital needs of the Company.
CRITICAL ACCOUNTING POLICIES
Determination of certain amounts in the Company's financial statements requires
the use of estimates. These estimates are based upon the Company's historical
experiences combined with management's understanding of current facts and
circumstances. Although the estimates are considered reasonable, actual results
could differ from the estimates. Discussed below are the accounting policies
considered by management to require the most judgement and to be critical in the
preparation of the financial statements. Other accounting policies are included
in Note A of the condensed consolidated financial statements.
Allowance for Doubtful Accounts - The Company maintains an allowance for
customer accounts that reduces receivables to amounts that are expected to be
collected. In estimating the allowance, management considers factors such as
current overall economic conditions, industry-specific economic conditions,
historical and anticipated customer performance, historical experience with
write-offs and the level of past-due amounts. Changes in these conditions may
result in additional allowances. The allowance for doubtful accounts was $9,465,
$7,569 and $8,825 at December 28, 2002, June 29, 2002 and December 29, 2001,
respectively.
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Inventory - The Company maintains an allowance for estimated obsolete or
unmarketable inventory based on the difference between the cost of the inventory
and its estimated market value. In estimating the allowance, management
considers factors such as excess or slow moving inventories, product expiration
dating, current and future customer demand, and market conditions. Changes in
these conditions may result in additional allowances. The allowance for
inventory was $20,855, $21,360 and $27,056 December 28, 2002, June 29, 2002 and
December 29, 2001, respectively.
Goodwill - Goodwill is tested for impairment annually or more frequently if
changes in circumstances or the occurrence of events suggest impairment exists.
The test for impairment requires the Company to make several estimates about
fair value, most of which are based on projected future cash flows. The
estimates associated with the goodwill impairment tests are considered critical
due to the judgments required in determining fair value amounts, including
projected future cash flows. Changes in these estimates may result in the
recognition of an impairment loss. The required annual testing of goodwill is
performed in the second quarter of the fiscal year and resulted in no impairment
charge for fiscal 2003.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS
Certain statements in Management's Discussion and Analysis of Results of
Operations and Financial Condition and other portions of 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 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 other comparable terminology.
Please see the "Cautionary Note Regarding Forward-Looking Statements" on pages
23-27 of the Company's Form 10-K for the year ended June 29, 2002 for a
discussion of certain important factors that relate to forward-looking
statements contained in this report. Although the Company believes that the
expectations reflected in these forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company is exposed to market risks, which include changes in interest rates
and changes in the foreign currency exchange rate as measured against the U.S.
dollar.
The Company is exposed to interest rate changes primarily as a result of
interest income earned on its investment of cash on hand and interest expense
related to its variable rate line of credit used to finance working capital when
necessary and for general corporate purposes. The Company had invested cash and
cash equivalents of $71,773 and no outstanding borrowings on its credit facility
at December 28, 2002. Management believes that a
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fluctuation in interest rates in the near future will not have a material impact
on the Company's consolidated financial statements.
The Company has international operations in Mexico and the United Kingdom. These
operations transact business in the local currency, thereby creating exposures
to changes in exchange rates. The Company does not currently have hedging or
similar foreign currency contracts. Significant currency fluctuations could
adversely impact foreign revenues; however, the Company does not expect any
significant changes in foreign currency exposure in the near future.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and its Chief Financial Officer have
reviewed and evaluated the effectiveness of the Company's disclosure controls
and procedures (as defined in the Securities Exchange Act of 1934 Rules
13a-14(c) and 15d-14(c)) as of a date within 90 days of the filing date of this
quarterly report on Form 10-Q (the "Evaluation Date"). Based on their review and
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known to
them by others within those entities in a timely manner, particularly during the
period in which this quarterly report on Form 10-Q was being prepared, and that
no changes are required at this time.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's internal controls
subsequent to the Evaluation Date, or any significant deficiencies or material
weaknesses in such internal controls requiring corrective actions. As a result,
no corrective actions were taken.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently defending numerous individual lawsuits pending in
various state and federal courts involving PPA, an ingredient formerly used in
the manufacture of certain OTC cough/cold and diet products. The Company
discontinued using PPA in November 2000 at the request of the FDA. These cases
allege that the plaintiff suffered injury, generally some type of stroke, from
ingesting PPA-containing products. Many of these suits also name other
manufacturers or retailers of PPA-containing products. These personal injury
suits seek an unspecified amount of compensatory, exemplary and statutory
damages. The Company maintains product liability insurance coverage for the
claims asserted in these lawsuits.
The Company believes that it has meritorious defenses to these lawsuits and
intends to vigorously defend them. At this time, the Company cannot determine
whether it will be named in additional PPA-related suits, the outcome of
existing suits or the effect that PPA-related suits may have on its financial
condition or operating results.
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Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Shareholders' Meeting held on October 29, 2002, the
Company's shareholders voted on the following matter:
1. Election of two directors of the Company:
The tabulation of votes provided by the Inspector of Election was as follows:
Nominee For Withhold/Against
------- ---------- ----------------
Peter R. Formanek 64,492,935 1,548,786
Herman Morris, Jr. 64,479,402 1,562,319
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description
- -------------- -----------
3(a) Amended and Restated Articles of Incorporation of
Registrant, incorporated by reference from Amendment
No. 2 to Registration Statement No. 33-43834 filed by
the Registrant on September 23, 1993.
3(b) Restated Bylaws of Registrant, dated April 10, 1996,
as amended, incorporated by reference from the
Registrant's Form 10-K filed on September 6, 2000.
4(a) Shareholders' Rights Plan, incorporated by reference
from the Registrant's Form 8-K filed on April 10,
1996. (SEC File No. 00-19725).
99(a) Certification under Section 906 of the Sarbanes-Oxley
Act of 2002.
*Denotes management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company filed a report, together with a copy of the slides presented at the
meeting, on Form 8-K on October 29, 2002 that announced it held its Annual
Shareholders' Meeting in Allegan, Michigan.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERRIGO COMPANY
--------------------------------------
(Registrant)
Date: January 24, 2003 By: /s/David T. Gibbons
----------------------------- -------------------------------------
David T. Gibbons
President and Chief Executive Officer
Date: January 24, 2003 By: /s/Douglas R. Schrank
------------------------------ --------------------------------------
Douglas R. Schrank
Executive Vice President and Chief
Financial Officer (Principal
Accounting and Financial Officer)
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CERTIFICATION
I, David T. Gibbons, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Perrigo Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 24, 2003
/s/David T. Gibbons
-------------------------------------
David T. Gibbons
President and Chief Executive Officer
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CERTIFICATION
I, Douglas R. Schrank, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Perrigo Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 24, 2003
/s/Douglas R. Schrank
-----------------------------------
Douglas R. Schrank
Executive Vice President and
Chief Financial Officer
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