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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: MARCH 29, 2003
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
(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 APRIL 17, 2003
--------------------- --------------
WITHOUT PAR 69,428,847 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 March 29, 2003 and March 30, 2002 1
Condensed consolidated balance sheets-- March 29, 2003, June 29,
2002 and March 30, 2002 2
Condensed consolidated statements of cash flows-- For the year-to-date
ended March 29, 2003 and March 30, 2002 3
Notes to condensed consolidated financial statements-- March 29, 2003 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks 14
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
CERTIFICATIONS 18
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Third Quarter Year-To-Date
--------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(as restated) (as restated)
Net sales $ 202,616 $ 198,491 $ 643,352 $ 644,301
Cost of sales 143,910 141,883 458,671 472,650
--------- --------- --------- ---------
Gross profit 58,706 56,608 184,681 171,651
Operating expenses
Distribution 3,814 4,048 11,924 12,330
Research and development 5,468 5,762 16,237 17,465
Selling and administration 26,899 26,264 81,049 76,089
--------- --------- --------- ---------
Subtotal 36,181 36,074 109,210 105,884
Restructuring -- -- -- 2,046
Unusual litigation -- (7,813) (3,128) (7,813)
--------- --------- --------- ---------
Total 36,181 28,261 106,082 100,117
--------- --------- --------- ---------
Operating income 22,525 28,347 78,599 71,534
Interest and other, net (373) (220) (1,095) (496)
--------- --------- --------- ---------
Income before income taxes 22,898 28,567 79,694 72,030
Income tax expense 8,766 10,657 29,970 27,169
--------- --------- --------- ---------
Net income $ 14,132 $ 17,910 $ 49,724 $ 44,861
========= ========= ========= =========
Earnings per share
Basic $ 0.20 $ 0.25 $ 0.71 $ 0.61
Diluted $ 0.20 $ 0.24 $ 0.70 $ 0.60
Weighted average shares outstanding:
Basic 69,337 72,690 69,781 73,451
Diluted 70,601 73,859 70,967 74,939
Dividends declared per share $ 0.03 $ -- $ 0.03 $ --
See accompanying notes to condensed consolidated financial statements.
-1-
PERRIGO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 29, June 29, March 30,
2003 2002 2002
--------- --------- ---------
Assets (unaudited) (as restated) (unaudited)
Current assets (as restated)
Cash and cash equivalents $ 105,233 $ 76,824 $ 36,674
Accounts receivable, net of allowances 84,973 82,560 98,755
Inventories, net of allowances 156,043 155,611 145,379
Prepaid expenses and other current assets 6,064 6,896 8,936
Current deferred income taxes 23,603 19,860 19,364
--------- --------- ---------
Total current assets 375,916 341,751 309,108
Property and equipment 417,673 399,461 396,398
Less accumulated depreciation 206,907 188,417 184,943
--------- --------- ---------
210,766 211,044 211,455
Goodwill, net 35,919 35,919 47,471
Other 6,127 5,073 5,156
--------- --------- ---------
$ 628,728 $ 593,787 $ 573,190
========= ========= =========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 73,489 $ 74,449 $ 61,111
Notes payable 8,741 8,338 7,321
Payrolls and related taxes 34,539 31,338 27,733
Accrued expenses 36,469 32,721 31,808
Income taxes 8,815 8,088 10,134
--------- --------- ---------
Total current liabilities 162,053 154,934 138,107
Deferred income taxes 25,146 18,295 16,180
Other long-term liabilities 3,193 2,396 2,685
Shareholders' equity
Preferred stock, without par value, 10,000 shares authorized -- -- --
Common stock, without par value, 200,000 shares authorized 82,564 110,698 108,585
Unearned compensation (262) (608) (756)
Accumulated other comprehensive income 348 373 619
Retained earnings 355,686 307,699 307,770
--------- --------- ---------
Total shareholders' equity 438,336 418,162 416,218
--------- --------- ---------
$ 628,728 $ 593,787 $ 573,190
========= ========= =========
Supplemental Disclosures of Balance Sheet Information
Allowance for doubtful accounts $ 9,907 $ 7,569 $ 8,809
Allowance for inventory $ 19,806 $ 21,360 $ 23,448
Working capital $ 213,863 $ 186,817 $ 171,001
Preferred stock, shares issued -- -- --
Common stock, shares issued 69,425 72,550 72,471
See accompanying notes to condensed consolidated financial statements.
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PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Year-To-Date
--------------------------
2003 2002
--------- --------
Cash Flows From (For) Operating Activities: (as restated)
Net income $ 49,724 $ 44,861
Adjustments to derive cash flows:
Depreciation and amortization 19,777 17,968
Compensation - stock options 3,998 4,549
Deferred income taxes 3,108 92
Restructuring, net of cash -- 2,046
Changes in operating assets and liabilities, net of restructuring:
Accounts receivable (2,845) (5,102)
Inventories (712) 15,784
Current income taxes 718 (10,412)
Accounts payable (750) (23,256)
Payroll and related taxes 3,195 1,617
Accrued expenses 4,038 5,951
Other 1,682 (752)
--------- --------
Net cash from operating activities 81,933 53,346
--------- --------
Cash Flows (For) From Investing Activities:
Additions to property and equipment (19,458) (17,386)
Proceeds from sale of assets held for sale -- 14,161
Investment in equity subsidiaries (1,233) (41)
Other -- (385)
--------- --------
Net cash for investing activities (20,691) (3,651)
--------- --------
Cash Flows (For) From Financing Activities:
Borrowings (repayments) of short-term debt, net 776 (5,554)
Tax benefit of stock transactions 153 1,669
Issuance of common stock 1,353 10,232
Repurchase of common stock (33,682) (31,923)
Cash dividends (1,737) --
Other -- 1,584
--------- --------
Net cash for financing activities (33,137) (23,992)
--------- --------
Net Increase in Cash and Cash Equivalents 28,105 25,703
Cash and Cash Equivalents, at Beginning of Period 76,824 11,016
Effect of exchange rate changes on cash 304 (45)
--------- --------
Cash and Cash Equivalents, at End of Period $ 105,233 $ 36,674
========= ========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 598 $ 1,266
Income taxes paid $ 26,854 $ 36,939
See accompanying notes to condensed consolidated financial statements.
-3-
PERRIGO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 29, 2003
(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
years to conform with the current year presentation.
Operating results for the quarter and year-to-date ended March 29, 2003 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 adoption of SFAS 146 had no material impact on the
Company's financial statements. Additionally, 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
Inventories are summarized as follows:
March 29, June 29, March 30,
2003 2002 2002
-------- -------- --------
Finished Goods $ 58,124 $ 62,360 $ 57,043
Work in process 58,560 57,870 53,864
Raw materials 39,359 35,381 34,472
-------- -------- --------
$156,043 $155,611 $145,379
======== ======== ========
The Company maintains a reserve for estimated obsolete or unmarketable inventory
based on the difference between the cost of inventory and its estimated market
value. The inventory balances stated above are net of an inventory reserve of
$19,806 at March 29, 2003, $21,360 at June 29, 2002 and $23,448 at March 30,
2002.
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. For year-to-date fiscal 2003, the Company
purchased 3,296 shares of common stock for $33,682 of which 92 shares were
purchased for $1,015 in the third quarter of fiscal 2003. On an annual basis,
the Company 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 $13,306
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 results reported prior
to the second quarter of fiscal 2003, 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. Beginning in 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:
Third Quarter Year-to-Date
---------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income before adoption $15,507 $19,261 $53,565 $48,916
Compensation expense (net of tax benefit) 1,375 1,351 3,841 4,055
------- ------- ------- -------
Net income after adoption $14,132 $17,910 $49,724 $44,861
======= ======= ======= =======
Weighted average shares outstanding
Basic 69,337 72,690 69,781 73,451
Diluted
Before adoption 71,041 74,309 71,395 75,474
After adoption 70,601 73,859 70,967 74,939
Basic EPS
Before adoption $ 0.22 $ 0.26 $ 0.77 $ 0.67
After adoption $ 0.20 $ 0.25 $ 0.71 $ 0.61
Diluted EPS
Before adoption $ 0.22 $ 0.26 $ 0.75 $ 0.65
After adoption $ 0.20 $ 0.24 $ 0.70 $ 0.60
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:
Third Quarter Year-to-Date
---------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income $14,132 $17,910 $49,724 $44,861
Other comprehensive income:
Foreign currency translation adjustments (542) 199 (25) 191
------- ------- ------- -------
Comprehensive income $13,590 $18,109 $49,699 $45,052
======= ======= ======= =======
-6-
NOTE E - EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the basic and
diluted EPS calculation follows:
Third Quarter Year-to-Date
---------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- -------
Numerator
Net income used for both basic and diluted EPS $14,132 $17,910 $49,724 $44,861
Denominator
Weighted average shares outstanding for
basic EPS 69,337 72,690 69,781 73,451
Dilutive effect of stock options 1,264 1,169 1,186 1,488
------- ------- ------- -------
Weighted average shares outstanding for
diluted EPS 70,601 73,859 70,967 74,939
======= ======= ======= =======
Options outstanding that are anti-dilutive were 3,412 and 1,688 for fiscal 2003
and 2002, respectively. These options are excluded from the diluted EPS
calculation.
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 included money
damages and a permanent injunction enjoining defendants from future violations
of antitrust laws. The Company has entered into settlement agreements with all
defendants. The Company received final 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
-7-
entered into by two of the Company's foreign subsidiaries. The Company has
guarantees of approximately $10,800 as of March 29, 2003. Although this amount
represents the maximum exposure to loss, the Company believes the actual risk of
loss is insignificant. Of this amount, $8,741 was recorded in the financial
statements as notes payable as of March 29, 2003.
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 primarily 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.
Store Brand All
Health Care Other Total
----------- ---------- ----------
Third Quarter 2003
Net sales $183,560 $19,056 $202,616
Operating income $ 21,020 $ 1,505 $ 22,525
Operating income % 11.5% 7.9% 11.1%
Third Quarter 2002
Net sales $183,719 $14,772 $198,491
Operating income $ 28,015 $ 332 $ 28,347
Operating income % 15.2% 2.2% 14.3%
Year-to-date 2003
Net sales $583,913 $59,439 $643,352
Operating income $ 74,360 $ 4,239 $ 78,599
Operating income % 12.7% 7.1% 12.2%
Year-to-date 2002
Net sales $595,055 $49,246 $644,301
Operating income $ 68,623 $ 2,911 $ 71,534
Operating income % 11.5% 5.9% 11.1%
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 December 2003. No additional charges related to this
restructuring plan were recorded or are expected to be recorded in fiscal 2003.
In fiscal 2003, $1,475 was paid primarily related to severance costs and
professional fees. One hundred seventy-five production and administrative
employees have been terminated in fiscal 2003.
-8-
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
Reductions (564)
-------
Balance at March 29, 2003 $ 1,025
=======
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.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER AND YEAR-TO-DATE FISCAL YEARS 2003 AND 2002
(in thousands)
RESULTS OF OPERATIONS
STORE BRAND HEALTH CARE
Third Quarter Year-to Date
------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $183,560 $183,719 $583,913 $595,055
Gross profit $ 54,610 $ 52,481 $169,981 $157,472
Gross profit % 29.8% 28.6% 29.1% 26.5%
Operating expenses $ 33,590 $ 24,466 $ 95,621 $ 88,849
Operating expenses % 18.3% 13.3% 16.4% 14.9%
Operating income $ 21,020 $ 28,015 $ 74,360 $ 68,623
Operating income % 11.5% 15.2% 12.7% 11.5%
Net Sales
Third quarter net sales for fiscal 2003 decreased $159 to $183,560 from $183,719
during fiscal 2002. Net sales decreased approximately $6,200 primarily due to
lower unit sales of nutrition and contract manufactured products. This decrease
was offset by higher unit sales of existing analgesic, cough/cold and antacid
products.
Year-to-date net sales for fiscal 2003 decreased $11,142 or 2% to $583,913 from
$595,055 during fiscal 2002. Net sales decreased approximately $26,000 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 tablet encapsulation 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.
Gross Profit
Third quarter gross profit increased $2,129 or 4% during fiscal 2003 compared to
fiscal 2002. The gross profit percent to net sales was 29.8% in fiscal 2003
compared to 28.6% in fiscal
-10-
2002. The increase in gross profit percentage was primarily due to improved
operating efficiencies, partially offset by higher obsolescence expenses.
Year-to-date gross profit increased $12,509 or 8% during fiscal 2003 compared to
fiscal 2002. The gross profit percent to net sales was 29.1% in fiscal 2003
compared to 26.5% in fiscal 2002. Approximately two-thirds of the increase in
gross profit percentage was due to improved operating efficiencies and one-third
was due to a favorable mix of products sold and improved net realized pricing.
Operating Expenses
Third quarter operating expenses increased $9,124 or 37% during fiscal 2003
compared to fiscal 2002. Operating expenses were favorably impacted by unusual
litigation income of $7,813 in fiscal 2002. Selling and administration increased
$1,509 primarily due to rising insurance costs. The Company expects insurance
costs to continue to be higher in fiscal 2003 than fiscal 2002. Research and
development decreased $365 due to the timing of projects.
Year-to-date operating expenses increased $6,772 or 8% during fiscal 2003 as
compared to fiscal 2002. Operating expenses were impacted by a $4,685 reduction
of unusual litigation income in fiscal 2003. The lawsuit that gave rise to this
income has been settled with all defendants and no additional income will be
received. Selling and administration increased $5,692 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 $1,431 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
Third Quarter Year-to Date
--------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 19,056 $ 14,772 $ 59,439 $ 49,246
Gross profit $ 4,096 $ 4,127 $ 14,700 $ 14,179
Gross profit % 21.5% 27.9% 24.7% 28.8%
Operating expenses $ 2,591 $ 3,795 $ 10,461 $ 11,268
Operating expenses % 13.6% 25.7% 17.6% 22.9%
Operating income $ 1,505 $ 332 $ 4,239 $ 2,911
Operating income % 7.9% 2.2% 7.1% 5.9%
Net Sales
Third quarter net sales for fiscal 2003 increased by $4,284 or 29% to $19,056
from $14,772 during fiscal 2002. The increase in sales was primarily due to
increased volume at Wrafton.
Year-to-date net sales for fiscal 2003 increased $10,193 or 21% to $59,439 from
$49,246 during fiscal 2002 primarily due to increased volume at Wrafton. Because
fiscal 2002 was a transitional year for Wrafton, fiscal 2002 included eight
months of results compared to fiscal
-11-
2003, which included nine months of results.
Gross Profit
Third quarter gross profit decreased by $31 or 1% during fiscal 2003 compared to
fiscal 2002. The gross profit percent to net sales was 21.5% in fiscal 2003
compared to 27.9% 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 $521 or 4% during fiscal 2003 compared to
fiscal 2002. The gross profit percent to net sales was 24.7% in fiscal 2003
compared to 28.8% 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)
Third quarter interest and other, net, decreased $153 for fiscal 2003. Interest
expense for fiscal 2003 was $29 compared to $78 for fiscal 2002. Other income
for fiscal 2003 was $402 compared to $298 for fiscal 2002.
Year-to-date interest and other, net, decreased $599 for fiscal 2003. Interest
expense for fiscal 2003 was $191 compared to $897 for fiscal 2002. The
difference in interest expense was primarily due to a higher level of invested
cash throughout fiscal 2003 versus fiscal 2002. Other income for fiscal 2003 was
$1,286 compared to $1,393 for fiscal 2002.
INCOME TAXES (CONSOLIDATED)
For the third quarter of fiscal 2003, the effective tax rate was 38.3% compared
to 37.3% for fiscal 2002.
The effective tax rate for fiscal 2003 was 37.6% compared to 37.7% for fiscal
2002.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $28,409 to $105,233 at March 29, 2003 from
$76,824 at March 30, 2002. Working capital, including cash, increased $27,046 to
$213,863 at March 29, 2003 from $186,817 at March 30, 2002. The Company's
priorities for use of the cash and cash equivalents include support of seasonal
working capital demands, investment in capital assets, opportunistic repurchase
of common stock and acquisition of complementary businesses that could leverage
retailer relationships, offer a product niche opportunity or support geographic
expansion.
Year-to-date net cash provided by operating activities increased 54% to $81,933
for fiscal 2003 compared to $53,346 for fiscal 2002 primarily due to improved
profitability and working capital management. Fiscal 2002 was unfavorably
impacted by an estimated tax payment of $8,000 that related to the fiscal 2001
tax liability.
Year-to-date net cash used for investing activities increased $17,040 for fiscal
2003 primarily due to proceeds received in fiscal 2002 related to the sale of
the logistics facility that offset
-12-
fiscal 2002 capital expenditures. Capital expenditures for facilities and
equipment for fiscal 2003 were for normal equipment replacement and productivity
enhancements. Capital expenditures are anticipated to be $6,000 to $8,000 for
the remainder of fiscal 2003.
Year-to-date net cash used for financing activities increased 38% to $33,137 for
fiscal 2003 compared to $23,992 for fiscal 2002. Proceeds from employee
exercises of stock options in fiscal 2002 were $8,879 higher than 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. For year-to-date fiscal 2003, the Company
purchased 3,296 shares of common stock for $33,682 of which 92 shares were
purchased for $1,015 in the third quarter of fiscal 2003. On an annual basis,
the Company 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 $13,306
available to purchase additional shares. The common stock repurchased was
retired upon purchase for all years.
In the third quarter of fiscal 2003, the Board of Directors adopted a policy of
paying regular quarterly dividends. The Company paid quarterly dividends of
$1,737 for fiscal 2003. The Company expects to continue paying quarterly
dividends in the foreseeable future.
The Company had no long-term debt at March 29, 2003 and had $175,000 available
on its unsecured credit facility. Cash and cash equivalents, 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 $9,907,
$7,569 and $8,809 at March 29, 2003, June 29, 2002 and March 30, 2002,
respectively.
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
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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 $19,806, $21,360 and
$23,448 at March 29, 2003, June 29, 2002 and March 30, 2002, 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 $105,233 and no outstanding borrowings on its credit
facility at March 29, 2003. Management believes that a fluctuation in interest
rates in the near future will not have a material impact on the Company's
consolidated financial statements.
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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 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.
(b) Reports on Form 8-K
None
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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: April 28, 2003 By: /s/David T. Gibbons
--------------------------- ----------------------------------
David T. Gibbons
President and Chief Executive Officer
Date: April 28, 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: April 28, 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: April 28, 2003
/s/Douglas R. Schrank
-------------------------------
Douglas R. Schrank
Executive Vice President and
Chief Financial Officer
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