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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 27, 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
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
515 EASTERN AVENUE
ALLEGAN, MICHIGAN 49010
----------------- -----
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
(269) 673-8451
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
--------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [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 23, 2004
--------------------- ----------------
WITHOUT PAR 70,124,170
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PERRIGO COMPANY
FORM 10-Q
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated statements of income -- For the quarters
and year-to-date ended December 27, 2003 and December 28, 2002 1
Condensed consolidated balance sheets -- December 27, 2003,
June 28, 2003 and December 28, 2002 2
Condensed consolidated statements of cash flows -- For the year-to-date
ended December 27, 2003 and December 28, 2002 3
Notes to condensed consolidated financial statements 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 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Second Quarter Year-To-Date
------------------------- ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(as adjusted) (as adjusted)
Net sales $ 245,094 $ 227,521 $ 454,899 $ 440,736
Cost of sales 171,198 163,225 323,017 314,761
--------- --------- --------- ---------
Gross profit 73,896 64,296 131,882 125,975
Operating expenses
Distribution 3,833 4,083 7,355 8,110
Research and development 6,186 5,321 11,899 10,769
Selling and administration 25,107 28,547 48,513 54,150
--------- --------- --------- ---------
Subtotal 35,126 37,951 67,767 73,029
Unusual litigation - - - (3,128)
--------- --------- --------- ---------
Total 35,126 37,951 67,767 69,901
--------- --------- --------- ---------
Operating income 38,770 26,345 64,115 56,074
Interest and other, net (504) (514) (953) (722)
--------- --------- --------- ---------
Income before income taxes 39,274 26,859 65,068 56,796
Income tax expense 1,039 10,045 10,325 21,204
--------- --------- --------- ---------
Net income $ 38,235 $ 16,814 $ 54,743 $ 35,592
========= ========= ========= =========
Earnings per share
Basic $ 0.55 $ 0.24 $ 0.78 $ 0.51
Diluted $ 0.53 $ 0.24 $ 0.76 $ 0.50
Weighted average shares outstanding
Basic 69,967 69,273 70,006 70,000
Diluted 71,500 70,394 71,568 71,003
See accompanying notes to condensed consolidated financial statements.
-1-
PERRIGO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
December 27, June 28, December 28,
2003 2003 2002
------------ --------- -------------
(unaudited) (unaudited)
(as adjusted)
Assets
Current assets
Cash and cash equivalents $ 110,809 $ 93,827 $ 71,773
Accounts receivable 123,832 87,018 102,722
Inventories 142,626 160,326 153,477
Current deferred income taxes 30,455 32,643 23,970
Prepaid expenses and other current assets 9,358 5,383 6,907
----------- --------- ---------
Total current assets 417,080 379,197 358,849
Property and equipment 459,397 429,115 411,858
Less accumulated depreciation 233,706 210,337 201,759
----------- --------- ---------
225,691 218,778 210,099
Goodwill 35,919 35,919 35,919
Non-current deferred income taxes 6,976 3,968 3,320
Other non-current assets 21,579 6,108 4,678
----------- --------- ---------
$ 707,245 $ 643,970 $ 612,865
=========== ========= =========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 81,487 $ 72,186 $ 68,970
Notes payable 8,109 8,980 9,469
Payroll and related taxes 28,337 40,535 27,884
Accrued expenses 46,941 36,590 41,931
Accrued income taxes 6,068 5,568 9,872
Current deferred income taxes 2,975 2,683 2,313
----------- --------- ---------
Total current liabilities 173,917 166,542 160,439
Non-current deferred income taxes 26,060 25,484 23,778
Other non-current liabilities 5,128 3,520 3,212
Shareholders' equity
Preferred stock, without par value, 10,000 shares
authorized - - -
Common stock, without par value, 200,000 shares
authorized 92,404 88,990 81,669
Unearned compensation (608) (111) (414)
Accumulated other comprehensive income 1,540 1,282 890
Retained earnings 408,804 358,263 343,291
----------- --------- ---------
Total shareholders' equity 502,140 448,424 425,436
----------- --------- ---------
$ 707,245 $ 643,970 $ 612,865
=========== ========= =========
Supplemental Disclosures of Balance Sheet Information
Allowance for doubtful accounts $ 7,623 $ 10,242 $ 9,465
Allowance for inventory $ 22,124 $ 21,717 $ 20,855
Working capital $ 243,163 $ 212,655 $ 198,410
Preferred stock, shares issued - - -
Common stock, shares issued 70,076 70,034 69,479
See accompanying notes to condensed consolidated financial statements.
-2-
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Year-To-Date
--------------------------
2004 2003
---- ----
(as adjusted)
Cash Flows From Operating Activities
Net income $ 54,743 $ 35,592
Adjustments to derive cash flows
Depreciation and amortization 14,367 13,520
Compensation - stock options 2,609 2,667
Deferred income taxes (683) 338
Changes in operating assets and liabilities, net of amounts
acquired in a business acquisition
Accounts receivable (30,761) (20,155)
Inventories 25,741 2,137
Accounts payable 3,246 (5,458)
Payroll and related taxes (12,189) (3,453)
Accrued income taxes 500 1,794
Accrued expenses 7,510 9,197
Other (5,202) 1,330
--------- ---------
Net cash from operating activities 59,881 37,509
--------- ---------
Cash Flows For Investing Activities
Additions to property and equipment (13,535) (12,022)
Non-current note receivable (10,000) -
Acquisition of a business (13,401) -
Investment in equity subsidiaries (2,000) -
--------- ---------
Net cash for investing activities (38,936) (12,022)
--------- ---------
Cash Flows For Financing Activities
Borrowings (repayments) of short-term debt, net (765) 1,107
Tax benefit of stock transactions 355 59
Issuance of common stock 2,390 1,059
Repurchase of common stock (1,940) (32,667)
Cash dividends paid (4,202) -
Other - (117)
--------- ---------
Net cash for financing activities (4,162) (30,559)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 16,783 (5,072)
Cash and cash equivalents, at beginning of period 93,827 76,824
Effect of exchange rate changes on cash 199 21
--------- ---------
Cash and cash equivalents, at end of period $ 110,809 $ 71,773
========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for
Interest paid $ 213 $ 467
Income taxes paid $ 9,539 $ 18,922
See accompanying notes to condensed consolidated financial statements.
-3-
PERRIGO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 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 to the current year presentation.
Operating results for the quarter and year-to-date ended December 27, 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 28, 2003.
In December 2003, the Company acquired Peter Black Pharmaceuticals, Ltd. (Peter
Black) for $13,401 in cash. Peter Black, located in the United Kingdom, is the
largest manufacturer of store brand vitamin and nutritional supplement products
for grocery stores, pharmacies and contract customers in the United Kingdom. The
assets and liabilities, which are not considered significant to the Company, are
included in the Company's consolidated balance sheet at December 27, 2003. No
goodwill was recorded as a result of the acquisition. Results of operations will
be included beginning in the third quarter of fiscal 2004.
Financial Accounting Standards Board (FASB) Interpretation 46, as revised by 46R
(FIN 46R), requires that if a business enterprise has a controlling financial
interest in a variable interest entity, and is considered the primary
beneficiary, the assets, liabilities and results of the activities of the
variable interest entity shall be included in the consolidated financial
statements of the business enterprise. As a result of the Company's evaluation
of the requirements of FIN 46R, no variable interest entities that are subject
to consolidation were identified and, as such, the adoption of FIN 46R for
fiscal year 2004 had no impact on the Company's consolidated financial position
or results of operations.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (Act) was signed into law. In response to this new law, the FASB
released FASB Staff Position (FSP) 106-1, which would permit deferral of any
accounting for the effects of the Act pending further consideration of the
underlying accounting issues, unless a sponsor amends its plan. The Company is a
sponsor of a postretirement health care plan (plan) that provides prescription
drug benefits. In accordance with this FSP, any measures of the accumulated
postretirement benefit obligation or net periodic postretirement benefit cost in
the financial statements and accompanying notes do not reflect the effects of
the Act on the plan. The
-4-
Company is currently evaluating any effects the Act may have on the plan and its
financial statements.
NOTE B - EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the basic and
diluted EPS calculation follows:
Second Quarter Year-to-Date
----------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
Numerator
Net income used for both basic and diluted EPS $38,235 $16,814 $54,743 $35,592
======= ======= ======= =======
Denominator
Weighted average shares outstanding for basic EPS 69,967 69,273 70,006 70,000
Dilutive effect of stock options 1,533 1,121 1,562 1,003
------- ------- ------- -------
Weighted average shares outstanding for diluted EPS 71,500 70,394 71,568 71,003
======= ======= ======= =======
Options outstanding that are anti-dilutive were 2,182 and 3,469 for the first
half of fiscal 2004 and 2003, respectively. These options are excluded from the
diluted EPS calculation.
NOTE C - INVENTORIES
Inventories are summarized as follows:
December 27, June 28, December 28,
2003 2003 2002
---- ---- ----
Finished goods $ 55,297 $ 59,547 $ 57,370
Work in process 48,538 58,628 58,801
Raw materials 38,791 42,151 37,306
-------- -------- --------
$142,626 $160,326 $153,477
======== ======== ========
The Company maintains an allowance 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 allowance of $22,124 at December 27, 2003, $21,717 at June 28, 2003
and $20,855 at December 28, 2002.
NOTE D - SHAREHOLDERS' EQUITY
In fiscal 2004, 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.
The total remaining expenditure approved by the Board of Directors for the
repurchase of additional shares is $31,366. The repurchases were authorized in
$20,000 increments announced on August 20, 2002 and October 29, 2003 and will
expire on February 19, 2004 and April 28, 2005, respectively. No share
repurchase programs expired or were terminated during the periods noted. The
common stock repurchased was retired upon purchase.
-5-
The following table lists the repurchase of shares by period for fiscal year
2004:
Number of
Shares
Purchased Value Value
Total Average Under of of Shares
Number of Price Publicly Additional Available
Shares Paid per Announced Shares for
Fiscal 2004 Purchased Share Plans Approved Purchase
----------- --------- -------- --------- ---------- ---------
June 29 to Aug 2 - - - - $ 13,306
Aug 3 to Aug 30 - - - - 13,306
Aug 31 to Sept 27 25 $ 13.79 25 - 12,961
Sept 28 to Nov 1 121 13.18 121 $ 20,000 31,366
Nov 2 to Nov 29 - - - - 31,366
Nov 30 to Dec 27 - - - - 31,366
--- --- ----------
Total 146 146 $ 20,000
=== === ==========
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 Accounting Principles
Board Opinion 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
Statement of Financial Accounting Standards (SFAS) 123, "Accounting for
Stock-Based Compensation", as amended by SFAS 148, for stock-based employee
compensation. All prior periods presented have been adjusted 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 June 30,
2002 of $19,458, representing the cumulative stock option compensation recorded
for prior years net of the tax effect.
NOTE E - 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
--------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income $ 38,235 $ 16,814 $ 54,743 $ 35,592
Other comprehensive income:
Foreign currency translation adjustments 1,353 (62) 258 517
-------- -------- -------- --------
Comprehensive income $ 39,588 $ 16,752 $ 55,001 $ 36,109
======== ======== ======== ========
-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 over-the-counter
cough/cold and diet products. The Company discontinued using PPA in November
2000 at the request of the United States Food and Drug Administration. 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.
The U.S. Federal Trade Commission (FTC) is investigating a 1998 agreement
between Alpharma, Inc. and the Company. The inquiry could result in the Company
being involved in further proceedings with the FTC or state attorneys general.
The Company is cooperating with the FTC.
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 $8,109 as of December 27, 2003. Although
this amount represents the maximum exposure to loss, the Company believes the
actual risk of loss is insignificant. Of this amount, $8,109 was recorded in the
financial statements as notes payable as of December 27, 2003.
NOTE G - SEGMENT INFORMATION
The Company has reorganized its segment reporting with the acquisition of Peter
Black. The Company has four reporting segments; Consumer Healthcare, UK
Operations, Mexico Operations and Pharmaceuticals. Consumer Healthcare includes
the U.S. operations supporting the sale of over-the-counter drug and nutrition
products. UK Operations support the sale of over-the-counter drug and nutrition
products in the United Kingdom and includes the newly acquired Peter Black. Both
Consumer Healthcare and UK Operations meet the quantitative thresholds requiring
separate disclosure. Mexico Operations support the sale of over-the-counter drug
products in Mexico. Pharmaceuticals includes the development and eventual sale
of prescription drug products. While Mexico Operations and Pharmaceuticals do
not meet the quantitative thresholds requiring separate disclosure, the Company
feels that separately disclosing these segments provides valuable information to
its shareholders. The accounting policies of the operating segments are the same
as those described in the summary of significant accounting policies.
-7-
Consumer UK Mexico
Healthcare Operations Operations Pharmaceuticals Total
----------- ---------- ---------- --------------- --------
Second Quarter 2004
Net sales $222,788 $ 14,965 $ 7,341 - $245,094
Operating income (loss) $ 37,867 $ 900 $ 1,081 $ (1,078) $ 38,770
Operating income % 17.0% 6.0% 14.7% - 15.8%
Second Quarter 2003
Net sales $205,284 $ 13,416 $ 8,821 - $227,521
Operating income $ 24,191 $ 1,038 $ 1,116 - $ 26,345
Operating income % 11.8% 7.7% 12.7% - 11.6%
Year-to-Date 2004
Net sales $413,513 $ 27,628 $ 13,758 - $454,899
Operating income (loss) $ 62,767 $ 1,334 $ 1,371 $ (1,357) $ 64,115
Operating income % 15.2% 4.8% 10.0% - 14.1%
Year-to-Date 2003
Net sales $400,353 $ 25,184 $ 15,199 - $440,736
Operating income $ 53,340 $ 1,778 $ 956 - $ 56,074
Operating income % 13.3% 7.1% 6.3% - 12.7%
NOTE H - RESTRUCTURING
Update of 2002 restructuring -- The Company approved a restructuring plan
related to its Mexican operating company in the fourth quarter of fiscal 2002.
The implementation of the plan began in June 2002 and was completed in September
2003. No additional charges related to the restructuring plan were recorded in
fiscal 2004. The year-to date activity of the restructuring accrual is detailed
in the following table:
Fiscal 2002 Restructuring
Severance and Other costs
-------------------------
Balance at June 28, 2003 230
Reduction - first quarter fiscal 2004 (230)
-----
Balance at December 27, 2003 $ -
=====
NOTE I - SUBSEQUENT EVENT
Subsequent to the second quarter of fiscal 2004, the Company was notified by the
Internal Revenue Service that it had concluded the routine Federal tax
examination of tax years 1998, 1999 and 2000. As a result, the Company recorded
a one-time income tax benefit of $13,100 in the second quarter of fiscal 2004,
reducing its income tax accrual associated with these audits. The Company
believes it has appropriately accrued for probable Federal income tax exposures
subsequent to 2000.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER FISCAL YEARS 2004 AND 2003
(in thousands)
RESULTS OF OPERATIONS
Segments
The Company has reorganized its segment reporting with the acquisition of Peter
Black. The Company has four reporting segments; Consumer Healthcare, UK
Operations, Mexico Operations and Pharmaceuticals. Consumer Healthcare includes
the U.S. operations supporting the sale of over-the-counter drug and nutrition
products. UK Operations support the sale of over-the-counter drug and nutrition
products in the United Kingdom and includes the newly acquired Peter Black. Both
Consumer Healthcare and UK Operations meet the quantitative thresholds requiring
separate disclosure. Mexico Operations support the sale of over-the-counter drug
products in Mexico. Pharmaceuticals includes the development and eventual sale
of prescription drug products. While Mexico Operations and Pharmaceuticals do
not meet the quantitative thresholds requiring separate disclosure, the Company
feels that separately disclosing these segments provides valuable information to
its shareholders. The accounting policies of the operating segments are the same
as those described in the summary of significant accounting policies.
Acquisition
In December 2003, the Company acquired Peter Black for $13,401 in cash. Peter
Black, located in the United Kingdom, is the largest manufacturer of store brand
vitamin and nutritional supplement products for grocery stores, pharmacies and
contract customers in the United Kingdom selling to supermarket, drug and mass
merchandise retailers under their store brand labels. The assets and
liabilities, which are not considered significant to the Company, are included
in the Company's consolidated balance sheet at December 27, 2003. Results of
operations will be included beginning in the third quarter of 2004.
Tax Examination
Subsequent to the second quarter of fiscal 2004, the Company was notified by the
Internal Revenue Service that it had concluded the routine Federal tax
examination of tax years 1998, 1999 and 2000. As a result, the Company recorded
a one-time income tax benefit of $13,100 in the second quarter of fiscal 2004,
reducing its income tax accrual associated with these audits. The Company
believes it has appropriately accrued for probable Federal income tax exposures
subsequent to 2000.
Seasonality
The Company's sales of over-the-counter and nutrition products are subject to
the seasonal demands of the cough/cold/flu and allergy products in the second
and third quarters. The second quarter of fiscal 2004 saw higher sales for these
products reflecting the peak in the cough/cold/flu season in the U.S. market.
There can be no assurance that the third quarter will continue this trend or
that it will equal the seasonal demand of last year's third quarter.
-9-
CONSUMER HEALTHCARE
Second Quarter Year-to-Date
---------------------- ----------------------
2004 2003 2004 2003
---- ---- ---- ----
Net sales $222,788 $205,284 $413,513 $400,353
Gross profit $ 68,982 $ 58,354 $123,421 $115,371
Gross profit % 31.0% 28.4% 29.8% 28.8%
Operating expenses $ 31,115 $ 34,163 $ 60,654 $ 62,031
Operating expenses % 14.0% 16.6% 14.7% 15.5%
Operating income $ 37,867 $ 24,191 $ 62,767 $ 53,340
Operating income % 17.0% 11.8% 15.2% 13.3%
Net Sales
Second quarter net sales for fiscal 2004 increased 9% or $17,504 compared to
fiscal 2003. Net sales increased approximately $24,000 primarily due to sales of
a new product, loratadine and pseudoephedrine sulfate extended release tablets,
and increased unit sales of existing analgesic and cough and cold products. The
increase was offset by lower unit sales of existing vitamin products and
products related to tablet/caplet gelatin coating processing.
Year-to-date net sales for fiscal 2004 increased 3% or $13,160 compared to
fiscal 2003. Net sales increased approximately $29,000 primarily due to sales of
new products, including loratadine and pseudoephedrine sulfate extended release
tablets and a starch blocker, and increased unit sales of existing analgesic
products. The increase was offset by lower unit sales of existing vitamin
products and products related to tablet/caplet gelatin coating processing.
Factors that contributed to the decline in sales of vitamin products included
strong price competition, retail inventory levels and reduced store counts at a
large retailer.
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 twelve months prior to the
supplier discontinuation. The Company is working to arrange alternative sources
of this coating, including development of 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. Sales related to these products have decreased $8,000
during the first half of fiscal 2004 compared to fiscal 2003.
Gross Profit
Second quarter gross profit increased 18% or $10,628 during fiscal 2004 compared
to fiscal 2003. The increase in gross profit percent was primarily due to
improved operating efficiencies and success in certain supply chain initiatives.
Year-to-date gross profit increased 7% or $8,050 during fiscal 2004 compared to
fiscal 2003. The increase in gross profit percent was primarily due to improved
operating efficiencies and success in certain supply chain initiatives.
-10-
Operating Expenses
Second quarter operating expenses decreased 9% or $3,048 during fiscal 2004
compared to fiscal 2003. Selling and administration expenses decreased $3,096,
primarily due to a reduction in bad debt expense.
Year-to-date operating expenses decreased 2% or $1,377 during fiscal 2004
compared to fiscal 2003. Selling and administration expenses decreased by $4,354
primarily due to a reduction in bad debt expense that was partially related to
the settlement of a large customer's 2002 bankruptcy. Operating expenses were
favorably impacted by unusual litigation income of $3,128 in the first quarter
of fiscal year 2003.
UK OPERATIONS
Second Quarter Year-to-Date
-------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
Net sales $14,965 $13,416 $27,628 $25,184
Gross profit $ 2,252 $ 2,235 $ 3,839 $ 4,184
Gross profit % 15.1% 16.7% 13.9% 16.6%
Operating expenses $ 1,352 $ 1,197 $ 2,505 $ 2,406
Operating expenses % 9.0% 8.9% 9.1% 9.6%
Operating income $ 900 $ 1,038 $ 1,334 $ 1,778
Operating income % 6.0% 7.7% 4.8% 7.1%
Net Sales
Second quarter net sales for fiscal 2004 increased 12% or $1,549 compared to
fiscal 2003, approximately two-thirds of which is due to exchange rate
fluctuations and one-third to increased sales volume of over-the-counter
products.
Year-to-date net sales for fiscal 2004 increased 10% or $2,444 compared to
fiscal 2003, approximately two-thirds of which is due to exchange rate
fluctuations and one-third to increased sales volume of over-the-counter
products.
In December 2003, the Company acquired Peter Black for $13,401 in cash. Peter
Black, located in the United Kingdom, is the largest manufacturer of store brand
vitamin and nutritional supplement products for grocery stores, pharmacies and
contract customers in the United Kingdom selling to supermarket, drug and mass
merchandise retailers under their store brand labels. The assets and
liabilities, which are not considered significant to the Company, are included
in the Company's consolidated balance sheet at December 27, 2003. No goodwill
was recorded as a result of this acquisition. Results of operations will be
included beginning in the third quarter of fiscal 2004.
Gross Profit
Second quarter gross profit percent decreased during fiscal 2004 compared to
fiscal 2003 primarily due to lower margin contract sales in the mix of products
sold.
-11-
Year-to-date gross profit percent decreased during fiscal 2004 compared to
fiscal 2003 primarily due to lower margin contract sales in the mix of products
sold.
MEXICO OPERATIONS
Second Quarter Year-to-Date
-------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ 7,341 $ 8,821 $13,758 $15,199
Gross profit $ 2,662 $ 3,707 $ 4,622 $ 6,420
Gross profit % 36.3% 42.0% 33.6% 42.2%
Operating expenses $ 1,581 $ 2,591 $ 3,251 $ 5,464
Operating expenses % 21.5% 29.4% 23.6% 35.9%
Operating income $ 1,081 $ 1,116 $ 1,371 $ 956
Operating income % 14.7% 12.7% 10.0% 6.3%
Net Sales
Second quarter net sales for fiscal 2004 decreased 17% or $1,480 compared to
fiscal 2003. The decrease was evenly distributed between exchange rate
fluctuations and volume as a result of exiting the small retailer market as a
part of the restructuring in fiscal 2003.
Year-to-date net sales for fiscal 2004 decreased 10% or $1,441 compared to
fiscal 2003, primarily due to exchange rate fluctuations.
Gross Profit
Second quarter gross profit decreased 28% or $1,045 during fiscal 2004
compared to fiscal 2003. The decrease was primarily due to the decision to
change from direct selling to the use of independent distributors in the small
retailer market resulting in lower margin sales in the mix of products.
Year-to-date gross profit decreased 28% or $1,798 during fiscal 2004 compared to
fiscal 2003. The decrease was primarily due to the decision to change from
direct selling to the use of independent distributors in the small retailer
market resulting in lower margin sales in the mix of products.
Operating Expenses
Second quarter operating expenses decreased 39% or $1,010 during fiscal 2004
compared to fiscal 2003. The decrease was primarily due to cost savings measures
implemented as a result of the restructuring and the change from direct selling
to the use of independent distributors in the small retailer market.
Year-to-date operating expenses decreased 41% or $2,213 during fiscal 2004
compared to fiscal 2003. The decrease was primarily due to cost savings measures
implemented as a result of the restructuring and the change from direct selling
to the use of independent distributors in the small retailer market.
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PHARMACEUTICALS
Fiscal 2004 operating expenses, related primarily to research and development
activities for prescription drug products, were $1,078 and $1,357 for the second
quarter and year-to-date, respectively. The Company anticipates investing $3,000
to $5,000 in the last half of fiscal 2004, primarily in research and development
costs for the development of prescription drug products.
INTEREST AND OTHER (CONSOLIDATED)
Second quarter interest income was $237 for fiscal 2004 compared to interest
expense of $116 for fiscal 2003. Other income was $267 for fiscal 2004 compared
to $630 for fiscal 2003.
Year-to-date interest income was $332 for fiscal 2004 compared to interest
expense of $162 for fiscal 2003. Other income was $621 for fiscal 2004 compared
to $884 for fiscal 2003.
For both the quarter and first half of fiscal 2004, the difference in interest
income and expense was due to the level of invested cash balances in fiscal 2004
compared to fiscal 2003.
INCOME TAXES (CONSOLIDATED)
For the second quarter of fiscal 2004, the effective tax rate was 2.6% compared
to 37.4% for fiscal 2003.
For the first half of fiscal 2004, the effective tax rate was 15.9% compared to
37.3% for fiscal 2003.
Subsequent to the second quarter of fiscal 2004, the Company was notified by the
Internal Revenue Service that it had concluded the routine Federal tax
examination of tax years 1998, 1999 and 2000. As a result, the Company recorded
a one-time income tax benefit of $13,100 in the second quarter of fiscal 2004,
reducing its income tax accrual associated with these audits. The Company
believes it has appropriately accrued for probable Federal income tax exposures
subsequent to 2000.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $39,036 to $110,809 at December 27, 2003
from $71,773 at December 28, 2002. Working capital, including cash, increased
$44,753 to $243,163 at December 27, 2003 from $198,410 at December 28, 2002. The
Company cancelled its $75,000 unsecured credit facility as a result of the
significant cash balance. 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 $22,372 to
$59,881 for fiscal 2004 compared to $37,509 for fiscal 2003. The increase is
primarily due to a $19,000 increase in net income, which includes a tax benefit
of $13,100, and a $16,000 increase because of the seasonal nature of the
cough/cold/flu business.
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Year-to-date net cash used for investing activities increased $26,914 to $38,936
for fiscal 2004 compared to $12,022 for fiscal 2003. In August 2003, the Company
entered into long-term agreements for the development and distribution of
certain generic prescription drug products. As a part of the agreements, the
Company loaned $10,000 to its partner. Repayment of the note receivable is
expected to begin in fiscal 2007. In December 2003, the Company acquired Peter
Black for $13,401 in cash. The assets and liabilities, which are not considered
significant to the Company, are included in the Company's consolidated balance
sheet at December 27, 2003.
Capital expenditures for facilities and equipment for fiscal 2004 were for
normal equipment replacement and productivity enhancements. Capital expenditures
are anticipated to be $10,000 to $15,000 for the remainder of fiscal 2004.
Year-to-date net cash used for financing activities decreased $26,397 to $4,162
for fiscal 2004 compared to $30,559 for fiscal 2003 primarily due to a reduction
in common stock repurchases of $30,727 and partially offset by dividend payments
in fiscal 2004 of $4,202.
In fiscal 2004, the Company purchased 146 shares of its common stock for $1,940.
Purchases are made on the open market, subject to market conditions, and are
funded by cash from operations. Since November 2000, the Board of Directors has
approved a total expenditure of $100,000 with a remaining balance of $31,366
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
$4,202 during fiscal 2004. The Company expects to continue paying quarterly
dividends in the foreseeable future.
The Company had no long-term debt at December 27, 2003. Cash and cash
equivalents and cash flows from operations 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 judgment and to be critical in the
preparation of the 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 $7,623,
$10,242 and $9,465 at December 27, 2003, June 28, 2003 and December 28, 2002,
respectively. The decrease of $2,619 in fiscal 2004 compared to fiscal 2003
related primarily
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to the bankruptcy settlement of a single customer and a reduction in their
accounts receivable balance.
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, products on quality hold, current and future customer demand, and market
conditions. Changes in these conditions may result in additional allowances. The
allowance for inventory was $22,124, $21,717 and $20,855 at December 27, 2003,
June 28, 2003 and December 28, 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
in fiscal 2004.
Product Liability and Workers' Compensation - The Company maintains accruals to
provide for claims incurred that are related to product liability and workers'
compensation. In estimating these accruals, management considers actuarial
valuations of exposure based on loss experience. These actuarial valuations
include significant estimates and assumptions, which include, but are not
limited to, loss development, interest rates, product sales, litigation costs,
accident severity and payroll expenses. Changes in these estimates and
assumptions may result in additional accruals. The accrual for product liability
claims was $3,718, $3,229, and $2,128 at December 27, 2003, June 28, 2003 and
December 28, 2002, respectively. The accrual for workers' compensation claims
was $3,670, $3,632 and $3,517 at December 27, 2003, June 28, 2003 and December
28, 2002, respectively.
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
25-30 of the Company's Form 10-K for the year ended June 28, 2003 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
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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, if the Company
borrows funds to finance its operations, interest expense. The Company had
invested cash and cash equivalents of $110,809. 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.
The Company has 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 cannot anticipate significant
changes in foreign currency exposure in the near future.
Item 4. Controls and Procedures
As of December 27, 2003, the Company's management, including its Chief Executive
Officer and its Chief Financial Officer, have reviewed and evaluated the
effectiveness of the Company's disclosure controls and procedures pursuant to
Rule 13a-15(b) of the Securities Exchange Act of 1934. Based on that review and
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are adequate and
effective in ensuring that all material information relating to the Company and
its consolidated subsidiaries required to be included in the Company's periodic
SEC filings would be made known to them by others within those entities in a
timely manner and that no changes are required at this time.
In connection with the evaluation by the Company's management, including its
Chief Executive Officer and Chief Financial Officer, of the Company's internal
control over financial reporting pursuant to Rule 13a-15(d) of the Securities
Exchange Act of 1934, no changes during the quarter ended December 27, 2003 were
identified that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
-16-
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Number of
Shares
Purchased Value Value
Total Average Under of of Shares
Number of Price Publicly Additional Available
Shares Paid per Announced Shares for
Fiscal 2004 Purchased Share Plans Approved Purchase
----------- --------- -------- --------- ---------- ---------
June 29 to Aug 2 - - - - $ 13,306
Aug 3 to Aug 30 - - - - 13,306
Aug 31 to Sept 27 25 $ 13.79 25 - 12,961
Sept 28 to Nov 1 121 13.18 121 $ 20,000 31,366
Nov 2 to Nov 29 - - - - 31,366
Nov 30 to Dec 27 - - - - 31,366
--- --- ----------
Total 146 146 $ 20,000
=== === ==========
The total remaining expenditure approved by the Board of Directors for the
repurchase of additional shares is $31,366. The repurchases were authorized in
$20,000 increments announced on August 20, 2002 and October 29, 2003 and will
expire on February 19, 2004 and April 28, 2005, respectively. No share
repurchase programs expired or were terminated during the periods noted. The
common stock repurchased was retired upon purchase.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Shareholders' Meeting held on October 28, 2003, the
Company's shareholders voted on the following matter:
1. Election of three directors of the Company:
The tabulation of votes provided by the Inspector of Election was as follows:
Nominee For Withhold/Against
------- --- ----------------
Gary M. Cohen 54,459,342 10,418,233
David T. Gibbons 59,497,430 5,380,145
Judith A. Hemberger 60,125,527 4,752,048
2. Approval of the Company's 2003 Long-Term Incentive Plan.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
50,995,380 7,238,829 101,373 6,541,993
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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).
10(a)* Registrant's 2003 Long-Term Incentive Plan effective October
28, 2003, as amended, incorporated by reference from the
Registrant's Proxy Statement for its 2003 Annual Meeting of
Shareholders filed on September 26, 2003.
31(A) Rule 13a-14(a) Certification of Chief Executive Officer.
31(B) Rule 13a-14(a) Certification of Chief Financial Officer.
32 Section 1350 Certifications.
* Denotes management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
On October 24, 2003, the Company furnished under Item 12 its October
24, 2003, press release containing its earnings release for the first
quarter of fiscal 2004.
On October 28, 2003, the Company furnished under Item 9 a copy of the
slides presented at the Annual Shareholders' Meeting at the Perrigo
Corporate Office, Allegan, Michigan.
On November 17, 2003, the Company furnished under Item 9 an
announcement that the Federal Trade Commission is investigating a 1998
agreement between Alpharma and Perrigo.
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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: February 3, 2004 By: /s/David T. Gibbons
-------------------------------------
David T. Gibbons
Chairman, President and Chief
Executive Officer
Date: February 3, 2004 By: /s/Douglas R. Schrank
-------------------------------------
Douglas R. Schrank
Executive Vice President and Chief
Financial Officer
(Principal Accounting and Financial
Officer)
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