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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 27, 2004
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
----------------- -----
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
(269) 673-8451
--------------
(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 14, 2004
--------------------- ---------------
WITHOUT PAR 70,664,249
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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 quarter
and the year-to-date ended March 27, 2004 and March 29, 2003 1
Condensed consolidated balance sheets-- March 27, 2004,
June 28, 2003 and March 29, 2003 2
Condensed consolidated statements of cash flows-- For the year-to-date
ended March 27, 2004 and March 29, 2003 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 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Third Quarter Year-To-Date
------------------------- ------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net sales $ 230,740 $ 202,616 $ 685,639 $ 643,352
Cost of sales 164,108 143,910 487,125 458,671
--------- --------- --------- ---------
Gross profit 66,632 58,706 198,514 184,681
Operating expenses
Distribution 4,117 3,814 11,472 11,924
Research and development 6,685 5,468 18,584 16,237
Selling and administration 29,318 26,899 77,831 81,049
--------- --------- --------- ---------
Subtotal 40,120 36,181 107,887 109,210
Unusual litigation - - - (3,128)
--------- --------- --------- ---------
Total 40,120 36,181 107,887 106,082
--------- --------- --------- ---------
Operating income 26,512 22,525 90,627 78,599
Interest and other, net (1,206) (373) (2,159) (1,095)
--------- --------- --------- ---------
Income before income taxes 27,718 22,898 92,786 79,694
Income tax expense 9,979 8,766 20,304 29,970
--------- --------- --------- ---------
Net income $ 17,739 $ 14,132 $ 72,482 $ 49,724
========= ========= ========= =========
Earnings per share
Basic $ 0.25 $ 0.20 $ 1.03 $ 0.71
Diluted $ 0.24 $ 0.20 $ 1.01 $ 0.70
Weighted average shares outstanding
Basic 70,296 69,337 70,103 69,781
Diluted 72,598 70,601 72,035 70,967
Dividends declared per share $ 0.04 $ 0.03 $ 0.10 $ 0.03
See accompanying notes to condensed consolidated financial statements
-1-
PERRIGO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 27, June 28, March 29,
2004 2003 2003
----------- --------- -----------
(unaudited) (unaudited)
Assets
Current assets
Cash and cash equivalents $ 156,417 $ 93,827 $ 105,233
Accounts receivable 102,299 87,018 84,973
Inventories 154,847 160,326 156,043
Current deferred income taxes 30,041 32,643 26,828
Prepaid expenses and other current assets 19,846 5,383 6,064
--------- --------- ---------
Total current assets 463,450 379,197 379,141
Property and equipment 468,056 429,115 417,673
Less accumulated depreciation 241,724 210,337 206,907
--------- --------- ---------
226,332 218,778 210,766
Goodwill 35,919 35,919 35,919
Non-current deferred income taxes 8,062 3,968 4,209
Other non-current assets 12,884 6,108 6,127
--------- --------- ---------
$ 746,647 $ 643,970 $ 636,162
========= ========= =========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 89,289 $ 72,186 $ 73,489
Notes payable 9,746 8,980 8,741
Payroll and related taxes 35,530 40,535 34,539
Accrued expenses 49,308 36,590 36,469
Accrued income taxes - 5,568 8,815
Current deferred income taxes 4,095 2,683 3,225
--------- --------- ---------
Total current liabilities 187,968 166,542 165,278
Non-current deferred income taxes 26,315 25,484 29,355
Other non-current liabilities 5,490 3,520 3,193
Shareholders' equity
Preferred stock, without par value, 10,000 shares authorized - - -
Common stock, without par value, 200,000 shares authorized 99,622 88,990 82,564
Unearned compensation (631) (111) (262)
Accumulated other comprehensive income 3,801 1,282 348
Retained earnings 424,082 358,263 355,686
--------- --------- ---------
Total shareholders' equity 526,874 448,424 438,336
--------- --------- ---------
$ 746,647 $ 643,970 $ 636,162
========= ========= =========
Supplemental Disclosures of Balance Sheet Information
Allowance for doubtful accounts $ 7,606 $ 10,242 $ 9,907
Allowance for inventory $ 22,493 $ 21,717 $ 19,806
Working capital $ 275,482 $ 212,655 $ 213,863
Preferred stock, shares issued - - -
Common stock, shares issued 70,595 70,034 69,425
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
--------- ---------
Cash Flows From Operating Activities
Net income $ 72,482 $ 49,724
Adjustments to derive cash flows
Depreciation and amortization 21,270 19,777
Compensation - stock options 3,848 3,998
Deferred income taxes 35 3,108
Changes in operating assets and liabilities,
net of amounts acquired in a business acquisition
Accounts receivable (11,150) (2,845)
Inventories 13,551 (712)
Accounts payable 13,074 (750)
Payroll and related taxes (5,001) 3,195
Accrued income taxes (5,572) 718
Accrued expenses 9,879 4,038
Other (8,208) 1,682
--------- ---------
Net cash from operating activities 104,208 81,933
--------- ---------
Cash Flows For Investing Activities
Additions to property and equipment (18,638) (19,458)
Issuance of note receivable (10,000) -
Acquisition of a business (12,061) -
Investment in equity subsidiaries (2,000) (1,233)
--------- ---------
Net cash for investing activities (42,699) (20,691)
--------- ---------
Cash Flows From (For) Financing Activities
Borrowings (repayments) of short-term debt, net 789 776
Tax benefit of stock transactions 813 153
Issuance of common stock 7,911 1,353
Repurchase of common stock (1,940) (33,682)
Cash dividends (6,664) (1,737)
--------- ---------
Net cash from (for) financing activities 909 (33,137)
--------- ---------
Net Increase in Cash and Cash Equivalents 62,418 28,105
Cash and Cash Equivalents at beginning of period 93,827 76,824
Effect of exchange rate changes on cash 172 304
--------- ---------
Cash and Cash Equivalents at end of period $ 156,417 $ 105,233
========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for
Interest $ 467 $ 598
Income taxes $ 25,188 $ 26,854
See accompanying notes to condensed consolidated financial statements.
-3-
PERRIGO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 27, 2004
(in thousands, except per share amounts)
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 March 27, 2004 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 $12,061 in cash, plus contingent consideration that is not expected
to be material. 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,
were added to the Company's consolidated balance sheet beginning December 27,
2003. No goodwill was recorded as a result of the acquisition. Results of
operations are 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
-4-
statements and accompanying notes do not reflect the effects of the Act on the
plan. The 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 Earnings Per Share (EPS) calculation follows:
Third Quarter Year-to-Date
------------------- -------------------
2004 2003 2004 2003
------- ------- ------- -------
Numerator
Net income used for both basic and diluted EPS $17,739 $14,132 $72,482 $49,724
======= ======= ======= =======
Denominator
Weighted average shares outstanding for basic EPS 70,296 69,337 70,103 69,781
Dilutive effect of stock options 2,302 1,264 1,932 1,186
------- ------- ------- -------
Weighted average shares outstanding for diluted EPS 72,598 70,601 72,035 70,967
======= ======= ======= =======
Options outstanding that are anti-dilutive were 1,947 and 3,412 for the
year-to-date fiscal 2004 and 2003, respectively. These options are excluded from
the diluted EPS calculation.
NOTE C - INVENTORIES
Inventories are summarized as follows:
March 27, June 28, March 29,
2004 2003 2003
-------- -------- --------
Finished goods $ 64,317 $ 59,547 $ 58,124
Work in process 51,381 58,628 58,560
Raw materials 39,149 42,151 39,359
-------- -------- --------
$154,847 $160,326 $156,043
======== ======== ========
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 $22,493 at March 27, 2004, $21,717 at June 28, 2003 and
$19,806 at March 29, 2003.
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 $20,000. The remaining repurchase program was
announced on October 29, 2003 and will expire on April 28, 2005. The share
repurchase program announced on August 20, 2002 expired during the third quarter
of fiscal 2004. The common stock repurchased was retired upon purchase.
-5-
The following table lists the repurchase of shares by period for the third
quarter of fiscal year 2004:
Number of
Shares Value
Purchased of Value
Total Average Under Additional of Shares
Number of Price Publicly Shares Available
Third Quarter Shares Paid per Announced Approved for
Fiscal 2004 Purchased Share Plans Or (Expired) Purchase
----------- --------- -------- --------- ------------ --------
Dec 28 to Jan 31 - - - - 31,366
Feb 1 to Feb 28 - - - (11,366) 20,000
Feb 29 to Mar 27 - - - - 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:
Third Quarter Year-to-Date
--------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income $ 17,739 $ 14,132 $ 72,482 $ 49,724
Other comprehensive income:
Foreign currency translation adjustments 2,261 (542) 2,519 (25)
-------- -------- -------- --------
Comprehensive income $ 20,000 $ 13,590 $ 75,001 $ 49,699
======== ======== ======== ========
NOTE F - COMMITMENTS AND CONTINGENCIES
The Company is currently defending numerous individual lawsuits pending in
various state and
-6-
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.
In February 2004, the Company acquired an option to purchase a controlling
interest in a manufacturer of generic pharmaceuticals. This potential
acquisition would accelerate the Company's entry into the generic drug market.
If the option is exercised, the Company will pay approximately $198,000, or
$14.56 per share, plus contingent consideration to the majority shareholders.
The Company, within 90 days after acquiring the majority shares, would offer to
the remaining shareholders through either a tender offer or a merger agreement,
the higher of $17.84 per share or the total amount per share paid to the
majority shareholders. The option expires on August 6, 2004.
Guarantees of debt obligations are primarily issued to support borrowing
arrangements entered into by two of the Company's foreign subsidiaries. The
Company has guarantees of approximately $10,520 as of March 27, 2004. Although
this amount represents the maximum exposure to loss, the Company believes the
actual risk of loss is insignificant. Of this amount, $9,746 was recorded in the
financial statements as notes payable as of March 27, 2004.
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.
Mexico Operations support the sale of over-the-counter and prescription drug
products in Mexico. Pharmaceuticals includes the development and eventual sale
of prescription drug products. The accounting policies of each segment are the
same as those described in the summary of significant accounting policies.
-7-
Consumer UK Mexico
Healthcare Operations Operations Pharmaceuticals Total
---------- ---------- ---------- --------------- --------
Third Quarter 2004
Net sales $203,964 $ 21,789 $ 4,987 - $230,740
Operating income (loss) $ 28,771 $ 159 $ (771) $(1,647) $ 26,512
Operating income (loss)% 14.1% 0.7% (15.5)% - 11.5%
Third Quarter 2003
Net sales $183,560 $ 11,039 $ 8,017 - $202,616
Operating income $ 21,020 $ 624 $ 881 - $ 22,525
Operating income % 11.5% 5.7% 11.0% - 11.1%
Year-to-Date 2004
Net sales $617,477 $ 49,417 $ 18,745 - $685,639
Operating income (loss) $ 91,538 $ 1,493 $ 600 $(3,004) $ 90,627
Operating income % 14.8% 3.0% 3.2% - 13.2%
Year-to-Date 2003
Net sales $583,913 $ 36,223 $ 23,216 - $643,352
Operating income $ 74,360 $ 2,402 $ 1,837 - $ 78,599
Operating income % 12.7% 6.6% 7.9% - 12.2%
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 March 27, 2004 $ -
======
NOTE I - INCOME TAXES
In January 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
THIRD QUARTER FISCAL YEARS 2004 AND 2003
(in thousands, except per share amounts)
RESULTS OF OPERATIONS
Purchase Option
In February 2004, the Company acquired an option to purchase a controlling
interest in a manufacturer of generic pharmaceuticals. This potential
acquisition would accelerate the Company's entry into the generic drug market.
If the option is exercised, the Company will pay approximately $198,000, or
$14.56 per share, plus contingent consideration to the majority shareholders.
The Company, within 90 days after acquiring the majority shares, would offer to
the remaining shareholders through either a tender offer or a merger agreement,
the higher of $17.84 per share or the total amount per share paid to the
majority shareholders. The option expires on August 6, 2004.
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.
Mexico Operations support the sale of over-the-counter and prescription drug
products in Mexico. Pharmaceuticals includes the development and eventual sale
of prescription drug products. The accounting policies of each segment are the
same as those described in the summary of significant accounting policies.
Acquisition
In December 2003, the Company acquired Peter Black for $12,061 in cash, plus
contingent consideration that is not expected to be material. 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, were added to
the Company's consolidated balance sheet beginning December 27, 2003. Results of
operations are included beginning in the third quarter of fiscal 2004.
Tax Examination
In January 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.
-9-
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.
CONSUMER HEALTHCARE
Third Quarter Year-to-Date
----------------------- -----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net sales $203,964 $183,560 $617,477 $583,913
Gross profit $ 62,874 $ 54,610 $186,295 $169,981
Gross profit % 30.8% 29.8% 30.2% 29.1%
Operating expenses $ 34,103 $ 33,590 $ 94,757 $ 95,621
Operating expenses % 16.7% 18.3% 15.3% 16.4%
Operating income $ 28,771 $ 21,020 $ 91,538 $ 74,360
Operating income % 14.1% 11.5% 14.8% 12.7%
Net Sales
Third quarter net sales for fiscal 2004 increased 11% or $20,404 compared to
fiscal 2003, primarily due to sales of new products containing loratadine and
increased unit sales of existing vitamin products. The increase was offset by
lower unit sales of antacid and analgesic products.
Year-to-date net sales for fiscal 2004 increased 6% or $33,564 compared to
fiscal 2003. Net sales increased approximately $42,000 due to sales of new
products containing loratadine and a starch blocker. The increase was offset by
lower unit sales of existing vitamin products, antacid products and products
related to tablet/caplet gelatin coating processing.
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 has arranged alternative sources of this
coating to service customer requirements. Sales related to these products have
decreased $10,000 in fiscal 2004 compared to fiscal 2003. A further reduction in
sales of these products is not expected to be material in the fourth quarter of
fiscal 2004.
Gross Profit
Third quarter gross profit for fiscal 2004 increased 15% or $8,264 and
year-to-date gross profit increased 10% or $16,314 compared to fiscal 2003,
primarily due to increased sales volume from new products. The increase in gross
profit percent was primarily due to operating efficiencies.
-10-
Operating Expenses
Third quarter operating expenses increased 2% or $513 during fiscal 2004
compared to fiscal 2003, primarily due to an increase in research and
development expenses.
Year-to-date operating expenses decreased 1% or $864 during fiscal 2004 compared
to fiscal 2003. Selling and administration expenses decreased by $4,487
primarily due to a reduction in bad debt expense and 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
Third Quarter Year-to-Date
--------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
Net sales $21,789 $11,039 $49,417 $36,223
Gross profit $ 2,572 $ 1,629 $ 6,411 $ 5,813
Gross profit % 11.8% 14.8% 13.0% 16.0%
Operating expenses $ 2,413 $ 1,005 $ 4,918 $ 3,411
Operating expenses % 11.1% 9.1% 10.0% 9.4%
Operating income $ 159 $ 624 $ 1,493 $ 2,402
Operating income % 0.7% 5.7% 3.0% 6.6%
Net Sales
Third quarter net sales for fiscal 2004 increased 97% or $10,750 and
year-to-date net sales increased 36% or $13,194 compared to fiscal 2003. The
increase was due to sales of nutrition products of approximately $7,000 related
to the acquisition of Peter Black. Two thirds of the remaining increase was due
to exchange rate fluctuations. The balance of the increase was due to higher
sales volumes of over-the-counter and contract products.
Gross Profit
Third quarter gross profit for fiscal 2004 increased by 58% or $943 and
year-to-date gross profit increased by 10% or $598 compared to fiscal 2003
primarily due to the acquisition of Peter Black and exchange rate fluctuations.
The gross profit percent decreased due to lower margins on nutrition and
contract sales in the mix of products sold.
Operating Expenses
Third quarter operating expenses for fiscal 2004 increased by 140% or $1,408 and
year-to-date operating expenses increased by 44% or $1,507 compared to fiscal
2003 due to the acquisition of Peter Black and exchange rate fluctuations.
-11-
MEXICO OPERATIONS
Third Quarter Year-to-Date
--------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
Net sales $ 4,987 $ 8,017 $18,745 $23,216
Gross profit $ 1,186 $ 2,467 $ 5,808 $ 8,887
Gross profit % 23.8% 30.8% 31.0% 38.3%
Operating expenses $ 1,957 $ 1,586 $ 5,208 $ 7,050
Operating expenses % 39.2% 19.8% 27.8% 30.4%
Operating income $ (771) $ 881 $ 600 $ 1,837
Operating income % (15.5)% 11.0% 3.2% 7.9%
Net Sales
Third quarter net sales for fiscal 2004 decreased 38% or $3,030 compared to
fiscal 2003, primarily due to lower volume of government contract sales and
distributor sales.
Year-to-date net sales for fiscal 2004 decreased 19% or $4,471 compared to
fiscal 2003, primarily due to lower volume of government contract sales and
distributor sales. Approximately 25% of the decrease was due to exchange rate
fluctuations.
Gross Profit
Third quarter gross profit for fiscal 2004 decreased 52% or $1,281 and
year-to-date gross profit decreased 35% or $3,079 compared to fiscal 2003.
Approximately half of the decrease in gross profit was related to lower volume
of products sold. The remaining decrease was related to lower margins in both
government contract and distributor markets due to pricing and product mix
changes.
Operating Expenses
Third quarter operating expenses during fiscal 2004 increased 23% or $371
compared to fiscal 2003, primarily due to bad debt expense.
Year-to-date operating expenses decreased 26% or $1,842 compared to fiscal 2003,
primarily due to lower selling expenses as a result of a change from direct
selling to the use of independent distributors.
PHARMACEUTICALS
Fiscal 2004 operating expenses were $1,647 and $3,004 for the third quarter and
year-to-date, respectively. The Company anticipates investing $1,000 to $3,000
in the last quarter of fiscal 2004, primarily in research and development costs
for the development of prescription drug products.
INTEREST AND OTHER (CONSOLIDATED)
Third quarter interest income was $324 for fiscal 2004 compared to interest
expense of $29 for fiscal 2003. Other income was $882 for fiscal 2004 compared
to $402 for fiscal 2003.
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Year-to-date interest income was $656 for fiscal 2004 compared to interest
expense of $191 for fiscal 2003. Other income was $1,503 for fiscal 2004
compared to $1,286 for fiscal 2003.
For both periods 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 third quarter of fiscal 2004, the effective tax rate was 36.0% compared
to 38.3% for fiscal 2003.
For year-to-date fiscal 2004, the effective tax rate was 21.9% compared to 37.6%
for fiscal 2003.
In January 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 $51,184 to $156,417 at March 27, 2004 from
$105,233 at March 29, 2003. Working capital, including cash, increased $61,619
to $275,482 at March 27, 2004 from $213,863 at March 29, 2003. 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 $22,275 to
$104,208 for fiscal 2004 compared to $81,933 for fiscal 2003, primarily due to
an increase in net income, which includes a tax benefit of $13,100.
Year-to-date net cash used for investing activities increased $22,008 to $42,699
for fiscal 2004 compared to $20,691 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, which was repaid in April 2004. In
December 2003, the Company acquired Peter Black for $12,061 in cash.
In February 2004, the Company acquired an option to purchase a controlling
interest in a manufacturer of generic pharmaceuticals. This potential
acquisition would accelerate the Company's entry into the generic drug market.
If the option is exercised, the Company will pay approximately $198,000, or
$14.56 per share, plus contingent consideration to the majority shareholders.
The Company, within 90 days after acquiring the majority shares, would offer to
the remaining shareholders through either a tender offer or a merger agreement,
the higher of $17.84 per share or the total amount per share paid to the
majority shareholders. The option expires on August 6, 2004.
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Capital expenditures for facilities and equipment for fiscal 2004 were for
normal equipment replacement and productivity enhancements. Capital expenditures
are anticipated to be $5,000 to $10,000 for the remainder of fiscal 2004.
Year-to-date net cash from financing activities increased $34,046 to $909 for
fiscal 2004 compared to $33,137 used for financing activities in fiscal 2003.
The increase was primarily due to a reduction in common stock repurchases of
$31,742 and an increase in employee stock option exercises of $6,558. The
increase was partially offset by higher dividend payments of $4,927 in fiscal
2004.
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 $20,000
available to purchase additional shares through April 28, 2005. 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
$6,664 during fiscal 2004. The Company expects to continue paying quarterly
dividends in the foreseeable future.
The Company had no long-term debt at March 27, 2004. 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 $7,606,
$10,242 and $9,907 at March 27, 2004, June 28, 2003 and March 29, 2003,
respectively. The decrease of $2,636 in fiscal 2004 compared to fiscal 2003
related primarily to a reduction in the accounts receivable balance and related
reserves of a single customer who recently exited from bankruptcy.
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
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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
$22,493, $21,717 and $19,806 at March 27, 2004, June 28, 2003 and March 29,
2003, 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 $3,963, $3,229, and $2,548 at March 27, 2004, June 28, 2003 and March
29, 2003, respectively. The accrual for workers' compensation claims was $3,250,
$3,632 and $3,856 at March 27, 2004, June 28, 2003 and March 29, 2003,
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
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
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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. As of March 27, 2004,
the Company had invested cash and cash equivalents of $156,417. 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 predict future changes in
foreign currency exposure.
Item 4. Controls and Procedures
As of March 27, 2004, 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 March 27, 2004 were
identified that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Number of
Shares Value
Purchased of Value
Total Average Under Additional of Shares
Number of Price Publicly Shares Available
Third Quarter Shares Paid per Announced Approved for
Fiscal 2004 Purchased Share Plans Or (Expired) Purchase
----------- --------- --------- ---------- ------------ --------
Dec 28 to Jan 31 - - - - 31,366
Feb 1 to Feb 28 - - - (11,366) 20,000
Feb 29 to Mar 27 - - - - 20,000
The total remaining expenditure approved by the Board of Directors for the
repurchase of additional shares is $20,000. The remaining repurchase program for
$20,000 was announced on October 29, 2003 and will expire on April 28, 2005. The
share repurchase program announced on August 20, 2002 expired during the third
quarter of fiscal 2004. The common stock repurchased was retired upon purchase.
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).
31 Rule 13a-14(a) Certifications.
32 Section 1350 Certifications.
(b) Reports on Form 8-K
On February 3, 2004, the Company furnished under Item 12 its February 3,
2004, press release containing its earnings release for the second quarter
and six months of fiscal 2004.
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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 23, 2004 By: /s/ David T. Gibbons
--------------- ------------------------------------
David T. Gibbons
Chairman, President and Chief
Executive Officer
Date: April 23, 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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