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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: SEPTEMBER 25, 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
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 38-2799573
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
515 EASTERN AVENUE
ALLEGAN, MICHIGAN 49010
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(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
(269) 673-8451
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS OF COMMON STOCK OCTOBER 13, 2004
- --------------------- ----------------
WITHOUT PAR 71,217,193
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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
ended September 25, 2004 and September 27, 2003 1
Condensed consolidated balance sheets -- September 25, 2004,
June 26, 2004 and September 27, 2003 2
Condensed consolidated statements of cash flows -- For the quarters
ended September 25, 2004 and September 27, 2003 3
Notes to condensed consolidated financial statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risks 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 6. Exhibits 15
SIGNATURES 16
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
First Quarter
-----------------------------
2005 2004
---- ----
Net sales $ 227,719 $ 211,839
Cost of sales 163,006 151,819
------------- -----------
Gross profit 64,713 60,020
------------- -----------
Operating expenses
Distribution 4,193 3,522
Research and development 6,354 5,713
Selling and administration 27,540 25,440
------------- -----------
Total 38,087 34,675
Operating income 26,626 25,345
Interest and other, net (840) (449)
------------- -----------
Income before income taxes 27,466 25,794
Income tax expense 9,888 9,286
------------- -----------
Net income $ 17,578 $ 16,508
============= ===========
Earnings per share
Basic $ 0.25 $ 0.24
Diluted $ 0.24 $ 0.23
Weighted average shares outstanding
Basic 70,948 70,040
Diluted 73,043 71,809
See accompanying notes to condensed consolidated financial statements.
-1-
PERRIGO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 25, June 26, September 27,
2004 2004 2003
------------- ----------- -------------
(unaudited) (unaudited)
Assets
Current assets
Cash and cash equivalents $ 136,544 $ 161,252 $ 83,046
Investment securities 5,270 10,448 -
Accounts receivable 112,624 86,040 99,200
Inventories 181,837 174,253 149,872
Current deferred income taxes 29,306 29,877 30,359
Prepaid expenses and other current assets 11,017 11,359 10,844
----------- ----------- ----------
Total current assets 476,598 473,229 373,321
Property and equipment 463,241 462,185 431,777
Less accumulated depreciation 240,144 234,544 216,389
----------- ----------- ----------
223,097 227,641 215,388
Goodwill 35,919 35,919 35,919
Non-current deferred income taxes 8,761 8,137 6,677
Other non-current assets 17,755 14,168 19,140
----------- ----------- ----------
$ 762,130 $ 759,094 $ 650,445
=========== =========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 83,516 $ 88,858 $ 67,616
Notes payable 9,465 9,528 7,191
Payroll and related taxes 20,857 41,387 22,354
Accrued expenses 44,751 43,689 41,276
Accrued income taxes 7,417 - 15,264
Current deferred income taxes 4,044 4,024 2,965
----------- ----------- ----------
Total current liabilities 170,050 187,486 156,666
Non-current deferred income taxes 29,259 29,606 25,538
Other non-current liabilities 6,898 5,770 4,727
Shareholders' equity
Preferred stock, without par value, 10,000 shares authorized - - -
Common stock, without par value, 200,000 shares authorized 109,396 104,160 90,363
Unearned compensation (1,075) (514) (56)
Accumulated other comprehensive income 2,817 2,892 187
Retained earnings 444,785 429,694 373,020
----------- ----------- ----------
Total shareholders' equity 555,923 536,232 463,514
----------- ----------- ----------
$ 762,130 $ 759,094 $ 650,445
=========== =========== ==========
Supplemental Disclosures of Balance Sheet Information
Allowance for doubtful accounts $ 7,971 $ 8,296 $ 9,321
Allowance for inventory $ 21,124 $ 22,888 $ 21,602
Working capital $ 306,548 $ 285,743 $ 216,655
Preferred stock, shares issued - - -
Common stock, shares issued 71,208 70,882 69,994
See accompanying notes to condensed consolidated financial statements
-2-
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
First Quarter
---------------------------------
2005 2004
---- ----
Cash Flows (For) From Operating Activities
Net income $ 17,578 $ 16,508
Adjustments to derive cash flows
Depreciation and amortization 7,092 7,031
Share-based compensation 1,578 1,318
Deferred income taxes (410) (77)
Changes in operating assets and liabilities,
net of a purchase of assets
Accounts receivable (25,543) (12,352)
Inventories (6,676) 10,276
Accounts payable (5,463) (4,439)
Payroll and related taxes (20,535) (18,175)
Accrued expenses 1,062 4,712
Accrued income taxes 7,422 9,705
Other 918 (6,312)
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Net cash (for) from operating activities (22,977) 8,195
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Cash Flows (For) From Investing Activities
Additions to property and equipment (2,394) (4,993)
Purchase of assets (5,000) -
Issuance of note receivable - (10,000)
Investment in equity subsidiaries - (1,000)
Purchase of securities (1,000) -
Proceeds from sales of securities 6,000 -
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Net cash (for) from investing activities (2,394) (15,993)
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Cash From (For) Financing Activities
Borrowings (repayments) of short-term debt, net (92) (1,631)
Tax benefit of stock transactions 118 -
Issuance of common stock 3,101 400
Repurchase of common stock (122) (343)
Cash dividends (2,487) (1,751)
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Net cash from (for) financing activities 518 (3,325)
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Net decrease in cash and cash equivalents (24,853) (11,123)
Cash and cash equivalents, at beginning of period 161,252 93,827
Effect of exchange rate changes on cash 145 342
------------ ------------
Cash and cash equivalents, at end of period $ 136,544 $ 83,046
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 141 $ 162
Income taxes paid $ 815 $ 579
Income taxes refunded $ 4,062 -
See accompanying notes to condensed consolidated financial statements.
-3-
PERRIGO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 25, 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 ended September 25, 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 26, 2004.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (Act) was signed into law. The Act entitles employers who provide
certain prescription drug benefits for retirees to receive a federal subsidy
beginning in calendar 2006, thereby creating the potential for significant
benefit cost savings. FASB Staff Position (FSP) 106-2 requires companies to
record the amount expected to be received under the Act as an actuarial gain, to
the extent the related post-retirement medical plan's (plan) total unrecognized
actuarial gains or losses exceed certain thresholds, to be amortized into income
over time. FSP 106-2 is effective beginning the first quarter of fiscal 2005.
The Company is a sponsor of a plan that provides prescription drug benefits. As
the subsidy is expected to be passed on to the retirees through a reduction in
premiums, the Company does not anticipate a material impact on its financial
statements or the plan. Accordingly, any effects of the Act will be incorporated
in the next measurement of plan assets and obligations.
The Company entered into a purchase agreement to acquire certain assets from a
manufacturer of foot care products in the first quarter of fiscal 2005.
-4-
NOTE B - EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the basic and
diluted earnings per share (EPS) calculation follows:
First Quarter
--------------------
2005 2004
---- ----
Numerator
Net income used for both basic and diluted EPS $17,578 $16,508
======= =======
Denominator
Weighted average shares outstanding for basic EPS 70,948 70,040
Dilutive effect of share-based awards 2,095 1,769
------- -------
Weighted average shares outstanding for diluted EPS 73,043 71,809
======= =======
Share-based awards outstanding that are anti-dilutive were 481 and 1,690 for the
first quarter of fiscal 2005 and 2004, respectively. These share-based awards
are excluded from the diluted EPS calculation.
NOTE C - INVENTORIES
Inventories are summarized as follows:
September 25, June 26, September 27,
2004 2004 2003
---- ---- ----
Finished goods $ 75,045 $ 71,875 $ 58,282
Work in process 59,411 58,784 53,610
Raw materials 47,381 43,594 37,980
--------- --------- ----------
$ 181,837 $ 174,253 $ 149,872
========= ========= ==========
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 $21,124 at September 25, 2004, $22,888 at June 26, 2004
and $21,602 at September 27, 2003.
NOTE D - SHAREHOLDERS' EQUITY
The Company has a common stock repurchase program. Purchases are made on the
open market, subject to market conditions, and are funded by cash from
operations. All common stock repurchased is retired upon purchase. The remaining
expenditure approved by the Board of Directors for the repurchase of additional
shares is $20,000. This repurchase program was announced on October 29, 2003 and
will expire on April 28, 2005. In a private transaction, the Company repurchased
7 shares of common stock for $122 on August 12, 2004.
NOTE E - COMPREHENSIVE INCOME
Comprehensive income is comprised of all changes in shareholders' equity during
the period
-5-
other than from transactions with shareholders. Comprehensive income consists of
the following:
First Quarter
--------------------
2005 2004
---- ----
Net income $17,578 $16,508
Other comprehensive income (loss):
Foreign currency translation adjustments (75) (1,095)
------- -------
Comprehensive income $17,503 $15,413
======= =======
NOTE F - COMMITMENTS AND CONTINGENCIES
The Company is not a party to any litigation, other than routine litigation
incidental to its business except for the litigation described below. The
Company believes that none of the routine litigation, individually or in the
aggregate, will be material to the business of the Company.
In August 2004, the Company agreed to settle with the United States Federal
Trade Commission (FTC) which had been investigating a 1998 agreement between
Alpharma, Inc. and the Company related to a children's ibuprofen suspension
product. The agreement between Alpharma, Inc. and the Company is no longer in
effect. The consent order included payment of $4,750 to resolve all claims by
the FTC and state governments as well as certain restrictions on future
contractual agreements of this nature. The Company is involved in related
proceedings with private litigants. These restrictions and proceedings are not
expected to have a material impact on the Company's future results of
operations. The $4,750 charge was recorded in the fourth quarter of fiscal 2004
and paid in the first quarter of fiscal 2005.
The Company is currently defending numerous individual lawsuits pending in
various state and federal courts involving phenylpropanolamine (PPA), an
ingredient used in the manufacture of certain OTC cough/cold and diet products.
The Company discontinued using PPA in the United States in November 2000 at the
request of the United States Food and Drug Administration (FDA). These cases
allege that the plaintiff suffered injury, generally some type of stroke, from
ingesting PPA-containing products. Many of these suits also name other
manufacturers or retailers of PPA-containing products. These personal injury
suits seek an unspecified amount of compensatory, exemplary and statutory
damages. The Company maintains product liability insurance coverage for the
claims asserted in these lawsuits. The Company believes that it has meritorious
defenses to these lawsuits and intends to vigorously defend them. At this time,
the Company cannot determine whether it will be named in additional PPA-related
suits, the outcome of existing suits or the effect that PPA-related suits may
have on its financial condition or operating results.
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 $10,226 as of September 25, 2004.
Although this amount represents the maximum exposure to loss, the Company
believes the actual risk of loss is insignificant. Of this amount, $9,465 was
recorded in the financial statements as notes payable as of September 25, 2004.
-6-
NOTE G - SEGMENT INFORMATION
The Company has four reportable segments; Consumer Healthcare, Pharmaceuticals,
UK Operations and Mexico Operations. Consumer Healthcare includes the U.S.
operations supporting the sale of OTC pharmaceutical and nutritional products.
Pharmaceuticals includes the development and eventual sale of prescription drug
products. UK Operations support the sale of OTC pharmaceutical and nutritional
products in the United Kingdom. Mexico Operations support the sale of OTC and
prescription drug products in Mexico for retail, wholesale, and governmental
customers in Mexico.
Consumer Pharma- UK Mexico
Healthcare ceuticals Operations Operations Total
---------- --------- ---------- ---------- -----
First Quarter 2005
Net sales $199,535 - $ 23,218 $ 4,966 $ 227,719
Operating income (loss) $ 27,832 $ (1,299) $ 209 $ (116) $ 26,626
Operating income (loss)% 13.9% - 0.9% (2.3)% 11.7%
First Quarter 2004
Net sales $192,759 - $ 12,663 $ 6,417 $ 211,839
Operating income (loss) $ 24,900 $ (279) $ 434 $ 290 $ 25,345
Operating income % 12.9% - 3.4% 4.5% 12.0%
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER FISCAL YEARS 2005 AND 2004
(in thousands, except per share amounts)
RESULTS OF OPERATIONS
Segments
The Company has four reportable segments; Consumer Healthcare, Pharmaceuticals,
UK Operations and Mexico Operations. Consumer Healthcare includes the U.S.
operations supporting the sale of OTC (over-the-counter) pharmaceutical and
nutritional products. Pharmaceuticals include the development and eventual sale
of prescription drug products. UK Operations support the sale of OTC
pharmaceutical and nutritional products in the United Kingdom. Mexico Operations
support the sale of OTC and prescription drug products for retail, wholesale and
governmental customers in Mexico.
Consumer Healthcare contributed strong performance in the first quarter of
fiscal 2005 with an increase in sales of 4% coupled with a 12% increase in
operating income. This performance was partially offset by decreases in sales in
Mexico and operating income in both the UK and Mexico. UK Operations is
executing its merger integration plan for the Wrafton and Peter Black businesses
and the results are expected to turn around over the last three quarters of
fiscal 2005. The Mexico business is making progress toward changing its business
model to incorporate more retail store brand sales. See segment discussion for
further details.
Seasonality
The Company's sales of OTC pharmaceutical and nutritional products are subject
to the seasonal demands for cough/cold/flu and allergy products. Accordingly,
operating results for the quarter ended September 25, 2004 are not necessarily
indicative of the results that may be expected for a full year.
CONSUMER HEALTHCARE
First Quarter
-----------------------------
2005 2004
---- ----
Net sales $199,535 $ 192,759
Gross profit $ 60,451 $ 56,473
Gross profit % 30.3% 29.3%
Operating expenses $ 32,619 $ 31,573
Operating expenses % 16.3% 16.4%
Operating income $ 27,832 $ 24,900
Operating income % 13.9% 12.9%
Net Sales
First quarter net sales for fiscal 2005 increased 4% or $6,776 compared to
fiscal 2004. Net
-8-
sales increased due to sales of cough, cold and allergy products containing
loratadine and higher unit sales of vitamin products. The increase was partially
offset by a decline in sales of starch blocker which was introduced in the first
quarter of fiscal 2004 as well as antacids and analgesics.
Gross Profit
First quarter gross profit for fiscal 2005 increased 7% or $3,978 compared to
fiscal 2004 primarily due to a favorable mix of products sold and higher unit
sales volume.
Operating Expenses
First quarter operating expenses for fiscal 2005 increased 3% or $1,046 during
fiscal 2005 compared to fiscal 2004 consistent with the increase in net sales.
Operating Income
First quarter operating income for fiscal 2005 increased 12%, or $2,932,
demonstrating good operating leverage as sales and gross profit increased by
only 4% and 7%, respectively.
PHARMACEUTICALS
First quarter fiscal 2005 and 2004 operating expenses were $1,299 and $279,
respectively. The Company anticipates investing approximately $10,000 to $12,000
in fiscal 2005, primarily in research and development costs for the development
of prescription drug products.
UK OPERATIONS
First Quarter
-----------------------------
2005 2004
---- ----
Net sales $ 23,218 $ 12,663
Gross profit $ 2,794 $ 1,587
Gross profit % 12.0% 12.5%
Operating expenses $ 2,585 $ 1,153
Operating expenses % 11.1% 9.1%
Operating income $ 209 $ 434
Operating income % 0.9% 3.4%
Net Sales
First quarter net sales for fiscal 2005 increased 83% or $10,555 compared to
fiscal 2004. The majority of the increase was due to sales of nutritional
products of approximately $8,600 related to the acquisition of Peter Black in
December 2003. The remaining increase was primarily due to exchange rate
fluctuations.
Gross Profit
First quarter gross profit for fiscal 2005 increased 76% or $1,207 compared
to fiscal 2004
-9-
primarily due to the acquisition of Peter Black.
Operating Expenses
First quarter operating expenses for fiscal 2005 increased 124% or $1,432
compared to fiscal 2004 primarily due to the acquisition of Peter Black.
Operating Income
First quarter operating income for fiscal 2005 decreased 52% or $225. The
merger integration plan for the Wrafton and Peter Black businesses continues to
reduce breakeven levels. The turnaround is expected to be evident in
improved operating income over the next three quarters of fiscal 2005.
MEXICO OPERATIONS
First Quarter
-----------------------------
2005 2004
---- ----
Net sales $ 4,966 $ 6,417
Gross profit $ 1,468 $ 1,960
Gross profit % 29.6% 30.5%
Operating expenses $ 1,584 $ 1,670
Operating expenses % 31.9% 26.0%
Operating income (loss) $ (116) $ 290
Operating income (loss)% (2.3)% 4.5%
Net Sales
First quarter net sales for fiscal 2005 decreased 23% or $1,451 compared to
fiscal 2004, primarily due to lower volume of government contract sales and
distributor sales. Approximately 25% of the decrease was due to exchange rate
fluctuations. The decrease was partially offset by a 30% increase in the store
brand market which now represents one-third of total sales.
Gross Profit
First quarter gross profit for fiscal 2005 decreased 25% or $492 compared to
fiscal 2004. The decrease was primarily due to lower volume of products sold.
Approximately 25% of the decrease in gross profit was due to exchange rate
fluctuations.
Operating Expenses
First quarter operating expenses during fiscal 2005 decreased 5% or $86 compared
to fiscal 2004. Increased investment in new product initiatives was offset by
reductions in administrative and bad debt expense.
Operating Income
First quarter operating income decreased 140% or $406. The Mexican business is
making
-10-
good progress in changing its business model. It has become more dependent on
retail store brand sales which grew 30% in the quarter and represents one-third
of total sales.
INTEREST AND OTHER (CONSOLIDATED)
First quarter interest income was $357 for fiscal 2005 compared to interest
income of $95 for fiscal 2004. Other income was $483 for fiscal 2005 compared to
$354 for fiscal 2004.
The difference in interest income was due to the level of invested cash balances
in fiscal 2005 compared to fiscal 2004.
INCOME TAXES (CONSOLIDATED)
The effective tax rate for the first quarter of fiscal 2005 and 2004 was 36%.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investment securities increased $58,768 to $141,814
at September 25, 2004 from $83,046 at September 27, 2003. Working capital,
including cash, increased $89,893 to $306,548 at September 25, 2004 from
$216,655 at September 27, 2003. The Company's priorities for use of the cash and
investment securities 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.
First quarter net cash used for operating activities increased by $31,172 to
$22,977 for fiscal 2005 compared to cash provided of $8,195 for fiscal 2004. The
increased use of cash is primarily due to increases in accounts receivables and
inventory of $13,191 and $16,952, respectively, due to the timing of sales
within the quarter and the Company's decision to increase production and
inventory in the fourth quarter of fiscal 2004.
First quarter net cash used for investing activities decreased $13,599 to $2,394
for fiscal 2005 compared to cash used of $15,993 for fiscal 2004. During the
first quarter of 2005, the Company sold $6,000 of securities and used the
proceeds primarily to meet seasonal working capital demands and to acquire
certain assets from a manufacturer of foot care products for $5,000. In August
2003, the Company issued a $10,000 note receivable which was repaid in April
2004.
First quarter capital expenditures for facilities and equipment were for normal
replacement and productivity enhancements. Capital expenditures are anticipated
to be $25,000 to $30,000 for fiscal 2005.
First quarter net cash from financing activities increased $3,843 to $518 for
fiscal 2005 compared to cash used of $3,325 for financing activities in fiscal
2004. The increase was primarily due to an increase in employee stock option
exercises of $2,701 and lower repayments of short-term debt of $1,539 partially
offset by a higher dividend payment of $736.
The Company has a common stock repurchase program. Purchases are made on the
open market, subject to market conditions, and are funded by cash from
operations. All common stock repurchased is retired upon purchase. The total
remaining expenditure approved by the
-11-
Board of Directors for the repurchase of additional shares is $20,000. This
repurchase program was announced on October 29, 2003 and will expire on April
28, 2005. During the first quarter of fiscal 2005, the Company repurchased 7
shares of common stock from a private party for $122. In the first quarter of
fiscal 2004, the Company repurchased 25 shares of its common stock for $343.
In January 2003, the Board of Directors adopted a policy of paying regular
quarterly dividends. The Company paid quarterly dividends of $2,487 and $1,751,
or $0.035 and $0.025 per share for the first quarter of 2005 and 2004,
respectively. The declaration and payment of dividends and the amount paid, if
any, is subject to the discretion of the Board of Directors and will depend on
the earnings, financial condition and capital and surplus requirements of the
Company and other factors the Board of Directors may consider relevant.
The Company had no long-term debt at September 25, 2004. Cash, cash equivalents,
investment securities 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. The accounting policies, discussed below, are
considered by management to require the most judgment and are critical in the
preparation of the financial statements. These policies are reviewed by the
Audit Committee. Other accounting policies are included in Note A of the
consolidated financial statements included in the Company's annual report on
Form 10-K for the year-ended June 26, 2004.
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 $7,971,
$8,296 and $9,321 at September 25, 2004, June 26, 2004 and September 27, 2003,
respectively.
Inventory - The Company maintains an allowance for estimated obsolete or
unmarketable inventory based on the difference between the cost of the inventory
and its estimated market value. In estimating the allowance, management
considers factors such as excess or slow 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 $21,124, $22,888 and $21,602 at September 25, 2004,
June 26, 2004 and September 27, 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
-12-
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 each
fiscal year.
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 $4,074, $3,876, and $3,473 at September 25, 2004, June 26, 2004 and
September 27, 2003, respectively. The accrual for workers' compensation claims
was $2,249, $2,458 and $3,479 at September 25, 2004, June 26, 2004 and September
27, 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" in the
Company's Form 10-K for the year ended June 26, 2004 for a discussion of certain
important factors that relate to forward-looking statements contained in this
report. Although the Company believes that the expectations reflected in these
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Unless otherwise required by applicable
securities laws, the Company disclaims any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company is exposed to market risks, which include changes in interest rates
and changes in the foreign currency exchange rate as measured against the U.S.
dollar.
The Company is exposed to interest rate changes primarily as a result of
interest income earned on its investment of cash on hand and, if the Company
borrows funds to finance its operations, interest expense. As of September 25,
2004, the Company had invested cash, cash equivalents and investment securities
of $141,814. Management believes that a fluctuation in interest rates in the
near future will not have a material impact on the Company's consolidated
financial statements.
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The Company has operations in the United Kingdom and Mexico. 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. However, the Company may obtain a contractual
currency exchange rate in contemplation of a significant transaction, such as a
foreign acquisition. 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 September 25, 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 September 25, 2004
were identified that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company has a repurchase program approved by the Board of Directors for the
repurchase of $20,000 of additional common shares. This repurchase program was
announced on October 29, 2003 and will expire on April 28, 2005. The Company
repurchased 7 shares of common stock from a private party for $122 on August 12,
2004. The common stock repurchased was retired upon purchase.
The following table lists the repurchase of shares by period for the first
quarter of fiscal year 2005:
Number of
Shares Value
Purchased of Value
Total Average Under Additional of Shares
Number of Price Publicly Shares Available
First Quarter Shares Paid per Announced Approved for
Fiscal 2005 Purchased Share Plans Or (Expired) Purchase
----------- --------- -------- --------- ------------ ----------
6/27 to 7/31 - - - - $ 20,000
8/1 to 8/28 - - - - 20,000
8/29 to 9/25 7 $17.37 - - 20,000
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Item 6. 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 Management Incentive Bonus Plan, effective
June 27, 2004.
31 Rule 13a-14(a) Certifications.
32 Section 1350 Certifications.
* Denotes management contract or compensatory plan or arrangement.
On August 3, 2004, the Company announced that it is negotiating a
settlement with the U.S. Federal Trade Commission (FTC) in order to close
the FTC's investigation into a 1998 agreement between the Company and New
Jersey-based, Alpharma Inc.
On August 10, 2004, the Company furnished under Item 12 its August 10,
2004, press release containing its earnings release for its full year and
fourth quarter earnings release for the year ended June 26, 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: October 26, 2004 By: /s/David T. Gibbons
-------------------------------------------
David T. Gibbons
Chairman, President and Chief Executive
Officer
Date: October 26, 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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