10-Q 1 c65560e10-q.txt QUARTERLY REPORT ================================================================================ 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 29, 2001 ------------------ 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) (616) 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 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 18, 2001 --------------------- ------------------- WITHOUT PAR 73,585,211 SHARES ================================================================================ PERRIGO COMPANY AND SUBSIDIARIES 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 29, 2001 and September 30, 2000 1 Condensed consolidated balance sheets -- September 29, 2001 and June 30, 2001 2 Condensed consolidated statements of cash flows -- For the quarters ended September 29, 2001 and September 30, 2000 3 Notes to condensed consolidated financial statements-- September 29, 2001 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3. Quantitative and Qualitative Disclosures About Market Risks 7 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 8 SIGNATURES 10
PERRIGO COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited) First Quarter ---------------------------- 2002 2001 ---- ---- Net sales $ 217,116 $ 192,142 Cost of sales 166,227 146,394 --------- --------- Gross profit 50,889 45,748 --------- --------- Operating expenses Distribution 4,017 3,457 Research and development 3,846 3,958 Selling and administration 22,576 21,586 --------- --------- 30,439 29,001 --------- --------- Operating income 20,450 16,747 Interest and other, net (163) (174) --------- --------- Income before income taxes 20,613 16,921 Income tax expense 7,523 6,387 --------- --------- Net income $ 13,090 $ 10,534 ========= ========= Basic earnings per share $ 0.18 $ 0.14 ========= ========= Diluted earnings per share $ 0.17 $ 0.14 ========= ========= See accompanying notes to condensed consolidated financial statements. -1- PERRIGO COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
September 29, June 30, 2001 2001 ------------ --------- (Unaudited) ASSETS Current assets Cash and cash equivalents $ 297 $ 11,016 Accounts receivable, net of allowances of $6,902 and $5,902, respectively 120,525 96,828 Inventories 171,119 161,112 Prepaid expenses and other current assets 11,536 8,771 Current deferred income taxes 19,203 19,203 Assets held for sale 16,207 16,207 --------- --------- Total current assets 338,887 313,137 Property and equipment 382,055 377,269 Less accumulated depreciation 171,990 165,182 --------- --------- 210,065 212,087 Goodwill, net 47,045 47,195 Other 3,820 3,493 --------- --------- $ 599,817 $ 575,912 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 84,862 $ 84,385 Notes payable 8,979 12,759 Payrolls and related taxes 18,934 26,121 Accrued expenses 31,141 27,917 Income taxes 19,097 20,577 --------- --------- Total current liabilities 163,013 171,759 Deferred income taxes 17,784 17,419 Long-term debt 21,380 - Other long-term liabilities 2,353 859 Shareholders' equity Preferred stock, without par value, 10,000 shares authorized, none issued - - Common stock, without par value, 200,000 shares authorized, 73,996 and 74,072 issued, respectively 105,497 108,952 Unearned compensation (1,017) (465) Accumulated other comprehensive income 757 428 Retained earnings 290,050 276,960 --------- --------- Total shareholders' equity 395,287 385,875 --------- --------- $ 599,817 $ 575,912 ========= =========
See accompanying notes to condensed consolidated financial statements. -2- PERRIGO COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
First Quarter ------------------------- 2002 2001 ---- ---- Cash Flows From (For) Operating Activities: Net income $ 13,090 $ 10,534 Depreciation and amortization 6,808 6,176 -------- -------- 19,898 16,710 Accounts receivable (24,697) (22,502) Inventories (10,007) 861 Current and deferred income taxes (1,115) 22,209 Accounts payable 477 8,879 Other (4,665) 6,484 -------- -------- Net cash (for) from operating activities (20,109) 32,641 -------- -------- Cash Flows (For) Investing Activities: Additions to property and equipment (4,786) (5,810) -------- -------- Net cash (for) investing activities (4,786) (5,810) -------- -------- Cash Flows From (For) Financing Activities: Borrowings of long-term debt 21,380 - Repayments of short-term debt (3,780) (558) Issuance of common stock 9,785 27 Repurchase of common stock (13,240) - Other 31 59 -------- -------- Net cash from (for) financing activities 14,176 (472) -------- -------- Net (Decrease) Increase in Cash and Cash Equivalents (10,719) 26,359 Cash and Cash Equivalents, at Beginning of Period 11,016 7,055 -------- -------- Cash and Cash Equivalents, at End of Period $ 297 $ 33,414 ======== ======== Supplemental Disclosures of Cash Flow Information: Interest paid $ 604 $ 552 Income taxes paid $ 8,344 $ 43
See accompanying notes to condensed consolidated financial statements. -3- PERRIGO COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 29, 2001 (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 to conform to the current year presentation. Operating results for the quarter ended September 29, 2001 are not necessarily indicative of the results that may be expected for the year ending June 29, 2002. 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 30, 2001. In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, "Business Combinations". SFAS 141 requires all business combinations to be accounted for by the purchase method and eliminates use of the pooling-of-interests method. It also requires upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. Additionally, the statement requires recognition of intangible assets apart from goodwill and provides for additional disclosure of information related to a business combination. This SFAS is effective for all business combinations initiated after June 30, 2001. The adoption of this standard did not have a significant impact on the Company's financial statements. The Company's previous business combinations were accounted for using the purchase method. In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets". SFAS 142 eliminates goodwill amortization, provides guidance and requirements for impairment testing of goodwill and discusses the treatment of other intangible assets. Adoption of the standard is required for fiscal years beginning after December 15, 2001. However, because earlier adoption is permissible, the Company adopted the standard effective July 1, 2001. Goodwill amortization expense was $283 for the first quarter of fiscal year 2001. The impairment tests of goodwill and other intangible assets as required by this standard are not expected to impact earnings in fiscal year 2002. -4- NOTE B - INVENTORIES September 29, June 30, 2001 2001 ---- ---- Finished goods $ 76,240 $ 73,996 Work in process 57,009 52,573 Raw materials 37,870 34,543 --------- --------- $ 171,119 $ 161,112 ========= ========= NOTE C - 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: First Quarter ---------------------- 2002 2001 ---- ---- Net income $13,090 $10,534 Other comprehensive income: Foreign currency translation adjustments 329 230 ------- ------- Comprehensive income $13,419 $10,764 ======= ======= NOTE D - EARNINGS PER SHARE A reconciliation of the numerators and denominators used in the basic and diluted Earnings per Share (EPS) calculation follows: First Quarter ---------------------- 2002 2001 ---- ---- Numerator: Net income used for both basic and diluted EPS $13,090 $10,534 ======= ======= Denominator: Weighted average shares outstanding for basic EPS 74,314 73,505 Dilutive effect of stock options 2,611 424 ------- ------- Weighted average shares outstanding for diluted EPS 76,925 73,929 ======= ======= Options outstanding where the exercise price was higher than the market price were 446 and 2,991 for the first quarter of fiscal years 2002 and 2001, respectively. These options are excluded from the diluted EPS calculation. NOTE E - SHAREHOLDERS' EQUITY During the first quarter of fiscal year 2002, the Company purchased 965 shares of common stock for $13,240 under its common stock repurchase program. The common stock was retired. In addition, common stock increased $9,785 primarily due to the exercise of 851 stock options. -5- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FIRST QUARTER OF FISCAL YEARS 2002 AND 2001 (in thousands) RESULTS OF OPERATIONS FIRST QUARTER OF FISCAL YEARS 2002 AND 2001 Results of Operations The Company's net sales increased $24,974 or 13% to $217,116 during the first quarter of fiscal year 2001, from $192,142 during the first quarter of fiscal year 2001. The increase in sales in fiscal year 2002 was primarily due to sales of a new antacid product, sales of Wrafton Laboratories Ltd. (Wrafton), a company purchased in the fourth quarter of fiscal year 2001 and higher sales of existing vitamin and analgesic products. Gross profit increased $5,141 during the first quarter of fiscal year 2002 compared to the same period of fiscal year 2001. The increase in gross profit was primarily due to higher sales volume. The gross profit percent to net sales was 23.4% for the first quarter of fiscal year 2002 compared to 23.8% for the same period of fiscal year 2001. The decrease in gross profit percent was due to an increase in obsolescence expense resulting from higher inventories, added costs for quality compliance and the inclusion of Wrafton in this year's consolidated results. Operating expenses increased $1,438 during the first quarter of fiscal year 2002 compared to the same period in fiscal year 2001. Operating expenses as a percent to net sales were 14.0% for the first quarter of fiscal year 2002 compared to 15.1% for the same period of fiscal year 2001. Distribution increased $560 or 16% primarily due to increased sales. Selling and administration increased $990 primarily due to higher insurance costs and the acquisition of Wrafton. Interest and other, net decreased $11. Interest expense was $380 in the first quarter of fiscal year 2002 compared to $236 in the first quarter of fiscal year 2001. The effective tax rate was 36.5% for the first quarter of fiscal year 2002 compared to 37.7% for the same period in fiscal year 2001. LIQUIDITY AND CAPITAL RESOURCES In the first quarter of fiscal year 2002, working capital, excluding cash, increased $45,215 to $175,577. Cash and cash equivalents decreased from $11,016 to $297 as the Company funded working capital requirements, stock repurchases, and capital expenditures. Cash flow used for operating activities in the first quarter of fiscal year 2002 was $21,630. Cash flow was negatively impacted by an increase in accounts receivable of $24,697, primarily due to sales increases and an increase in inventory of $10,007, primarily due to seasonal production increases. Cash flow from operations was also negatively impacted by a decrease in accrued payrolls and related taxes due to the timing of certain payments. Negative cash flow in the -6- first quarter of the fiscal year is in line with the normal seasonal cycle of the Company. Capital expenditures for facilities and equipment of $4,786 during the first quarter of fiscal year 2002 were primarily for normal equipment replacement, productivity enhancements and capacity additions. During the first quarter of fiscal year 2002, the Company purchased 965 shares of common stock for $13,240 under its common stock repurchase program. The common stock was retired. In addition, $9,785 was received in proceeds from the issuance of common stock primarily due to the exercise of 851 stock options. Long-term debt was $21,380 on September 29, 2001. The Company had no long-term debt on June 30, 2001. The Company had $153,620 available on its $175,000 unsecured credit facility on September 29, 2001. Cash flows from operations and borrowings from its credit facility are expected to be sufficient to finance the known or foreseeable liquidity and capital needs of the Company. 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. Please see the "Cautionary Note Regarding Forward-Looking Statements" on pages 24-29 of the Company's Form 10-K for the year ended June 30, 2001 for a discussion of certain important factors that relate to forward-looking statements contained in this report. In addition, the Company's future results may be affected by the impact of events flowing from the September 11, 2001 terrorist attacks. 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 its variable rate line of credit used to finance working capital when necessary and for general corporate purposes. The Company had $21,380 outstanding on its credit facility at September 29, 2001. 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 international operations in Mexico and the United Kingdom. These operations transact business in the local currency, thereby creating exposures to changes in exchange rates. The Company does not currently have hedging or similar foreign currency contracts. Significant currency fluctuations could adversely impact foreign revenues; -7- however, the Company does not expect any significant changes in foreign currency exposure in the near future. PART II. OTHER INFORMATION 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 Registrants 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 (Commission File No. 0-19725). 10(a)* Registrant's Management Incentive Plan, incorporated by reference from the Registration Statement No. 33-69324 filed by the Registrant on September 23, 1993. 10(b)* Registrant's 1988 Employee Incentive Stock Option Plan as amended, incorporated by reference from Exhibit A of the Registrant's 2000 proxy statement. 10(c)* Registrant's 1989 Non-Qualified Stock Option Plan for Directors as amended, incorporated by reference from Exhibit B of the Registrant's 2000 proxy statement. 10(d)* Registrant's Restricted Stock Plan for Directors, dated November 6, 1997, incorporated by reference from Registrant's 1998 Form 10-K filed on October 6, 1998. 10(e) Credit Agreement, dated September 23, 1999, between Registrant and Bank One, Michigan, incorporated by reference from the Registrant's Form 10-K filed on October 1, 1999. 10(f) Guaranty Agreement, dated September 23, 1999, executed by L. Perrigo Company and Perrigo Company of South Carolina, Inc., in favor of the Agent and each Lender, incorporated by reference from the Registrant's Form 10-K filed on October 1, 1999. -8- 10(h)* Employment Agreement, Restricted Stock Agreement, Contingent Restricted Stock Agreement, and Noncompetition and Nondisclosure Agreement, dated April 19, 2000, between Registrant and David T. Gibbons, incorporated by reference from the Registrant's Form 10-Q filed on April 26, 2000. 10(i)* Consulting Agreement, Noncompetition and Nondisclosure Agreement and Indemnity Agreement, dated June 2, 2000, between Registrant and Michael J. Jandernoa, incorporated by reference from the Registrant's Form 10-K filed on September 6, 2000. 10(j)* Restricted Stock Agreement, dated August 14, 2001, between registrant and David T. Gibbons, incorporated by reference from the Registrant's Form 10-K filed on September 7, 2001. 10(k)* Restricted Stock Agreement, dated August 14, 2001, between registrant and Douglas R. Schrank, incorporated by reference from the Registrant's Form 10-K filed on September 7, 2001. 10(l)* Registrant's Restricted Stock Plan for Directors II, dated August 14, 2001. 10(m)* Description of Nonqualified Deferred Compensation Plan. * Denotes management contract or compensatory plan or arrangement. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the first quarter of fiscal year 2002. -9- 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 22, 2001 By: /s/David T. Gibbons ------------------- ---------------------------------------------------- David T. Gibbons President and Chief Executive Officer Date: October 22, 2001 By: /s/Douglas R. Schrank ------------------- ---------------------------------------------------- Douglas R. Schrank Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) -10-