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UNITED STATES
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 31, 2007
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
----------------- -----
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
(269) 673-8451
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
--------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
LARGE ACCELERATED FILER [X] ACCELERATED FILER [ ] NON-ACCELERATED FILER [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] YES [X] NO
As of May 4, 2007, the registrant had 92,705,432 outstanding shares of common
stock.
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PERRIGO COMPANY
FORM 10-Q
INDEX
PAGE
NUMBER
------
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated statements of income 2
Condensed consolidated balance sheets 3
Condensed consolidated statements of cash flows 4
Notes to condensed consolidated financial statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risks 25
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 1A. Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 6. Exhibits 28
SIGNATURES 29
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in 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 particular, statements about the Company's
expectations, beliefs, plans, objectives, assumptions, future events or future
performance contained in this report, including certain statements contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are 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 the negative of those terms or other
comparable terminology. Please see Item 1A of the Company's Form 10-K for the
year ended July 1, 2006 and Item 1A of this Form 10-Q for a discussion of
certain important risk factors that relate to forward-looking statements
contained in this report. The Company has based these forward-looking statements
on its current expectations, assumptions, estimates and projections. While the
Company believes these expectations, assumptions, estimates and projections are
reasonable, such forward-looking statements are only predictions and involve
known and unknown risks and uncertainties, many of which are beyond the
Company's control. These and other important factors may cause actual results,
performance or achievements to differ materially from those expressed or implied
by these forward-looking statements. The forward-looking statements in this
report are made only as of the date hereof, and 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.
-1-
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Third Quarter Year-to-Date
------------------------- -------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Net sales $ 362,288 $ 332,321 $ 1,073,132 $ 1,011,752
Cost of sales 262,079 235,043 779,981 721,988
----------- ----------- ----------- -----------
Gross profit 100,209 97,278 293,151 289,764
----------- ----------- ----------- -----------
Operating expenses
Distribution 7,020 6,438 21,559 20,541
Research and development 16,390 12,260 44,339 37,135
Selling and administration 44,710 48,225 142,423 141,695
----------- ----------- ----------- -----------
Subtotal 68,120 66,923 208,321 199,371
----------- ----------- ----------- -----------
Write-off of in-process research and
development 8,252 -- 8,252 --
Restructuring 306 -- 948 --
----------- ----------- ----------- -----------
Total 76,678 66,923 217,521 199,371
----------- ----------- ----------- -----------
Operating income 23,531 30,355 75,630 90,393
Interest, net 3,650 2,465 11,536 11,606
Other income, net (1,874) (2,310) (4,193) (9,346)
----------- ----------- ----------- -----------
Income before income taxes 21,755 30,200 68,287 88,133
Income tax expense 4,699 9,339 13,261 28,995
----------- ----------- ----------- -----------
Net income $ 17,056 $ 20,861 $ 55,026 $ 59,138
=========== =========== =========== ===========
Earnings per share
Basic $ 0.19 $ 0.23 $ 0.60 $ 0.64
Diluted $ 0.18 $ 0.22 $ 0.59 $ 0.63
Weighted average shares outstanding
Basic 91,643 92,683 92,161 92,966
Diluted 93,298 94,044 93,604 94,143
Dividends declared per share $ 0.045 $ 0.043 $ 0.133 $ 0.125
See accompanying notes to condensed consolidated financial statements.
-2-
PERRIGO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, July 1, March 25,
2007 2006 2006
----------- ----------- -----------
(unaudited) (unaudited)
Assets
Current assets
Cash and cash equivalents $ 34,873 $ 19,018 $ 29,168
Investment securities 58,220 26,733 6,685
Accounts receivable 246,582 240,130 220,425
Inventories 310,272 302,941 273,668
Current deferred income taxes 39,122 52,058 47,088
Prepaid expenses and other current assets 23,833 16,298 16,010
----------- ----------- -----------
Total current assets 712,902 657,178 593,044
Property and equipment 641,343 606,907 599,702
Less accumulated depreciation 320,672 287,549 281,733
----------- ----------- -----------
320,671 319,358 317,969
Restricted cash 422,000 400,000 400,000
Goodwill 189,450 152,183 147,633
Other intangible assets 155,899 132,426 138,043
Non-current deferred income taxes 42,624 43,143 32,725
Other non-current assets 47,015 46,336 41,460
----------- ----------- -----------
$ 1,890,561 $ 1,750,624 $ 1,670,874
=========== =========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 158,499 $ 179,740 $ 163,494
Notes payable 3,763 20,081 26,969
Payroll and related taxes 43,590 54,153 48,632
Accrued customer programs 40,494 49,534 46,020
Accrued liabilities 48,135 45,335 46,832
Accrued income taxes 16,210 14,132 7,004
Current deferred income taxes 13,886 8,456 9,002
Current portion of long-term debt 14,910 -- --
----------- ----------- -----------
Total current liabilities 339,487 371,431 347,953
Non-current liabilities
Long-term debt 709,342 621,717 594,360
Non-current deferred income taxes 102,129 81,923 68,924
Other non-current liabilities 34,346 34,809 35,274
----------- ----------- -----------
Total non-current liabilities 845,817 738,449 698,558
Shareholders' equity
Preferred stock, without par value, 10,000 shares authorized -- -- --
Common stock, without par value, 200,000 shares authorized 507,025 516,098 518,996
Accumulated other comprehensive income (loss) 34,434 3,593 (7,377)
Retained earnings 163,798 121,053 112,744
----------- ----------- -----------
Total shareholders' equity 705,257 640,744 624,363
----------- ----------- -----------
$ 1,890,561 $ 1,750,624 $ 1,670,874
=========== =========== ===========
Supplemental Disclosures of Balance Sheet Information
Allowance for doubtful accounts $ 9,933 $ 11,178 $ 10,619
Allowance for inventory $ 37,390 $ 42,509 $ 43,035
Working capital $ 373,415 $ 285,747 $ 245,091
Preferred stock, shares issued -- -- --
Common stock, shares issued 92,510 92,922 93,087
See accompanying notes to condensed consolidated financial statements.
-3-
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Year-to-Date
--------------------
2007 2006
--------- --------
Cash Flows (For) From Operating Activities
Net income $ 55,026 $ 59,138
Adjustments to derive cash flows
Write-off of in-process research and development 8,252 --
Depreciation and amortization 41,997 42,155
Share-based compensation 6,530 7,274
Deferred income taxes 12,749 (2,707)
--------- --------
Sub-total 124,554 105,860
--------- --------
Changes in operating assets and liabilities
Accounts receivable (8,616) (8,701)
Inventories (4,224) 1,201
Accounts payable (19,254) 19,180
Payroll and related taxes (10,151) 5,928
Accrued customer programs (9,040) 4,354
Accrued liabilities 2,968 (12,358)
Accrued income taxes 3,008 (17,480)
Other (5,084) 12,648
--------- --------
Sub-total (50,393) 4,772
--------- --------
Net cash from operating activities 74,161 110,632
--------- --------
Cash Flows (For) From Investing Activities
Purchases of securities (228,341) (29,134)
Proceeds from sales of securities 198,530 39,384
Additions to property and equipment (30,133) (18,672)
Proceeds from sale of property and equipment 2,613 --
Acquisition of assets (59,538) --
--------- --------
Net cash for investing activities (116,869) (8,422)
--------- --------
Cash (For) From Financing Activities
Borrowings (repayments) of short-term debt, net (16,293) 1,543
Borrowings of long-term debt 130,000 15,000
Repayments of long-term debt (30,000) (75,000)
Tax effect of stock transactions (30) (762)
Issuance of common stock 5,347 5,223
Repurchases of common stock (20,919) (20,488)
Cash dividends (12,281) (11,660)
--------- --------
Net cash (for) from financing activities 55,824 (86,144)
--------- --------
Net increase in cash and cash equivalents 13,116 16,066
Cash and cash equivalents, beginning of period 19,018 16,707
Effect of exchange rate changes on cash 2,739 (3,605)
--------- --------
Cash and cash equivalents, end of period $ 34,873 $ 29,168
========= ========
Supplemental Disclosures of Cash Flow Information
Cash paid/received during the period for:
Interest paid $ 25,547 $ 27,093
Interest received $ 15,119 $ 15,870
Income taxes paid $ 8,500 $ 40,106
Income taxes refunded $ 8,443 $ 5,239
See accompanying notes to condensed consolidated financial statements.
-4-
PERRIGO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(in thousands, except per share amounts)
Perrigo Company is a leading global healthcare supplier that develops,
manufactures and distributes over-the-counter (OTC) and prescription
pharmaceuticals, nutritional products, active pharmaceutical ingredients (API)
and consumer products. The Company is the world's largest manufacturer of OTC
pharmaceuticals and nutritional products for the store brand market.
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 three quarters ended March 31, 2007 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 July 1, 2006.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement 109, Accounting for Income Taxes" (FIN 48),
which clarifies the accounting for uncertainty in income taxes. FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Interpretation requires that the Company recognize in
the financial statements the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods and disclosure. The
provisions of FIN 48 are effective for fiscal years beginning after December 15,
2006 with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. The adoption of the
interpretation is not expected to have a material impact on the Company's
consolidated results of operations or financial position.
In June 2006, the FASB ratified the consensus reached by the Emerging Issues
Task Force (EITF) on EITF Issue 06-03, "How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross Versus Net Presentation)". The scope of this Issue includes
taxes that are externally imposed on a revenue producing transaction between a
seller and a customer. The EITF concluded that a company should disclose its
accounting policy (i.e., gross or net presentation) regarding the presentation
of such taxes. If taxes included in gross revenues are significant, a company
should disclose the amount of such taxes for each period for which an income
statement is presented. The EITF was effective as of the third quarter of fiscal
2007 and had no impact on the Company's consolidated financial statements. The
Company records such taxes on a net basis.
-5-
In September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) 157, "Fair Value Measurements". This statement clarifies the definition
of fair value, establishes a framework for measuring fair value and expands the
disclosures on fair value measurements. SFAS 157 is effective for the Company's
fiscal year ending June 27, 2009. The Company has not yet determined if the
adoption of this statement will have a material impact on its consolidated
results of operations or financial position.
In September 2006, the FASB issued SFAS 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
87, 88, 106 and 132(R)". SFAS 158 requires companies to recognize a net
liability or asset and an offsetting net of tax adjustment to accumulated other
comprehensive income to report the funded status of defined benefit pension and
other postretirement benefit plans. SFAS 158 requires prospective application,
and the recognition and disclosure requirements are effective for the Company's
fiscal year ending June 30, 2007. Based on preliminary evaluations of SFAS 158,
the Company does not expect the adoption of this requirement of the statement to
have a material impact on its results of operations or financial position.
Additionally, SFAS 158 requires companies to measure plan assets and obligations
at their year-end balance sheet date. This requirement is effective for the
Company's fiscal year ending June 27, 2009. Since the Company's measurement date
currently aligns with its year-end balance sheet date, this requirement will
have no impact on the Company's consolidated results of operations or financial
position.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin 108, "Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements" (SAB 108).
SAB 108 provides guidance on how prior year misstatements should be taken into
consideration when quantifying misstatements in current year financial
statements for purposes of determining whether the current year's financial
statements are materially misstated. SAB 108 becomes effective during the
Company's 2007 fiscal year. The Company does not expect that the adoption of SAB
108 will have a material impact on its consolidated results of operations or
financial position.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities -- including an amendment of FAS
115," which permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective of this statement is to provide
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The provisions of SFAS No. 159 are
effective for fiscal years beginning after November 15, 2007. The adoption of
this statement is not expected to have a material impact on the Company's
consolidated results of operations or financial position.
NOTE B - ACQUISITIONS
Qualis, Inc. - On March 7, 2007, the Company announced that it entered into a
purchase agreement to acquire Qualis, Inc., a privately-owned manufacturer of
store brand pediculicide products, for $12,000. The assets to be acquired in
this transaction consist of the intangible assets attributable to the products
acquired, which include primarily store brand over-the-counter product
formulations that compare to Rid(R) and Nix(R). The transaction is expected to
close on or around June 30, 2007.
-6-
Glades Pharmaceuticals, Inc. - On March 26, 2007, the Company acquired certain
generic prescription dermatological products from Glades Pharmaceuticals, Inc.
(Glades) for approximately $57,000 in cash plus $2,500 of consideration for
future research and development collaborations. These assets are included in the
accompanying consolidated balance sheet as of March 31, 2007. The operating
results related to these products will be included in the Rx Pharmaceuticals
segment of the Company's consolidated results of operations beginning in the
fourth quarter of fiscal 2007.
The total allocated purchase price for accounting purposes through March 31,
2007 was $37,538. In addition, the Company has placed $22,000 in an escrow
account pending the resolution of a contingency with respect to a single
product. At March 31, 2007, these escrow funds are included in restricted cash.
This contingency is required to be resolved within two years of the purchase
date. Upon satisfactory resolution of the contingency, the total purchase price
would be increased to $59,538; otherwise, the $22,000 will be returned to the
Company. The $37,538 allocated purchase price includes the fair value assigned
to the Company's license to market and distribute the product during the period
until the escrow funds are released. The Company has allocated the current
purchase price of $37,538 as follows:
Intangible assets - developed product technology $ 23,617
Intangible assets - in-process research and development 8,252
Inventory 5,669
---------
Total assets acquired $ 37,538
=========
Management assigned fair value to the identifiable intangible assets by
estimating the discounted forecasted cash flows of the products acquired. The
average estimated useful life of the developed product technology is 12 years
and will be amortized on a straight-line basis. The amount allocated to
in-process research and development was charged to operations in the third
quarter of fiscal 2007. The valuation of in-process research and development
related to projects which were assigned fair values by discounting forecasted
cash flows directly related to the products expected to result from the subject
research and development. Assumptions used in the in-process research and
development valuation included a discount rate of 11% and commencement of net
cash inflows that varied between one and three years, depending on the project.
As of the date of acquisition, the technological feasibility of the acquired
in-process technology had not yet been established and the technology had no
future alternative uses and therefore was required to be expensed as of the
acquisition date. Over the next two years, the Company estimates that it will
incur additional costs related to efforts necessary to develop the acquired,
incomplete technology into commercially viable products that could be as much as
or more than $500. If the Company is unable to develop commercially viable
products or obtain approval from the United States Food and Drug Administration
(FDA) as required, the Company's future revenues and net income will be
adversely impacted.
A step-up in the value of inventory of $4,573 was recorded in the allocation of
the purchase price based on valuation estimates. The total amount allocated to
inventory of $5,669, which includes the step-up amount, will be charged to cost
of sales as the inventory is sold over the next three to six months, but is not
expected to have any impact beyond that period.
-7-
NOTE C - 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
-------------- -------------
2007 2006 2007 2006
------- ------- ------- -------
Numerator:
Net income used for both basic and diluted EPS $17,056 $20,861 $55,026 $59,138
======= ======= ======= =======
Denominator:
Weighted average shares outstanding for basic EPS 91,643 92,683 92,161 92,966
Dilutive effect of share-based awards 1,655 1,361 1,443 1,177
------- ------- ------- -------
Weighted average shares outstanding for diluted EPS 93,298 94,044 93,604 94,143
======= ======= ======= =======
Share-based awards outstanding that are anti-dilutive were 2,679 and 3,291 for
the third quarters of fiscal 2007 and 2006, respectively, and 2,762 and 4,584
for year-to-date fiscal 2007 and 2006, respectively. These share-based awards
were excluded from the diluted EPS calculation.
NOTE D - INVENTORIES
Inventories are summarized as follows:
March 31, July 1, March 25,
2007 2006 2006
--------- -------- ---------
Finished goods $150,187 $148,603 $145,398
Work in process 75,499 70,974 60,084
Raw materials 84,586 83,364 68,186
-------- -------- --------
$310,272 $302,941 $273,668
======== ======== ========
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 $37,390 at March 31, 2007, $42,509 at July 1, 2006 and
$43,035 at March 25, 2006.
NOTE E - GOODWILL
Goodwill allocated to the API and Rx Pharmaceuticals segments is tested for
impairment annually in the third quarter of the fiscal year. The current year
testing resulted in no impairment charge related to these segments. The
Company's API business is heavily dependent on new products currently under
development. Although not anticipated at this time, the termination of certain
key product development projects could have a materially adverse impact on the
future results of the API segment, which may include a charge for goodwill
impairment. The goodwill allocated to the Consumer Healthcare segment is tested
annually for impairment in the second quarter of the fiscal year. The current
year testing resulted in no impairment charge related to the Consumer Healthcare
segment.
-8-
There were no acquisitions, dispositions or impairments of goodwill during
fiscal 2007. Changes in the carrying amount of goodwill, by reportable segment,
are as follows:
Consumer Rx Pharma-
Healthcare ceuticals API Total
-------- -------- -------- --------
Balance as of July 1, 2006 $ 44,452 $ 61,406 $ 46,325 $152,183
Goodwill adjustment -- 14,877 11,326 26,203
Currency translation adjustment 2,230 5,055 3,779 11,064
-------- -------- -------- --------
Balance as of March 31, 2007 $ 46,682 $ 81,338 $ 61,430 $189,450
======== ======== ======== ========
During the first quarter of fiscal 2007, the Company recorded an adjustment to
goodwill for the Rx Pharmaceuticals and API segments. This adjustment was to
record a deferred tax liability for income and withholding taxes related to
pre-acquisition earnings in an approved enterprise zone in Israel. In accordance
with Emerging Issues Task Force 93-7, "Uncertainties Related to Income Taxes in
a Purchase Business Combination" (EITF 93-7), the Company treated this item as
an uncertain tax position at the time of the acquisition. Until the first
quarter of fiscal 2007, the Company was unable to reasonably estimate the
liability that was required. Certain factors still remain that could change the
ultimate liability and result in subsequent changes in goodwill. Provision has
not been made for U.S. or additional foreign taxes on undistributed
post-acquisition earnings of foreign subsidiaries because those earnings are
considered permanently reinvested in the operations of those subsidiaries.
NOTE F - INTANGIBLE ASSETS
Intangible assets and related accumulated amortization consist of the following:
March 31, 2007 July 1, 2006
----------------------- -------------------
Accumulated Accumulated
Gross Amortization Gross Amortization
------ ------------ ----- ------------
Developed product technology / formulation $149,551 $ 17,582 $117,615 $ 10,656
Distribution and license agreements 19,830 5,474 18,755 3,765
Customer relationships 4,900 3,688 4,900 2,698
Trademarks 9,984 1,622 9,503 1,228
-------- -------- -------- --------
Total $184,265 $ 28,366 $150,773 $ 18,347
======== ======== ======== ========
The Company recorded a charge for amortization expense of $9,783 and $8,856 for
year-to-date fiscal 2007 and 2006, respectively, for intangible assets subject
to amortization.
-9-
Estimated amortization expense increased significantly from the second quarter
of fiscal 2007 due to the intangible assets acquired in the Glades acquisition.
The expense below assumes that the related contingency is satisfactorily
resolved within the next two years. The estimated amortization expense for each
of the following five years is as follows:
Fiscal Year Amount
----------- ------
2007 (1) $ 3,825
2008 14,700
2009 15,200
2010 13,300
2011 13,300
(1) Reflects remaining three months of fiscal 2007.
NOTE G - OUTSTANDING DEBT
Total borrowings outstanding are summarized as follows:
March 31, July 1, March 25,
2007 2006 2006
--------- -------- ---------
Short-term debt:
Swingline loan $ 3,763 $ 19,195 $ 19,867
Bank loan - Germany subsidiary -- -- 5,092
Bank loans - Mexico subsidiary -- 886 2,010
Current portion of long-term debt 14,910 -- --
-------- -------- --------
Total 18,673 20,081 26,969
-------- -------- --------
Long-term debt:
Revolving line of credit 180,000 80,000 55,000
Term loan 100,000 100,000 100,000
Letter of undertaking - Israel subsidiary 400,000 400,000 400,000
Debenture - Israel subsidiary 29,342 41,717 39,360
-------- -------- --------
Total 709,342 621,717 594,360
-------- -------- --------
Total debt $728,015 $641,798 $621,329
======== ======== ========
The terms of the loan related to the letter of undertaking indicated above
require that the Company maintain a deposit of $400,000 in an uninsured account
with the lender as security for the loan. The deposit is included in the balance
sheet as a non-current asset.
NOTE H - 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 available cash or
borrowings. All common stock repurchased is retired upon purchase. The Company
has a 10b5-1 plan that allows brokers selected by the Company to repurchase
shares on behalf of the Company at times when it would ordinarily not be in the
market because of the Company's trading policies. The Company repurchased 317
shares of its common stock for $5,372 and 262 shares of its common stock for
$4,087 during the third quarter of fiscal
-10-
2007 and 2006, respectively. Year-to-date, the Company repurchased 1,279 shares
of its common stock for $20,919 and 1,431 shares of its common stock for $20,488
in fiscal 2007 and 2006, respectively. Year-to-date, private party transactions
accounted for 19 shares and 112 shares in fiscal 2007 and 2006, respectively.
NOTE I - 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
--------------------- ---------------------
2007 2006 2007 2006
-------- -------- -------- --------
Net income $ 17,056 $ 20,861 $ 55,026 $ 59,138
Other comprehensive income (loss):
Change in fair value of derivative instruments, net of tax (422) 964 (2,130) 4,253
Foreign currency translation adjustments 3,022 510 33,470 (10,131)
Change in fair value of investment securities, net of tax 378 (206) (499) 188
-------- -------- -------- --------
Comprehensive income $ 20,034 $ 22,129 $ 85,867 $ 53,448
======== ======== ======== ========
NOTE J - 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 reached a settlement with the United States Federal
Trade Commission (FTC) and states' attorneys general offices regarding a now
terminated agreement between Alpharma, Inc. and the Company related to a
children's ibuprofen suspension product. In connection with the Alpharma, Inc.
agreement and the related FTC settlement, the Company has been named as a
defendant in three suits, two of which are class actions that have been
consolidated with one another (the Direct Purchaser Action), filed on behalf of
Company customers (i.e., retailers), and the other consisting of four class
action suits (the Indirect Purchaser Action), filed on behalf of indirect
Company customers (i.e., consumers), alleging that the plaintiffs overpaid for
children's ibuprofen suspension product as a result of the Company's agreement
with Alpharma, Inc. On April 24, 2006, the court in the Direct Purchaser Action
issued an order and final judgment approving the settlement of this matter with
respect to defendants Alpharma, Inc. and the Company. The Company agreed to pay
$3,000 as part of the settlement of the Direct Purchaser Action. Separately,
Alpharma, Inc. and the Company entered into a settlement agreement to resolve
the Indirect Purchaser Action for a combination of cash and product donations of
approximately $1,000. On December 11, 2006, the court granted final approval of
the settlement for the Indirect Purchaser Action. The Company recorded income of
$500 in the second quarter of fiscal 2007 for the reduction of the associated
accruals and considers all related issues to be closed.
The Company is defending a few remaining 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 U.S. in November 2000 at the request of the FDA.
These cases allege that the plaintiff suffered injury, generally some type of
stroke, from ingesting PPA-containing products. Many of these suits also name
other manufacturers or retailers of
-11-
PPA-containing products. These personal injury suits seek an unspecified amount
of compensatory, exemplary and statutory damages. The Company maintains product
liability insurance coverage for the claims asserted in these lawsuits. The
Company believes that it has meritorious defenses to these lawsuits and intends
to vigorously defend them. At this time, the Company cannot determine whether it
will be named in additional PPA-related suits, the outcome of existing suits or
the effect that PPA-related suits may have on its financial condition or
operating results.
In addition to the foregoing discussion, the Company has pending certain other
legal actions and claims incurred in the normal course of business. The Company
believes that it has meritorious defenses to these lawsuits and/or is covered by
insurance and is actively pursuing the defense thereof. The Company believes the
resolution of all of these matters will not have a material adverse effect on
its financial condition and results of operations as reported in the
accompanying consolidated financial statements. However, depending on the amount
and timing of an unfavorable resolution of these lawsuits, the Company's future
results of operations or cash flow could be materially impacted in a particular
period.
The Company's Israeli subsidiary has provided a guaranty to a bank to secure the
debt of a 50% owned joint venture for approximately $470, not to exceed 50% of
the joint venture's debt, that is not recorded on the Company's condensed
consolidated balance sheets as of March 31, 2007.
NOTE K - SEGMENT INFORMATION
The Company has three reportable segments, aligned primarily by product:
Consumer Healthcare, Rx Pharmaceuticals and API, as well as an Other category.
The majority of corporate expenses, which generally represent shared services,
are charged to operating segments as part of a corporate allocation. Unallocated
expenses are comprised of certain corporate services that are not allocated to
the segments. These corporate services generally relate to executive management,
human resources, finance and information technology. Year-to-date and third
quarter fiscal 2007 included a one-time write-off of in-process research and
development for $8,252 related to the assets acquired from Glades
Pharmaceuticals, Inc. Year-to-date fiscal 2006 unallocated expenses included
one-time integration costs related to the Company's fiscal 2005 acquisition of
Agis Industries.
Rx
Consumer Pharma- Unallocated
Healthcare ceuticals API Other expenses Total
---------- --------- --- ----- -------- -----
Third Quarter 2007
Net sales $ 262,277 $ 34,025 $ 30,095 $ 35,891 -- $ 362,288
Operating income (loss) $ 21,578 $ 7,448 $ 4,002 $ 1,105 $ (10,602) $ 23,531
Third Quarter 2006
Net sales $ 238,594 $ 30,237 $ 30,250 $ 33,240 -- $ 332,321
Operating income (loss) $ 20,434 $ 4,260 $ 7,969 $ 747 $ (3,055) $ 30,355
Year-to-Date 2007
Net sales $ 780,033 $ 93,710 $ 88,507 $ 110,882 -- $1,073,132
Operating income (loss) $ 56,098 $ 16,921 $ 14,589 $ 6,745 $ (18,723) $ 75,630
Year-to-Date 2006
Net sales $ 735,916 $ 87,976 $ 83,904 $ 103,956 -- $1,011,752
Operating income (loss) $ 65,196 $ 13,396 $ 21,100 $ 877 $ (10,176) $ 90,393
-12-
NOTE L - RESTRUCTURING
In the fourth quarter of fiscal 2006, as a result of an ongoing review of its
Consumer Healthcare operating strategies, the Company's Board of Directors
approved plans to exit two unprofitable product lines, effervescent tablets and
psyllium-based laxatives. This action resulted in the sale of one Michigan plant
and the closure of an additional Michigan plant, both in the second quarter of
fiscal 2007. The Company recorded a gain of $1,276 in the second quarter of
fiscal 2007 based on the cash proceeds from the sale of the plant. The gain is
included in the restructuring line of the income statement. The Company also
recorded a $1,500 note receivable from the buyer of the plant. This amount,
reflecting further gain on the sale of the plant, has been deferred and will be
recognized as the note is repaid over the next five years. In addition, the
Company incurred a charge of $2,224 in the first three quarters of fiscal 2007
for employee-related and plant shutdown costs. The employee-related charge was
$1,578 for termination benefits for 72 employees. Unpaid termination benefits of
$168 as of March 31, 2007 are expected to be paid over the next three months.
Fiscal 2006 Restructuring
Employee Termination
-------------------------
Balance at December 30, 2006 $ 657
Additions 427
Payments (916)
-----
Balance at March 31, 2007 $ 168
=====
In connection with the Agis acquisition in fiscal 2005, the Company accrued
$3,933 of restructuring costs, consisting of employee termination benefits for
60 employees and certain lease termination costs. The Company made payments to
employees of $497 in the first three quarters of fiscal 2007 and recorded a
final adjustment to the accrual in the third quarter of fiscal 2007 as no
further termination benefits will be paid related to this restructuring. The
activity related to these restructuring costs is as follows:
Fiscal 2005 Restructuring
------------------------------------------
Employee Termination Lease Termination
-------------------- -----------------
Balance at July 1, 2006 $ 871 $ 1,098
Adjustment (374) --
Payments (497) (97)
------- -------
Balance at March 31, 2007 $ -- $ 1,001
======= =======
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER FISCAL YEARS 2007 AND 2006
(in thousands, except per share amounts)
OVERVIEW
Segments - The Company has three reportable segments, aligned primarily by
product: Consumer Healthcare, Rx Pharmaceuticals and API as well as an Other
category. The Consumer Healthcare segment includes the U.S., U.K. and Mexico
operations supporting the sale of OTC pharmaceutical and nutritional products
worldwide. The Rx Pharmaceuticals segment supports the development and sale of
prescription drug products. The API segment supports the development and
manufacturing of API products in Israel and Germany, with sales to customers
worldwide. The Other category consists of two operating segments, Israel
Consumer Products and Israel Pharmaceutical and Diagnostic Products, with sales
primarily to the Israeli market, including cosmetics, toiletries, detergents,
manufactured and imported pharmaceutical products and medical diagnostic
products. Neither of these operating segments meets the quantitative thresholds
required to be separately reportable segments.
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 first three quarters of fiscal 2007 are
not necessarily indicative of the results that may be expected for a full year.
Acquisitions - On March 7, 2007, the Company announced that it entered into a
purchase agreement to acquire Qualis, Inc., a privately-owned manufacturer of
store brand pediculicide products, for $12,000. The assets to be acquired in
this transaction consist of the intangible assets attributable to the products
acquired, which include primarily store brand over-the-counter product
formulations that compare to Rid(R) and Nix(R). The transaction is expected to
close on or around June 30, 2007.
On March 26, 2007, the Company acquired certain generic prescription
dermatological products from Glades Pharmaceuticals, Inc. (Glades) for
approximately $57,000 in cash plus $2,500 of consideration for future research
and development collaborations. These assets are included in the accompanying
consolidated balance sheet as of March 31, 2007. The operating results related
to these products will be included in the Company's consolidated results of
operations beginning in the fourth quarter of fiscal 2007.
Current Year Results - Net sales for the third quarter of fiscal 2007 were
$362,288, an increase of 9% over fiscal 2006. The increase was driven primarily
by the Consumer Healthcare segment. Consolidated new product sales for the third
quarter of fiscal 2007 were approximately $19,000. Gross profit was $100,209, an
increase of 3% over fiscal 2006. The gross profit percentage in the third
quarter of fiscal 2007 was 27.7%, down from 29.3% in last year's third quarter.
Operating expenses in the third quarter of fiscal 2007 were $76,678, an increase
of 15% over fiscal 2006. Operating expenses as a percent of net sales were
21.2%, up from 20.1% in the third quarter of fiscal 2006. Net income was
$17,056, a decrease of 18% from fiscal 2006. The third quarter of fiscal 2007
was negatively impacted by the in-process research and development charge
related to the Glades acquisition, the effect of which was partially offset by
the favorable effective tax rate.
-14-
Year-to-date net sales for fiscal 2007 were $1,073,132, an increase of 6% over
fiscal 2006. The increase spanned all of the Company's segments and included new
product sales of approximately $53,000. Gross profit was $293,151, an increase
of 1% over fiscal 2006. The year-to-date gross profit percentage in fiscal 2007
was 27.3%, down from 28.6% last year. Operating expenses were $217,521, an
increase of 9% over fiscal 2006 and up slightly as a percent of net sales over
fiscal 2006. Net income was $55,026, a decrease of 7% from fiscal 2006.
Year-to-date fiscal 2007 was negatively impacted by the acetaminophen product
recall and the in-process research and development charge related to the Glades
acquisition, the effects of which were partially offset by the favorable
effective tax rate.
Further details related to current year results are included in the following
Results of Operations.
Product Recall - On November 9, 2006, the Company initiated a voluntary
retail-level recall of certain lots of its acetaminophen 500 mg caplets
containing raw material purchased from a third party supplier. The Company's
quality control systems noted trace amounts of metal particulate in a very small
number of these caplet products. The probability of health risk is extremely
remote. Following the announcement of the recall, the Company received numerous
consumer inquiries, and in order to properly address these inquiries,
voluntarily initiated a consumer level return program in addition to the retail
returns process. The total cost of the recall is estimated to be approximately
$6,300 and has been recorded in the first three quarters of fiscal 2007. The
charge included sales returns and refunds, handling of on-hand inventories,
disposal of inventory and management of consumer inquiries. The total charge
recorded in the third quarter of fiscal 2007 was approximately $300. This
product recall related to the Consumer Healthcare segment. While the Company
believes its estimate of the total cost of the recall is reasonable, the Company
cannot predict whether this recall will have any further impact on its results
of operations.
Pseudoephedrine - The Company continued to be impacted by the legislative and
market concerns related to products containing pseudoephedrine, which have
resulted from concerns over the use of pseudoephedrine in the production of
methamphetamine, an illegal drug. Net sales of these products in the first three
quarters of fiscal 2007 were approximately $61,000 lower than the corresponding
quarters of fiscal 2006. Net sales of pseudoephedrine products are expected to
be approximately $30,000 for fiscal 2007, excluding expected sales of
pseudoephedrine replacement products.
-15-
RESULTS OF OPERATIONS
CONSUMER HEALTHCARE
Third Quarter Year-to-Date
-------------------- --------------------
2007 2006 2007 2006
-------- -------- -------- --------
Net sales $262,277 $238,594 $780,033 $735,916
Gross profit $ 59,233 $ 60,166 $174,780 $182,539
Gross profit % 22.6% 25.2% 22.4% 24.8%
Operating expenses $ 37,655 $ 39,732 $118,682 $117,343
Operating expenses % 14.4% 16.6% 15.2% 15.9%
Operating income $ 21,578 $ 20,434 $ 56,098 $ 65,196
Operating income % 8.2% 8.6% 7.2% 8.9%
Net Sales
Third quarter net sales for fiscal 2007 increased 10% or $23,683 compared to
fiscal 2006. The increase was comprised of $8,800 of international sales and
$14,900 of domestic sales. The increase in international sales resulted from
higher unit sales of existing products as well as $2,500 from favorable foreign
currency exchange. The domestic increases were driven by $16,700 of new product
sales in the smoking cessation, gastrointestinal and nutrition categories along
with an $11,000 increase in higher unit sales of existing products in the
analgesics and cough/cold categories compared to the third quarter of fiscal
2006. The domestic increases were partly offset by a $1,100 decrease in the
combination of pseudoephedrine and phenylephrine-containing products along with
lower unit sales of existing products in the smoking cessation, gastrointestinal
and nutrition product categories of $12,000.
Year-to-date net sales for fiscal 2007 increased 6% or $44,117 compared to
fiscal 2006. The increase was comprised of $21,600 of international sales and
$22,500 of domestic sales. The increase in international sales resulted from
higher unit sales of existing products as well as $4,600 from favorable foreign
currency exchange. The domestic increase resulted from $44,400 of new product
sales in the smoking cessation, gastrointestinal and nutrition categories along
with a $17,000 increase from higher unit sales of existing products in the
analgesics and cough/cold categories. These combined domestic increases were
partially offset by an $18,000 decrease in lower unit sales of existing products
in the gastrointestinal and nutrition product categories along with sales
declines from the combination of pseudoephedrine and phenylephrine-containing
products of $19,600 in fiscal 2007 compared to fiscal 2006.
The Company continued to be impacted by the legislative and market changes
related to products containing pseudoephedrine, which have resulted from
concerns over the use of pseudoephedrine in the production of methamphetamine,
an illegal drug. Net sales of these products in the first three quarters of
fiscal 2007 were approximately $61,000 lower than the corresponding quarters of
fiscal 2006. Net sales of pseudoephedrine products are expected to be
approximately $30,000 for fiscal 2007, excluding expected sales of
pseudoephedrine replacement products.
-16-
Gross Profit
Third quarter gross profit for fiscal 2007 decreased 2% or $933 compared to
fiscal 2006. The decrease was primarily due to higher costs for production and
quality assurance and the unfavorable margin impact from lower unit sales of
pseudoephedrine-containing products. These decreases were partly offset by the
gross profit on increased sales volume attributed to new products and
international sales.
Year-to-date gross profit for fiscal 2007 decreased 4% or $7,759 compared to
fiscal 2006. The decrease was primarily due to higher costs for production and
quality assurance, the unfavorable margin impact from lower unit sales of
pseudoephedrine-containing products and the acetaminophen product recall
(described below). These decreases were partly offset by the gross profit on
increased sales volume attributed to new products and international sales.
On November 9, 2006, the Company initiated a voluntary retail-level recall of
certain lots of its acetaminophen 500 mg caplets containing raw material
purchased from a third party supplier. The Company's quality control systems
noted trace amounts of metal particulate in a very small number of these caplet
products. The probability of health risk is extremely remote. Following the
announcement of the recall, the Company received numerous consumer inquiries,
and in order to properly address these inquiries, voluntarily initiated a
consumer level return program in addition to the retail returns process. The
total cost of the recall is estimated to be approximately $6,300 and was
recorded in the first three quarters of fiscal 2007. The charge included sales
returns and refunds, handling of on-hand inventories, disposal of inventory and
management of consumer inquiries. While the Company believes its estimate of the
total cost of the recall is reasonable, the Company cannot predict whether this
recall will have any further impact on its results of operations.
Operating Expenses
Third quarter operating expenses for fiscal 2007 decreased 5% or $2,077 compared
to fiscal 2006. The decreases were primarily due to lower employee-related costs
and a reduction in bad debt expense, which were partially offset by an increase
in research and development costs. Year-to-date operating expenses for fiscal
2007 increased 1% or $1,339 compared to fiscal 2006. The increases were
primarily due to higher research and development, relocation and recruiting
costs, as well as a restructuring charge, which were partially offset by a
reduction in bad debt expense and employee-related costs.
-17-
RX PHARMACEUTICALS
Third Quarter Year-to-Date
------------------- ------------------
2007 2006 2007 2006
-------- -------- -------- -------
Net sales $34,025 $30,237 $93,710 $87,976
Gross profit $16,131 $11,544 $41,305 $34,761
Gross profit % 47.4% 38.2% 44.1% 39.5%
Operating expenses $ 8,683 $ 7,284 $24,384 $21,365
Operating expenses % 25.5% 24.1% 26.0% 24.3%
Operating income $ 7,448 $ 4,260 $16,921 $13,396
Operating income % 21.9% 14.1% 18.1% 15.2%
Net Sales
Third quarter net sales for fiscal 2007 increased 13% or $3,788 compared to
fiscal 2006. This increase was primarily due to an increase in service and
royalty revenues, partially offset by price erosion.
Year-to-date net sales for fiscal 2007 increased 7% or $5,734 compared to fiscal
2006. This increase was primarily due to an increase in service and royalty
revenues of approximately $15,500 and new product sales of approximately $5,900,
partially offset by pricing pressure on current products sold under Abbreviated
New Drug Applications (ANDA) and an increase in expense for customer-related
programs of $5,000. Fiscal 2006 was unfavorably impacted by a mesalamine product
recall (described below) that decreased sales $1,350.
Fiscal 2007 results include an increase in expense related to the Company's
customer programs in the Rx Pharmaceuticals segment as noted above. Customer
programs are common in the industry and include such items as rebates and
chargebacks. The determination of the liability for these programs involves a
significant amount of estimation. The Company has a methodology by which it
accrues and validates its accrual of these expenses. This methodology includes
several variables: inventory reports supplied by wholesalers that indicate
inventory levels, detailed computations using historical payments and estimates
of sell-through to retailers with varying contract prices. The Company has been
monitoring its methodology and made material changes to certain of these
estimates in the second quarter of fiscal 2007. The changes to the estimates are
intended to further enhance the accuracy and reliability of the calculation of
the liability and to reduce the risk of incremental charges for customer
programs.
Gross Profit
Third quarter gross profit for fiscal 2007 increased 40% or $4,587 compared to
fiscal 2006, primarily due to an increase in service and royalty revenues.
Year-to-date gross profit for fiscal 2007 increased 19% or $6,544 compared to
fiscal 2006. The increase was due primarily to the increase in service and
royalty revenues and the absence of the mesalamine product recall, partially
offset by pricing pressure on current ANDA products and the increase in expense
for customer programs.
In the first quarter of fiscal 2006, the Company initiated a voluntary
retail-level recall of all affected lots of
-18-
mesalamine rectal suspension, an anti-inflammatory agent used to treat mild to
moderate ulcerative colitis, following reports of leakage related to the bottle
closure cap. The recall was not safety related and there have been no reports of
injury or illness related to the leakage of this product. The costs to write off
the value of the Company's on-hand inventories and the costs of return and
disposal, estimated to be $2,750, were recorded in the first quarter of fiscal
2006. No further expense is expected to be incurred related to this recall.
Operating Expenses
Third quarter operating expenses for fiscal 2007 increased 19% or $1,399
compared to fiscal 2006. Year-to-date operating expenses for fiscal 2007
increased 14% or $3,019 compared to fiscal 2006. The increase in both periods
was primarily due to higher spending for research and development.
API
Third Quarter Year-to-Date
-------------------- --------------------
2007 2006 2007 2006
------- ------- ------- -------
Net sales $30,095 $30,250 $88,507 $83,904
Gross profit $12,499 $14,310 $38,463 $39,111
Gross profit % 41.5% 47.3% 43.5% 46.6%
Operating expenses $ 8,497 $ 6,341 $23,874 $18,011
Operating expenses % 28.2% 21.0% 27.0% 21.5%
Operating income $ 4,002 $ 7,969 $14,589 $21,100
Operating income % 13.3% 26.3% 16.5% 25.1%
Net Sales
Third quarter net sales for fiscal 2007 were essentially flat compared to fiscal
2006. Fiscal 2006 included a one-time sale of intellectual property assets for
$4,000. This reduction in revenue, however, was offset by an increase in sales
of new products as well as sales of existing products in the North American and
Japanese markets.
Year-to-date net sales for fiscal 2007 increased 5% or $4,603 compared to fiscal
2006. This increase was due to sales of new products of approximately $2,300 as
well as an increase of approximately $10,400 related to customer and product mix
changes, partially offset by the absence in fiscal 2007 of the $4,000 sale of
intellectual property. The net sales of API are highly dependent on the level of
competition in the marketplace for a specific material. The current trend of
increased sales may not continue due to this dependency.
Gross Profit
Third quarter gross profit for fiscal 2007 decreased 13% or $1,811 compared to
fiscal 2006. This decrease was primarily due to the absence of the sale of
intellectual property, but was partially offset by the increased volume
attributable to new products and a change in customer and product mix.
Year-to-date gross profit for fiscal 2007 decreased 2% or $648 compared to
fiscal 2006. The year-to-
-19-
date gross profit for fiscal 2006 included approximately $4,000 in revenue
related to the sale of intellectual property as well as a charge of $1,747 for
the write-off of the step-up in the value of inventory resulting from the Agis
acquisition. The net decrease from the absence of this fiscal 2006 activity was
mostly offset by the gross profit on increased volume attributable to new
products and changes in customer and product sales mix.
Operating Expenses
Third quarter operating expenses for fiscal 2007 increased 34% or $2,156
compared to fiscal 2006. Year-to-date operating expenses for fiscal 2007
increased 33% or $5,863 compared to fiscal 2006. The increase in both periods
was primarily due to increased spending for research and development and higher
commissions on sales of certain products.
OTHER
The Other category includes two operating segments: Israel Consumer Products and
Israel Pharmaceutical and Diagnostic Products. Neither of these operating
segments individually meets the quantitative thresholds required to be a
reportable segment.
Third Quarter Year-to-Date
--------------------- ---------------------
2007 2006 2007 2006
-------- -------- -------- --------
Net sales $ 35,891 $ 33,240 $110,882 $103,956
Gross profit $ 12,346 $ 11,258 $ 38,603 $ 33,353
Gross profit % 34.4% 33.9% 34.8% 32.1%
Operating expenses $ 11,241 $ 10,511 $ 31,858 $ 32,476
Operating expenses % 31.3% 31.7% 28.7% 31.3%
Operating income $ 1,105 $ 747 $ 6,745 $ 877
Operating income % 3.1% 2.2% 6.1% 0.8%
Third quarter net sales for fiscal 2007 increased 8% or $2,651 compared to
fiscal 2006. The increase was primarily due to changes in the Israeli shekel to
U.S. dollar foreign exchange rate, partially offset by changes in customer and
product mix. Third quarter gross profit for fiscal 2007 increased 10% or $1,088
compared to fiscal 2006, primarily due to changes in the foreign exchange rate.
Year-to-date net sales for fiscal 2007 increased 7% or $6,926 compared to fiscal
2006, primarily due to changes in the foreign exchange rate and changes in
customer and product mix. Year-to-date gross profit for fiscal 2007 increased
16% or $5,250 compared to fiscal 2006. The year-to-date gross profit for fiscal
2006 included a charge of $2,697 for the write-off of the step-up in the value
of inventory resulting from the Agis acquisition. The remainder of the gross
profit increase was primarily due to changes in the foreign exchange rate.
Third quarter operating expenses for fiscal 2007 increased 7% or $730 compared
to fiscal 2006 primarily due to an increase in sales commissions and
administrative expenses. Year-to-date operating expenses for fiscal 2007
decreased 2% or $618 compared to fiscal 2006 primarily due to lower
administrative expenses, partially offset by an increase in sales commissions.
-20-
UNALLOCATED EXPENSES
Third Quarter Year-to-Date
------------------- --------------------
2007 2006 2007 2006
-------- -------- -------- --------
Operating expenses $ 10,602 $ 3,055 $ 18,723 $ 10,176
Operating income (loss) $(10,602) $ (3,055) $(18,723) $(10,176)
Unallocated expenses were comprised of certain corporate services that were not
allocated to the segments. These corporate services generally related to
executive management, human resources, finance and information technology.
Unallocated expenses for the third quarter increased $7,547 in fiscal 2007
compared to fiscal 2006 primarily due to the in-process research and development
charge related to the Glades acquisition. Year-to-date unallocated expenses
increased $8,547 compared to fiscal 2006 primarily due to the in-process
research and development charge related to the Glades acquisition and higher
wages and benefits. Year-to-date fiscal 2006 included acquisition integration
costs related to Agis of $2,600.
INTEREST AND OTHER (CONSOLIDATED)
Interest expense for the third quarter was $8,884 for fiscal 2007 and $7,884 for
fiscal 2006. Interest income for the third quarter was $5,234 for fiscal 2007
and $5,419 for fiscal 2006. Other income was $1,874 for the third quarter of
fiscal 2007 compared to $2,310 for the third quarter of fiscal 2006.
Year-to-date interest expense was $26,655 for fiscal 2007 and $27,476 for fiscal
2006. Year-to-date interest income was $15,119 for fiscal 2007 and $15,870 for
fiscal 2006. Year-to-date other income was $4,193 and $9,346 for fiscal 2007 and
2006, respectively. Other income for fiscal 2006 included a gain of $4,666 from
the sale of an equity investment.
INCOME TAXES (CONSOLIDATED)
The third quarter effective tax rate was 21.6% for fiscal 2007 and 30.9% for
fiscal 2006. Year-to-date the effective tax rate was 19.4% for fiscal 2007 and
32.9% for fiscal 2006. The Company's international expansion has changed the
relative composition of U.S. and foreign income resulting in a lower effective
tax rate than the Company had historically experienced. This tax rate will
fluctuate from quarter to quarter depending on the composition of income before
tax. Eighty percent of income before tax in the first three quarters of fiscal
2007 was contributed by foreign entities with a tax rate lower than the U.S.
statutory rate. The Company estimates the annualized effective tax rate for
fiscal 2007 will be between 20% and 23%.
The effective tax rate for fiscal 2007 included the impact of the newly enacted
Tax Relief and Healthcare Act of 2006 (the Act). Among other provisions, the Act
provides for the restoration of the research and development tax credit, applied
retroactively to January 1, 2006. Accordingly, tax expense in the second quarter
of fiscal 2007 was reduced approximately $1,300 to reflect the one-time impact
of the retroactive application of the Act.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investment securities increased $57,240 to $93,093 at
March 31, 2007 from $35,853 at March 25, 2006. Working capital, including cash,
increased $128,324 to $373,415 at March
-21-
31, 2007 from $245,091 at March 25, 2006. The increase in working capital was
due primarily to an increase in cash and investment securities, higher inventory
levels and accounts receivable associated with higher sales volume.
Year-to-date net cash provided from operating activities decreased by $36,471 to
$74,161 for fiscal 2007 compared to $110,632 for fiscal 2006. The decreased cash
from operations was primarily due to the change in inventory and accounts
payable related to a strategic build-up of inventories that occurred earlier in
the fiscal year, fiscal 2006 employee bonuses that were paid in fiscal 2007 and
increased sales volume, partially offset by lower payments for income taxes.
Year-to-date net cash used for investing activities increased $108,447 to
$116,869 for fiscal 2007 compared to $8,422 for fiscal 2006 primarily due to
higher capital expenditures, the Glades asset acquisition and a net increase in
the purchase of investment securities.
Year-to-date capital expenditures for facilities and equipment were for normal
replacement and productivity enhancements. Capital expenditures are anticipated
to be $40,000 to $45,000 for fiscal 2007. The annual capital expenditures for
fiscal 2006 were $36,000.
Year-to-date net cash provided from financing activities increased $141,968 to
$55,824 for fiscal 2007 compared to cash used for financing activities of
$86,144 for fiscal 2006. The increased cash from financing activities was
primarily due to increased net borrowings of long-term debt to fund the Glades
asset acquisition and the Company's working capital requirements.
The Company repurchased 317 shares of its common stock for $5,372 and 262 shares
for $4,087 during the third quarter of fiscal 2007 and 2006, respectively.
Year-to-date, the Company repurchased 1,279 shares of its common stock for
$20,919 and 1,431 shares for $20,488 in fiscal 2007 and 2006, respectively.
Private party transactions accounted for 1 share in each of the third quarters
of fiscal 2007 and 2006. Year-to-date, private party transactions accounted for
19 shares and 112 shares in fiscal 2007 and 2006, respectively.
The Company paid quarterly dividends totaling $12,281 and $11,660, or $0.1325
and $0.125 per share, for the first three quarters of fiscal 2007 and 2006,
respectively. The declaration and payment of dividends, 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.
GUARANTIES AND CONTRACTUAL OBLIGATIONS
The Company's Israeli subsidiary has provided a guaranty to a bank to secure the
debt of a 50% owned joint venture for approximately $470, not to exceed 50% of
the joint venture's debt, that is not recorded on the Company's condensed
consolidated balance sheets as of March 31, 2007.
During the third quarter of fiscal 2007, there were no material changes in
contractual obligations.
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,
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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. Other significant
accounting policies are included in Note A of the notes to the consolidated
financial statements in the Company's annual report on Form 10-K for the fiscal
year ended July 1, 2006.
Revenue Recognition and Customer Programs - The Company records revenues from
product sales when the goods are shipped to the customer. For customers with
Free on Board destination terms, a provision is recorded to exclude shipments
estimated to be in-transit to these customers at the end of the reporting
period. A provision is recorded and accounts receivable are reduced as revenues
are recognized for estimated losses on credit sales due to customer claims for
discounts, price discrepancies, returned goods and other items. A liability is
recorded as revenues are recognized for estimated customer program liabilities,
as discussed below.
A chargeback relates to an agreement the Company has with a wholesaler, a retail
customer that will ultimately purchase product from a wholesaler or a
pharmaceutical buying group for a contracted price that is different than the
Company's price to the wholesaler. The wholesaler will issue an invoice to the
Company for the difference in the contract prices. The calculation of the
accrual for chargebacks includes several variables: inventory reports supplied
by wholesalers that indicate inventory levels, detailed computations using
historical payments and estimates of sell-through to retailers with varying
contract prices.
Rebates are payments issued to the customer when certain criteria are met which
may include specific levels of product purchases, introduction of new products
or other objectives. The accrual for rebates is based on contractual agreements
and estimated purchasing levels by customers with such programs. Medicaid
rebates are payments made to states for pharmaceutical products covered by the
program. The accrual for Medicaid rebates is based on historical trends of
rebates paid and current period sales activity.
Shelf stock adjustments are credits issued to reflect decreases in the selling
price of a product and are based upon estimates of the amount of product
remaining in a customer's inventory at the time of the anticipated price
reduction. In many cases, the customer is contractually entitled to such a
credit. The accrual for shelf stock adjustments is based on specified terms with
certain customers, estimated launch dates of competing products and estimated
declines in market price.
The Company has a methodology by which it accrues and validates its accrual of
these liabilities. The Company has been monitoring its methodology and made
material changes to certain of the estimates in the second quarter of fiscal
2007 that resulted in additional accruals. The changes to the estimates are
intended to further enhance the accuracy and reliability of the calculation of
the liability and to reduce the risk of incremental charges for customer
programs. However, future changes in the estimates and assumptions related to
these programs may result in additional accruals.
The following table summarizes the activity included in the balance sheet for
accounts receivable
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allowances and customer program accruals:
Year-to-Date
---------------------------
2007 2006
--------- ---------
Balance, beginning of period $ 54,456 $ 48,378
Provision recorded 144,487 110,212
Credits processed (156,042) (107,253)
--------- ---------
Balance, end of the period $ 42,901 $ 51,337
========= =========
Allowance for Doubtful Accounts - The Company maintains an allowance for
customer accounts that reduces receivables to amounts that are expected to be
collected. In estimating the allowance, management considers factors such as
current overall economic conditions, industry-specific economic conditions,
historical and anticipated customer performance, historical experience with
write-offs and the level of past-due amounts. Changes in these conditions may
result in additional allowances. The allowance for doubtful accounts was $9,933
at March 31, 2007, $11,178 at July 1, 2006, and $10,619 at March 25, 2006.
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 $37,390 at March 31, 2007, $42,509 at July 1, 2006
and $43,035 at March 25, 2006.
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. Goodwill allocated to the Consumer Healthcare
segment is tested annually for impairment in the second quarter of the fiscal
year. The goodwill allocated to the API and Rx Pharmaceuticals segments is
tested for impairment annually in the third quarter of the fiscal year. The
current year testing in both the second and third quarter resulted in no
impairment charge. The Company's API business is heavily dependent on new
products currently under development. Although not anticipated at this time, the
termination of certain key product development projects could have a materially
adverse impact on the future results of the API segment, which may include a
charge for goodwill impairment. Goodwill was $189,450 at March 31, 2007,
$152,183 at July 1, 2006 and $147,633 at March 25, 2006.
Other Intangible Assets - Other intangible assets subject to amortization
consist of developed product
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technology, distribution and license agreements, customer relationships and
trademarks. Most of these assets are related to the Agis acquisition and are
amortized over their estimated useful economic lives using the straight-line
method. An accelerated method of amortization is used for customer
relationships. For intangible assets subject to amortization, an impairment
analysis is performed whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable. An impairment loss is
recognized if the carrying amount of the asset is not recoverable and its
carrying amount exceeds its fair value. Other intangible assets were $155,899 at
March 31, 2007, $132,426 at July 1, 2006 and $138,043 at March 25, 2006.
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 $2,435 at March 31, 2007, $1,937 at July 1, 2006 and $1,825 at March
25, 2006. The accrual for workers' compensation claims was $1,836 at March 31,
2007, $1,919 at July 1, 2006 and $2,968 at March 25, 2006.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company is exposed to market risks due to changes in currency exchange rates
and interest rates.
The Company is exposed to interest rate changes primarily as a result of
interest expense on borrowings used to finance the Agis acquisition and working
capital requirements and interest income earned on its investment of cash on
hand. As of March 31, 2007, the Company had invested cash, cash equivalents and
investment securities of $93,093 and short and long-term debt, net of restricted
cash, of $306,015.
The Company enters into certain derivative financial instruments, when available
on a cost-effective basis, to hedge its underlying economic exposure,
particularly related to the management of interest rate risk. Because of the use
of certain derivative financial instruments, the Company believes that a
significant fluctuation in interest rates in the near future will not have a
material impact on the Company's consolidated financial statements. These
instruments are managed on a consolidated basis to efficiently net exposures and
thus take advantage of any natural offsets. Derivative financial instruments are
not used for speculative purposes. Gains and losses on hedging transactions are
offset by gains and losses on the underlying exposures being hedged.
The Company has operations in the U.K., Israel, Germany and Mexico. These
operations transact business in their local currency and foreign currencies,
thereby creating exposures to changes in exchange rates. From time to time, the
Company enters into currency derivative instruments to hedge its underlying
exposure to currency fluctuations. Significant currency fluctuations could
adversely impact foreign revenues; however, the Company cannot predict future
changes in foreign currency exposure.
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Item 4. Controls and Procedures
As of March 31, 2007, the Company's management, including its Chief Executive
Officer and its Chief Financial Officer, has performed an interim review on 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, as
well as an evaluation and consideration of the update described below, the Chief
Executive Officer and Chief Financial Officer have concluded the Company's
disclosure controls and procedures are 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.
Following is an update of the remediation plan related to the Company's fiscal
2005 Agis acquisition which should be read in conjunction with Item 9A. Controls
and Procedures included in the Company's Form 10-K for the fiscal year ended
July 1, 2006.
- The Company implemented a new enterprise resource planning (ERP)
system at its Israeli location in the second quarter of fiscal 2007
which is intended to remediate the majority of the previously
disclosed weaknesses. The Israeli location is fully functioning on
this new system and the Company is in the process of evaluating
internal controls.
In connection with the interim evaluation by the Company's management, including
its Chief Executive Officer and Chief Financial Officer, of the Company's
internal control over financial reporting (ICFR) pursuant to Rule 13a-15(d) of
the Securities Exchange Act of 1934, no changes during the quarter ended March
31, 2007 were identified that have materially affected, or are reasonably likely
to materially affect, the Company's ICFR.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material changes to Legal Proceedings in the current quarter.
Item 1A. Risk Factors
The Company's Annual Report on Form 10-K filed for the year ended July 1, 2006
included a detailed discussion of the Company's risk factors. Other than the
items noted below, there have been no material changes to the risk factors that
were included in the Form 10-K during the first three quarters of fiscal 2007.
Regulatory Environment -- Several U.S. and foreign agencies regulate the
manufacturing, processing, formulation, packaging, labeling, testing, storing,
distribution, advertising and sale of the Company's products. Various state and
local agencies also regulate these activities. In addition, the Company
manufactures and markets certain of its products in accordance with the
guidelines established by voluntary standard organizations. Should the Company
or one of its third party service providers used in the development or
commercialization of product fail to adequately conform to these regulations and
guidelines, there may be a significant adverse impact on the operating results
of the Company. In particular, packaging or labeling changes mandated by the FDA
can have a material adverse impact on the results of operations of the Company.
Required changes could be related to safety or effectiveness issues. There is
also the risk that the FDA could require the Company to audit or repeat prior
bioequivalence or clinical studies or the FDA could change or withdraw the
approval governing such products, which could have a material adverse impact on
the results of the Company's operations. The Company believes that it has a good
relationship with the FDA, which it intends to maintain. If these relationships
should deteriorate, however, the Company's ability to bring new and current
products to market could be impeded. For further information, please see Item 1.
Business -- Government Regulation of the Company's Form 10-K for the year ended
July 1, 2006.
MDS Pharma Services -- MDS Pharma Services (MDS) is a contract research
organization that performs studies related to the bioequivalency of drugs. The
Company has engaged MDS in the past to perform these types of studies as part of
the approval process for certain drugs. Recently, the FDA notified the Company
and many other pharmaceutical companies about some concerns over the reliability
of studies conducted between 2000 and 2004. The FDA has requested that the
affected companies validate, confirm or repeat certain bioequivalence studies.
At this time, it is unknown whether the costs associated with confirming or
repeating these studies will be reimbursed by MDS. The FDA has given no
indication that it considers the affected products to be other than safe and
effective. Because the outcome of the issue is uncertain, the Company cannot
predict whether this issue will have a material impact on its results of
operations.
Pseudoephedrine-related Legal Matters -- The Company has been informed that
Independence County, Arkansas, has filed a lawsuit in Arkansas against various
manufacturers and distributors of products containing pseudoephedrine, which is
used to produce methamphetamine, an illegal drug. The Company has been informed
that other counties in Arkansas may join in the lawsuit as plaintiffs. Through
this lawsuit, Independence County, Arkansas reportedly seeks to recoup as
damages some of the expenses it has incurred to combat methamphetamine use and
addiction. The county also reportedly seeks punitive damages, disgorgement of
profits and attorneys fees. Although the Company believes that it has been named
as one of the defendants in that suit, it has not yet been served with any such
lawsuit. The Company believes that any such lawsuit is without merit and, if
served with the lawsuit, intends to vigorously defend against it. At this early
stage, the Company cannot predict whether this issue will have a material impact
on its results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (in
thousands, except per share amounts)
On February 15, 2006, the Board of Directors approved a plan to repurchase
shares of common stock with a value of up to $60,000. This plan expired on
February 17, 2007. On February 8, 2007, the Board of Directors approved an
additional plan to repurchase shares of common stock with a value of up to
$60,000. This plan will expire on February 9, 2009. The Company has a 10b5-1
plan that allows brokers selected by the Company to repurchase shares on behalf
of the Company at times when it would ordinarily not be in the market because of
the Company's trading policies. The amount of common stock repurchased in
accordance with the 10b5-1 plan on any given day is determined by the plan's
formula which is generally based on the market price of the Company's stock. All
common stock repurchased is retired upon purchase.
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The table below lists the Company's repurchases of shares of common stock during
its most recently completed quarter:
Total Average Total Number of Value of
Number of Price Shares Purchased Shares
Shares Paid per as Part of Publicly Available for
Fiscal 2007 Purchased (1) Share Announced Plans Purchase
---------------------------- ------------- -------- ------------------- -------------
$38,778
December 31 to February 3 108 $17.26 108 $36,918
February 4 to March 3 75 $17.14 75 $59,359
March 4 to March 31 134 $16.55 133 $57,160
--- ---
Total 317 316
(1) Private party transactions accounted for the purchase of 1 share in the
period from March 4 to March 31.
Item 6. Exhibits
Exhibit
Number Description
------- -----------
10(a) Registrant's 2003 Long-Term Incentive Plan, as amended as of February
7, 2007.
10(b) Letter Agreement by and between Perrigo Company and Ben-Zion
Zilberfarb, dated February 8, 2007 and effective February 16, 2007,
incorporated by reference from Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed on February 22, 2007.
10(c) Form of Restricted Stock Agreement (Under the Perrigo Company 2003
Long-Term Incentive Plan).
10(d) Form of Long-Term Incentive Award Agreement (Under the Perrigo Company
2003 Long-Term Incentive Plan).
10(e) Form of Restricted Stock Agreement (For Approved Section 102 Awards).
10(f) Form of 2006 Long-Term Incentive Award Agreement, For Approved Section
102 Awards (Under the Perrigo Company 2003 Long-Term Incentive Plan).
10(g) Form of 2006 Long-Term Incentive Award Agreement (Under the Perrigo
Company 2003 Long-Term Incentive Plan).
31 Rule 13a-14(a) Certifications.
32 Section 1350 Certifications.
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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: May 8, 2007 By: /s/ Joseph C. Papa
----------------------------------------
Joseph C. Papa
President and Chief Executive Officer
Date: May 8, 2007 By: /s/ Judy L. Brown
----------------------------------------
Judy L. Brown
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
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