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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: SEPTEMBER 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-19725
PERRIGO COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 38-2799573
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
515 EASTERN AVENUE
ALLEGAN, MICHIGAN 49010
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
(269) 673-8451
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is 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 October 27, 2006 the registrant had 92,627,810 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 -- For the quarters
ended September 30, 2006 and September 24, 2005 2
Condensed consolidated balance sheets -- September 30, 2006,
July 1, 2006 and September 24, 2005 3
Condensed consolidated statements of cash flows -- For the quarters
ended September 30, 2006 and September 24, 2005 4
Notes to condensed consolidated financial statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risks 21
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 6. Exhibits 24
SIGNATURES 25
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 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)
First Quarter
-------------------
2007 2006
-------- --------
Net sales $340,215 $319,734
Cost of sales 245,598 232,818
-------- --------
Gross profit 94,617 86,916
-------- --------
Operating expenses
Distribution 7,384 7,150
Research and development 13,047 12,649
Selling and administration 48,474 46,388
-------- --------
Total 68,905 66,187
Operating income 25,712 20,729
Interest, net 4,586 4,026
Other income, net (61) (1,246)
-------- --------
Income before income taxes 21,187 17,949
Income tax expense 4,305 5,038
-------- --------
Net income $ 16,882 $ 12,911
======== ========
Earnings per share
Basic $ 0.18 $ 0.14
Diluted $ 0.18 $ 0.14
Weighted average shares outstanding
Basic 92,168 93,188
Diluted 93,521 94,314
Dividends declared per share $ 0.043 $ 0.040
See accompanying notes to condensed consolidated financial statements.
-2-
PERRIGO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, July 1, September 24,
2006 2006 2005
------------- ---------- -------------
(unaudited) (unaudited)
Assets
Current assets
Cash and cash equivalents $ 33,027 $ 19,018 $ 25,118
Investment securities 27,922 26,733 15,823
Accounts receivable 230,239 240,130 212,433
Inventories 326,538 302,941 269,695
Current deferred income taxes 52,215 52,058 49,870
Prepaid expenses and other current assets 21,068 16,298 39,270
---------- ---------- ----------
Total current assets 691,009 657,178 612,209
Property and equipment 617,813 606,907 594,464
Less accumulated depreciation 298,260 287,549 275,758
---------- ---------- ----------
319,553 319,358 318,706
Restricted cash 400,000 400,000 400,000
Goodwill 183,205 152,183 144,362
Other intangible assets 134,078 132,426 144,315
Non-current deferred income taxes 43,380 43,143 26,828
Other non-current assets 44,449 46,336 44,617
---------- ---------- ----------
$1,815,674 $1,750,624 $1,691,037
========== ========== ==========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 172,680 $ 179,740 $ 142,361
Notes payable 5,740 20,081 19,303
Payroll and related taxes 41,458 54,153 37,788
Accrued customer programs 45,084 49,534 40,129
Accrued liabilities 41,164 45,335 56,821
Accrued income taxes 17,501 14,132 25,903
Current deferred income taxes 9,837 8,456 10,980
---------- ---------- ----------
Total current liabilities 333,464 371,431 333,285
Non-current liabilities
Long-term debt 678,272 621,717 670,814
Non-current deferred income taxes 105,427 81,923 56,586
Other non-current liabilities 36,922 34,809 37,715
---------- ---------- ----------
Total non-current liabilities 820,621 738,449 765,115
Shareholders' equity
Preferred stock, without par value, 10,000 shares authorized -- -- --
Common stock, without par value, 200,000 shares authorized 510,132 516,098 523,093
Accumulated other comprehensive income (loss) 17,461 3,593 (4,402)
Retained earnings 133,996 121,053 73,946
---------- ---------- ----------
Total shareholders' equity 661,589 640,744 592,637
---------- ---------- ----------
$1,815,674 $1,750,624 $1,691,037
========== ========== ==========
Supplemental Disclosures of Balance Sheet Information
Allowance for doubtful accounts $ 12,195 $ 11,178 $ 10,207
Allowance for inventory $ 40,992 $ 42,509 $ 37,164
Working capital $ 357,545 $ 285,747 $ 278,924
Preferred stock, shares issued -- -- --
Common stock, shares issued 92,556 92,922 93,561
See accompanying notes to condensed consolidated financial statements.
-3-
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
First Quarter
-------------------
2007 2006
-------- --------
Cash Flows From (For) Operating Activities
Net income $ 16,882 $ 12,911
Adjustments to derive cash flows
Depreciation and amortization 13,502 14,296
Share-based compensation 2,434 2,403
Deferred income taxes (1,157) (1,072)
-------- --------
Sub-total 31,661 28,538
-------- --------
Changes in operating assets and liabilities
Accounts receivable 8,550 (1,559)
Inventories (25,211) 3,776
Accounts payable (5,785) (723)
Payroll and related taxes (12,423) (4,631)
Accrued customer programs (4,450) (1,537)
Accrued liabilities (4,203) (2,938)
Accrued income taxes 3,474 2,757
Other 1,983 (5,961)
-------- --------
Sub-total (38,065) (10,816)
-------- --------
Net cash from (for) operating activities (6,404) 17,722
-------- --------
Cash Flows (For) From Investing Activities
Purchase of securities (52,340) (19,438)
Proceeds from sales of securities 51,074 21,372
Additions to property and equipment (8,113) (8,228)
-------- --------
Net cash for investing activities (9,379) (6,294)
-------- --------
Cash (For) From Financing Activities
Repayments of short-term debt, net (14,331) (6,104)
Borrowings of long-term debt 55,000 15,000
Tax (expense) benefit of stock transactions 616 (500)
Issuance of common stock 2,222 2,000
Repurchase of common stock (11,238) (8,558)
Cash dividends (3,939) (3,741)
-------- --------
Net cash (for) from financing activities 28,330 (1,903)
-------- --------
Net increase in cash and cash equivalents 12,547 9,525
Cash and cash equivalents, at beginning of period 19,018 16,707
Effect of exchange rate changes on cash 1,462 (1,114)
-------- --------
Cash and cash equivalents, at end of period $ 33,027 $ 25,118
======== ========
Supplemental Disclosures of Cash Flow Information
Cash paid/received during the period for:
Interest paid $ 8,309 $ 9,210
Interest received $ 4,700 $ 5,641
Income taxes paid $ 1,797 $ 2,928
Income taxes refunded $ -- $ 4,866
See accompanying notes to condensed consolidated financial statements.
-4-
PERRIGO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(in thousands, except per share amounts)
Perrigo Company is a leading global healthcare supplier and the world's largest
manufacturer of over-the-counter (OTC) pharmaceutical and nutritional products
for the store brand market. The Company also develops and manufactures generic
prescription (Rx) drugs, active pharmaceutical ingredients (API) and consumer
products.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals and other adjustments) considered necessary for a fair presentation
have been included. The Company has reclassified certain amounts in the prior
years to conform to the current year presentation.
Operating results for the quarter ended September 30, 2006 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 this statement is
not expected to have a material impact on the Company's consolidated financial
position or results of operations.
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 results of
operations or financial position.
-5-
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 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 results of operations or financial
position.
NOTE B - EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the basic and
diluted earnings per share (EPS) calculation follows:
First Quarter
-----------------
2007 2006
------- -------
Numerator:
Net income used for both basic and diluted EPS $16,882 $12,911
======= =======
Denominator:
Weighted average shares outstanding for basic EPS 92,168 93,188
Dilutive effect of share-based awards 1,353 1,126
------- -------
Weighed average shares outstanding for diluted EPS 93,521 94,314
======= =======
Share-based awards outstanding that are anti-dilutive were 2,787 and 3,852 for
the first quarter of fiscal 2007 and 2006, respectively. These share-based
awards were excluded from the diluted EPS calculation.
-6-
NOTE C - INVENTORIES
Inventories are summarized as follows:
September 30, July 1, September 24,
2006 2006 2005
------------- -------- -------------
Finished goods $163,793 $148,603 $133,347
Work in process 77,220 70,974 60,708
Raw materials 85,525 83,364 75,640
-------- -------- --------
$326,538 $302,941 $269,695
======== ======== ========
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 $40,992 at September 30, 2006, $42,509 at July 1, 2006
and $37,164 at September 24, 2005. The Company recorded additional charges of
$1,250 in the first quarter of fiscal 2007 for estimated obsolete
pseudoephedrine inventory on hand.
NOTE D - GOODWILL
There were no acquisitions, dispositions or impairments of goodwill during the
first quarter of 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 11,223 26,100
Currency translation adjustment 1,048 2,226 1,648 4,922
------- ------- ------- --------
Balance as of September 30, 2006 $45,500 $78,509 $59,196 $183,205
======= ======= ======= ========
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, however the
adjustment recorded was the Company's best estimate of the liability at
September 30, 2006. 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.
-7-
NOTE E - INTANGIBLE ASSETS
Intangible assets and related accumulated amortization consist of the following:
September 30, 2006 July 1, 2006
----------------------- -----------------------
Accumulated Accumulated
Gross Amortization Gross Amortization
-------- ------------ -------- ------------
Developed product technology/formulation $121,629 $12,801 $117,615 $10,656
Distribution and license agreements 19,275 4,260 18,755 3,765
Customer relationships 4,900 3,028 4,900 2,698
Trademarks 9,721 1,358 9,503 1,228
-------- ------- -------- -------
Total $155,525 $21,447 $150,773 $18,347
======== ======= ======== =======
The Company recorded a charge for amortization expense of $3,100 and $3,635 for
the first quarter of fiscal 2007 and 2006, respectively, for intangible assets
subject to amortization.
The estimated amortization expense for each of the following five years is as
follows:
Fiscal Year Amount
----------- -------
2007(1) $ 8,475
2008 10,700
2009 11,200
2010 9,300
2011 9,300
(1) Reflects remaining nine months of fiscal 2007.
-8-
NOTE F - OUTSTANDING DEBT
Total borrowings outstanding are summarized as follows:
September 30, July 1, September 24,
2006 2006 2005
------------- -------- -------------
Short-term debt:
Swingline loan $ 5,740 $ 19,195 $ 4,135
Bank loan - Germany subsidiary -- -- 8,651
Bank loan - U.K. subsidiary -- -- 2,161
Bank loans - Mexico subsidiary -- 886 4,356
-------- -------- --------
Total 5,740 20,081 19,303
-------- -------- --------
Long-term debt:
Revolving line of credit 135,000 80,000 130,000
Term loan 100,000 100,000 100,000
Letter of undertaking - Israel subsidiary 400,000 400,000 400,000
Debenture - Israel subsidiary 43,272 41,717 40,814
-------- -------- --------
Total 678,272 621,717 670,814
-------- -------- --------
Total debt $684,012 $641,798 $690,117
======== ======== ========
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.
On October 30, 2006, the Company entered into a Second Amendment to its Credit
Agreement, dated as of March 16, 2005. Under the Second Amendment, the
Applicable Margin for Eurocurrency Loans and the facility fees were reduced. The
maturity date of the credit facility was extended from March 16, 2010 to October
30, 2011 and the aggregate amount of revolving commitment may be increased to
$450,000, subject to certain conditions. Previously, the aggregate amount of
revolving commitment was $325,000.
NOTE G - 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 710
shares of its common stock for $11,238 and 606 shares for $8,558 during the
first quarter of fiscal 2007 and 2006, respectively. Private party transactions
accounted for 13 shares in the first quarter of fiscal 2007 and 110 shares in
the first quarter of fiscal 2006.
-9-
NOTE H - 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
-----------------
2007 2006
------- -------
Net income $16,882 $12,911
Other comprehensive income:
Change in fair value of derivative instruments, net of tax (1,786) 2,029
Foreign currency translation adjustments 16,297 (5,074)
Change in fair value of investment securities, net of tax (643) 330
------- -------
Comprehensive income $30,750 $10,196
======= =======
NOTE I - 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.
On July 25, 2006 the court issued an order preliminarily approving the
settlement of the Indirect Purchaser Action. However, the settlement is subject
to final court approval. The Company recorded a charge of $4,500 in the fourth
quarter of fiscal 2005 as its best estimate of the combined expected cost of the
settlements. While the Company believes the estimate of the charge is
reasonable, the total amount of future payments related to these lawsuits cannot
be assured and may be materially different than the recorded charge.
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 United
States Food and Drug Administration (FDA). These cases allege that the plaintiff
suffered injury, generally some type of stroke, from ingesting PPA-containing
products. Many of these suits also name other manufacturers or retailers of
PPA-containing products. These personal
-10-
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 $460, not to exceed 50% of
the joint venture's debt, that is not recorded on the Company's condensed
consolidated balance sheets as of September 30, 2006.
NOTE J - 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 related to one-time acquisition integration costs and certain corporate
services that are not allocated to the segments. The first quarter of fiscal
2006 included charges of $318, $1,747 and $2,697 for the Consumer Healthcare
segment, API segment and Other category, respectively, for the write-off of the
step-up in the value of inventory resulting from the Agis acquisition. The
write-off of the inventory step-up value was completed in the first quarter of
fiscal 2006.
Consumer Rx Pharma- Unallocated
Healthcare ceuticals API Other expenses Total
---------- ---------- ------- ------- ----------- --------
First Quarter 2007
Net sales $241,809 $31,425 $29,779 $37,202 -- $340,215
Operating income (loss) $ 17,100 $ 5,787 $ 4,658 $ 2,664 $(4,497) $ 25,712
Amortization of intangibles $ 847 $ 1,584 $ 429 $ 240 -- $ 3,100
First Quarter 2006
Net sales $227,100 $29,094 $26,791 $36,749 -- $319,734
Operating income (loss) $ 13,327 $ 3,836 $ 6,586 $ (864) $(2,156) $ 20,729
Amortization of intangibles $ 1,382 $ 1,584 $ 429 $ 240 -- $ 3,635
NOTE K - RESTRUCTURING
In the fourth quarter of fiscal 2006, as a result 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 would have resulted in the closure of two
Michigan plants that primarily manufacture these products. Subsequent to
September 30, 2006, the
-11-
Company entered into an agreement to sell one of the Michigan plants intended to
be shutdown. The Company expects to record a one-time gain of approximately
$2,000 in the second quarter of fiscal 2007 as a result of the sale of the
plant. The remaining plant is expected to be phased out and closed by the end of
the calendar year. The Company expects to incur a charge of approximately $2,000
in fiscal 2007 for employee-related and plant shutdown costs. As of September
30, 2006, the Company had not incurred any of the expected charges related to
this restructuring.
In connection with the Agis acquisition, the Company reviewed its Consumer
Healthcare operating strategies. As a result, the Company approved a
restructuring plan and recorded a charge to the Company's Consumer Healthcare
segment. The implementation of the plan began on March 24, 2005 and was
completed in its entirety by July 2006. Certain assets were written down to
their fair value resulting in an impairment charge of $3,232 in the fourth
quarter of fiscal 2005. In addition, the Company terminated 22 employees
performing in certain executive and administrative roles. Accordingly, the
Company recorded a charge for employee termination benefits of $3,150 in the
fourth quarter of fiscal 2005. The activity of the restructuring reserve is as
follows:
Fiscal 2005 Restructuring
Employee Termination
-------------------------
Balance at July 1, 2006 $ 105
Payments (105)
-----
Balance at September 30, 2006 $ --
=====
In connection with the Agis acquisition, the Company accrued $2,727 of
restructuring costs, consisting of employee termination benefits for 60
employees and certain lease termination costs. The Company accrued an additional
amount of $1,206 for employee termination benefits in the first quarter of
fiscal 2006. For accounting purposes, these restructuring costs were included in
the allocation of the total purchase price. The remaining employee termination
benefits are expected to be paid over the next three to six months. 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
Payments (323) (32)
----- ------
Balance at September 30, 2006 $ 548 $1,066
===== ======
NOTE L - SUBSEQUENT EVENT
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 remote and there have been no
reports of injury or illness related to this incident. The total cost of the
recall for sales returns, handling of on-hand inventories and disposal is
estimated to be approximately $2,900. The Company determined that $1,026 of the
total cost of the recall related to the first quarter of fiscal 2007. The
remainder of the charge will be recorded in the second quarter of fiscal 2007.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST 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. Segment information for prior periods has been restated to conform to
the current year presentation. 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 quarter of fiscal 2007 are not
necessarily indicative of the results that may be expected for a full year.
Current Year Results - Net sales for the first quarter of fiscal 2007 were
$340,215, an increase of 6% over fiscal 2006. The increase spanned all of the
Company's segments and included new product sales of approximately $11,000.
Gross profit was $94,617, an increase of 9% over fiscal 2006, generally in line
with the volume increase in net sales. The gross profit percentage in the first
quarter of fiscal 2007 was 27.8% up from 27.2% last year. Operating expenses
were $68,905, an increase of 4% over fiscal 2006, but as a percent of net sales
were slightly lower than in fiscal 2006. Net income was $16,882, an increase of
31% over fiscal 2006. However, the first quarter of fiscal 2006 was unfavorably
impacted by the write-off of the step up in inventory related to the Agis
acquisition. Further details for each reportable segment are included in the
following Results of Operations.
Product Recall (Subsequent Event) - 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
remote and there have been no reports of injury or illness related to this
incident. The total cost of the recall for sales returns, handling of on-hand
inventories and disposal is estimated to be approximately $2,900. The Company
determined that $1,026 of the total cost of the recall related to the first
quarter of fiscal 2007. The remainder of the charge will be recorded in the
second quarter of fiscal 2007. This product recall related to the Consumer
Healthcare segment.
-13-
RESULTS OF OPERATIONS
CONSUMER HEALTHCARE
First Quarter
-------------------
2007 2006
-------- --------
Net sales $241,809 $227,100
Gross profit $ 56,201 $ 52,644
Gross profit % 23.2% 23.2%
Operating expenses $ 39,101 $ 39,317
Operating expenses % 16.2% 17.3%
Operating income $ 17,100 $ 13,327
Operating income % 7.1% 5.9%
Net Sales
First quarter net sales for fiscal 2007 increased 6% or $14,709 compared to
fiscal 2006. The increase was comprised primarily of $9,100 of domestic sales
and $5,000 of international sales. The domestic increase resulted from $7,300 of
new product sales in the smoking cessation, antacid and nutrition categories
along with an $8,000 increase from higher unit sales of existing products in the
smoking cessation, cough/cold, and analgesics categories. These combined
domestic increases were partially offset by sales declines from the combination
of pseudoephedrine and phenylephrine-containing products that were $6,200 lower
in the first quarter of fiscal 2007 compared to the first quarter of 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. Sales of these products in the first quarter of fiscal 2007
were approximately $19,000 lower than the first quarter of fiscal 2006. Sales of
pseudoephedrine products are expected to be $30,000 to $35,000 for fiscal 2007,
excluding expected sales of pseudoephedrine replacement products. The Company
carefully monitors its inventory levels and expected sales for these products,
and, consequently, recorded a charge of approximately $1,250 in the first
quarter of fiscal 2007 for estimated obsolete inventory on hand.
Gross Profit
First quarter gross profit for fiscal 2007 increased 7% or $3,557 compared to
fiscal 2006 primarily due to increases in sales volume in both the domestic and
international operations. The increase resulted from higher gross margins
attributed to new products and improved gross margins in the international
operations partially offset by an unfavorable mix of products sold, higher
inventory obsolescence costs in the domestic operations and costs related to a
product recall.
Operating Expenses
First quarter operating expenses for fiscal 2007 were essentially flat compared
to fiscal 2006.
-14-
RX PHARMACEUTICALS
First Quarter
-----------------
2007 2006
------- -------
Net sales $31,425 $29,094
Gross profit $13,787 $11,625
Gross profit % 43.9% 40.0%
Operating expenses $ 8,000 $ 7,789
Operating expenses % 25.5% 26.8%
Operating income $ 5,787 $ 3,836
Operating income % 18.4% 13.2%
Net Sales
First quarter net sales for fiscal 2007 increased 8% or $2,331 compared to
fiscal 2006. This increase was primarily due to new product sales of $3,700 and
higher non-product revenues of approximately $4,000. These increases were
partially offset by pricing pressure on current products sold under Abbreviated
New Drug Applications (ANDA) and an adjustment for customer-related programs,
such as rebates, of approximately $3,300. Fiscal 2006 was unfavorably impacted
by a product recall, described below, that decreased sales $1,350.
Gross Profit
First quarter gross profit for fiscal 2007 increased 19% or $2,162 compared to
fiscal 2006. The increase was primarily due to non-product revenues, new product
sales and the absence of the mesalamine product recall. The increase was
partially offset by pricing pressure on current ANDA products and an adjustment
for customer-related programs.
In the first quarter of fiscal 2006, the Company initiated a voluntary
retail-level recall of all affected lots of 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
First quarter operating expenses for fiscal 2007 increased 3% or $211 during
fiscal 2007 compared to fiscal 2006. Research and development spending in this
segment was $4,312 for fiscal 2007 and $4,849 for fiscal 2006.
-15-
API
First Quarter
-----------------
2007 2006
------- -------
Net sales $29,779 $26,791
Gross profit $11,879 $12,004
Gross profit % 39.9% 44.8%
Operating expenses $ 7,221 $ 5,418
Operating expenses % 24.2% 20.2%
Operating income $ 4,658 $ 6,586
Operating income % 15.6% 24.6%
Net Sales
First quarter net sales for fiscal 2007 increased 11% or $2,988 compared to
fiscal 2006. The increase was primarily due to changes in the sales mix of both
products and customers, including strong sales of finished dosage forms in
Europe and the introduction of existing products into new geographic markets.
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
First quarter gross profit for fiscal 2007 decreased 1% or $125 compared to
fiscal 2006, primarily due to the changes in the sales mix of products and
customers as well as fixed overhead costs spread over lower production levels.
Fiscal 2006 included a charge of $1,747 for the write-off of the step-up in the
value of inventory resulting from the Agis acquisition.
Operating Expenses
First quarter operating expenses for fiscal 2007 increased 33% or $1,803
compared to fiscal 2006. The increase was primarily due to higher sales
commissions and research and development costs. Research and development
spending in this segment was $2,389 for fiscal 2007 and $1,584 for fiscal 2006.
-16-
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.
First Quarter
-----------------
2007 2006
------- -------
Net sales $37,202 $36,749
Gross profit $12,750 $10,643
Gross profit % 34.3% 29.0%
Operating expenses $10,086 $11,507
Operating expenses % 27.1% 31.3%
Operating income (loss) $ 2,664 $ (864)
Operating income (loss) % 7.2% (2.4)%
First quarter net sales for fiscal 2007 increased 1% or $453 compared to fiscal
2006. First quarter gross profit for fiscal 2007 increased 20% or $2,107
compared to fiscal 2006. The first quarter 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. First quarter operating expenses for fiscal
2007 decreased 12% or $1,421 compared to fiscal 2006 primarily due to lower
sales commissions and administration expenses.
UNALLOCATED EXPENSES
Unallocated expenses for the first quarter were $4,497 for fiscal 2007 and
$2,156 for fiscal 2006. These expenses were comprised of certain corporate
services that were not allocated to the segments. The increase in fiscal 2007
was primarily due to wages and benefits.
INTEREST AND OTHER (CONSOLIDATED)
Interest expense for the first quarter was $9,340 for fiscal 2007 and $9,504 for
fiscal 2006. Interest income for the first quarter was $4,754 for fiscal 2007
and $5,478 for fiscal 2006.
INCOME TAXES (CONSOLIDATED)
The effective tax rate for the first quarter was 20.3% for fiscal 2007 and 28.1%
for fiscal 2006. The relative composition of U.S. and Foreign income has changed
considerably for the Company. This change is expected to result in a lower
effective tax rate than the Company has historically experienced. The tax rate
will fluctuate from quarter to quarter depending on the composition of income
before tax. Sixty-eight percent of income before tax in the first quarter of
fiscal 2007 was contributed by foreign entities, generally Israeli, with a tax
rate lower than the U.S. statutory rate. The effective tax rate for succeeding
quarters is expected to be higher as the Company's U.S. income is likely to
represent a higher percentage of the total income than in the first quarter. The
estimated annualized effective tax rate for fiscal 2007 is between 30% and 32%.
-17-
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investment securities increased $20,008 to $60,949 at
September 30, 2006 from $40,941 at September 24, 2005. Working capital,
including cash, increased $78,621 to $357,545 at September 30, 2006 from
$278,924 at September 24, 2005. The increase in working capital was due
primarily to higher seasonal accounts receivable and the build-up of new product
and reformulation inventory. The Company's working capital balance is expected
to return to more normalized levels throughout the rest of fiscal 2007.
Cash used for operating activities increased by $24,126 to $6,404 for fiscal
2007 compared to cash provided from operating activities of $17,722 for fiscal
2006. The increase in cash used for operations was primarily related to the
strategic building of inventories and an increase in employee bonuses paid as a
result of fiscal 2006 operating results. Inventory levels tend to be higher in
the first quarter as the Company's operations focus on preparing to meet
customer requirements during peak demand of the cough/cold/flu season. In
addition, the Company's new product development process has added to the
inventory pipeline at September 30, 2006 in preparation for upcoming product
launches.
Cash used for investing activities increased $3,085 to $9,379 for fiscal 2007
compared to $6,294 for fiscal 2006. Capital expenditures for facilities and
equipment were for normal replacement and productivity enhancements. Capital
expenditures are anticipated to be $40,000 to $50,000 for fiscal 2007.
Cash from financing activities increased $30,233 to $28,330 for fiscal 2007
compared to cash used for financing activities of $1,903 for fiscal 2006. The
increase was primarily due to borrowings of long-term debt to fund the Company's
working capital requirements.
The Company repurchased 710 shares of its common stock for $11,238 and 606
shares for $8,558 during the first quarter of fiscal 2007 and 2006,
respectively. Private party transactions accounted for 13 shares in the first
quarter of fiscal 2007 and 110 shares in the first quarter of fiscal 2006.
The Company paid quarterly dividends in the first quarter of $3,939 and $3,741,
or $0.043 and $0.040 per share, for 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 $460, not to exceed 50% of
the joint venture's debt that is not recorded on the Company's condensed
consolidated balance sheet as of September 30, 2006.
During the first quarter of fiscal 2007, no material change in contractual
obligations occurred.
-18-
CRITICAL ACCOUNTING POLICIES
Determination of certain amounts in the Company's financial statements requires
the use of estimates. These estimates are based upon the Company's historical
experiences combined with management's understanding of current facts and
circumstances. Although the estimates are considered reasonable, actual results
could differ from the estimates. The accounting policies, discussed below, are
considered by management to require the most judgment and are critical in the
preparation of the financial statements. These policies are reviewed by the
Audit Committee. Other 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.
The Company maintains accruals for customer programs that consist primarily of
chargebacks, rebates and shelf stock adjustments. Certain of these accruals are
recorded in the balance sheet as current liabilities and others are recorded as
a reduction in accounts receivable.
A chargeback relates to an agreement the Company has with a wholesaler, a
pharmaceutical buying group or a retail customer that will ultimately purchase
product from a wholesaler 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 accrual for chargebacks
is based on historical chargeback experience and estimated wholesaler inventory
levels, as well as expected sell-through levels by wholesalers to retailers.
Rebates are payments issued to the customer when certain criteria are met such
as 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.
-19-
Changes in these estimates and assumptions related to customer programs may
result in additional accruals. The following table summarizes the activity for
the balance sheet for accounts receivable allowances and customer program
accruals:
First Fiscal First
Quarter Year Quarter
2007 2006 2006
-------- --------- --------
CUSTOMER RELATED ACCRUALS
Balance, beginning of period $ 54,456 $ 48,378 $ 48,378
Provision recorded 41,834 158,210 29,575
Credits processed (48,497) (152,132) (31,564)
-------- --------- --------
Balance, end of the period $ 47,793 $ 54,456 $ 46,389
======== ========= ========
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 $12,195
at September 30, 2006, $11,178 at July 1, 2006 and $10,207 at September 24,
2005.
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 $40,992 at September 30, 2006, $42,509 at July 1,
2006 and $37,164 at September 24, 2005.
Goodwill - Goodwill is tested for impairment annually or more frequently if
changes in circumstances or the occurrence of events suggest impairment exists.
The test for impairment requires the Company to make several estimates about
fair value, most of which are based on projected future cash flows. The
estimates associated with the goodwill impairment tests are considered critical
due to the judgments required in determining fair value amounts, including
projected future cash flows. Changes in these estimates may result in the
recognition of an impairment loss. The goodwill allocated to the API and Rx
Pharmaceuticals segments is tested annually for impairment in the third quarter
of the fiscal year. Goodwill allocated to the Consumer Healthcare segment is
tested annually for impairment in the second quarter of the fiscal year. In
fiscal 2006, although the testing performed on the Company's U.K. component
within the Consumer Healthcare segment indicated that the estimated fair value
exceeded the carrying value, these values were closer than they had been in
previous years. The narrowing of the difference in these values increases the
possibility of an impairment charge in future periods. The goodwill balance of
the U.K. component was $37,395 as of September 30, 2006. Goodwill was $183,205
at September 30, 2006, $152,183 at July 1, 2006 and $144,362 at September 24,
2005.
Other Intangible Assets - Other intangible assets subject to amortization
consist of developed product 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
-20-
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 had a net carrying value of $134,078 at September 30, 2006,
$132,426 at July 1, 2006 and $144,315 at September 24, 2005.
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 $2,069 at September 30, 2006, $1,937 at July 1, 2006 and $2,182 at
September 24, 2005. The accrual for workers' compensation claims was $2,016 at
September 30, 2006, $1,919 at July 1, 2006 and $2,703 at September 24, 2005.
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 September 30, 2006, the Company had invested cash, cash equivalents
and investment securities of $60,949 and short and long-term debt, net of
restricted cash, of $284,012.
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. Significant currency
fluctuations could adversely impact foreign revenues; however, the Company
cannot predict future changes in foreign currency exposure.
-21-
Item 4. Controls and Procedures
As of September 30, 2006, 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's implementation of an enterprise resource planning (ERP)
system at its Israeli location to remediate the majority of the
previously disclosed weaknesses is expected to be completed in the
second quarter of fiscal 2007.
- The Company continues to make minor changes in its control processes
to reduce reliance on spreadsheets for financial reporting, improve
segregation of duties issues and alleviate other less critical control
deficiencies.
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
September 30, 2006 were identified that have materially affected, or are
reasonably likely to materially affect, the Company's ICFR.
-22-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In August 2004, the Company reached a settlement with the 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. On July 26, 2006 the court issued an
order preliminarily approving the settlement of the Indirect Purchaser Action.
However, the Indirect Purchaser Action settlement is subject to final court
approval. The Company recorded a charge of $4,500 in the fourth quarter of
fiscal 2005 as its best estimate of the combined expected cost of the
settlements. While the Company believes the estimate of the charge is
reasonable, the total amount of future payments related to these lawsuits cannot
be assured and may be materially different than the recorded charge.
Item 1A. Risk Factors
The Company's Annual Report on Form 10-K filed for the fiscal year ended July 1,
2006 includes a detailed discussion of the Company's risk factors. During the
first quarter of fiscal 2007, there have been no material changes to the risk
factors that were included in the Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On February 15, 2006, 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 17, 2007. 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.
-23-
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 Price Shares Purchased Shares
of Shares Paid as Part of Publicly Available
Fiscal 2007 Purchased (1) per Share Announced Plans for Purchase
----------- ------------- --------- ------------------- ------------
$54,120
July 2 to August 5 281 $15.63 281 $49,727
August 6 to September 2 248 $15.74 247 $45,834
September 3 to September 30 181 $16.23 169 $43,087
--- ---
Total 710 697
(1) Private party transactions accounted for the purchase of 1 share in the
period from August 6 to September 2 and 12 shares in the period from
September 3 to September 30.
Item 6. Exhibits
Exhibit
Number Description
------- -----------
10(a) Employment Agreement dated as of September 8, 2006 by and between
Perrigo Company and Joseph C. Papa, incorporated by reference from
Registrant's Form 8-K filed on September 12, 2006.
10(b) Second Amendment to Employment Agreement dated as of September 9, 2006
by and between Perrigo Company and David T. Gibbons, incorporated by
reference from Registrant's Form 8-K filed on September 12, 2006.
10(c) Form of Long-Term Incentive Award Agreement, incorporated by reference
from the Registrant's Form 8-K filed on August 22, 2006.
10(d) Form of Indemnity Agreement.
10(e) Second Amendment to Credit Agreement, dated as of October 30, 2006,
among Perrigo Company, the Foreign Subsidiary Borrowers, JPMorgan
Chase Bank, N.A., as Administrative Agent for the Lenders, Bank Leumi
USA, as Syndication Agent, and Bank of America, N.A., LaSalle Bank
Midwest National Association, formerly known as Standard Federal Bank
N.A. and National City Bank of the Midwest, as Documentation Agents,
incorporated by reference from the Registrant's Form 8-K filed on
November 2, 2006.
31 Rule 13a-14(a) Certifications.
32 Section 1350 Certifications.
-24-
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: November 9, 2006 By: /s/ Joseph C. Papa
------------------------------------
Joseph C. Papa
President and Chief Executive
Officer
Date: November 9, 2006 By: /s/ Judy L. Brown
------------------------------------
Judy L. Brown
Executive Vice President and Chief
Financial Officer
(Principal Accounting and Financial
Officer)
-25-