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UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: APRIL 3, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ___
COMMISSION FILE NUMBER 0-19725
PERRIGO COMPANY
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 38-2799573
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
515 EASTERN AVENUE
ALLEGAN, MICHIGAN 49010
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(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
(616) 673-8451
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS OF COMMON STOCK MAY 3, 1999
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WITHOUT PAR 73,288,540 SHARES
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PERRIGO COMPANY AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated statements of income--For the thirteen-week
period ended April 3, 1999, the period from July 1, 1998 through
April 3, 1999 and for the three and nine months ended March 31, 1998 3
Condensed consolidated balance sheets--April 3, 1999
and June 30, 1998 4
Condensed consolidated statements of cash flows--For the period from
July 1, 1998 through April 3, 1999 and for the nine months ended
March, 1998 5
Notes to condensed consolidated financial statements--
April 3, 1999 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 17
</TABLE>
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PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Third Quarter Year-To-Date
-------------------------------------- -------------------------------
Period From
Thirteen-Week Three Months July 1, 1998 Nine Months
Period Ended Ended Through Ended
April 3, March 31, April 3, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $251,426 $223,676 $689,845 $688,187
Cost of sales 193,563 167,468 542,382 506,222
-------- ------- ------- -------
Gross profit 57,863 56,208 147,463 181,965
-------- ------- ------- -------
Operating expenses
Distribution 9,658 8,156 26,376 23,647
Research and development 3,525 3,402 10,982 9,343
Selling and administrative 25,375 26,906 90,383 82,399
Restructuring and redesign - 110 - 593
Unusual litigation 1,954 1,620 3,628 5,355
-------- ------- ------- -------
40,512 40,194 131,369 121,337
-------- ------- ------- -------
Operating income 17,351 16,014 16,094 60,628
Interest and other 3,001 688 9,038 1,752
-------- ------- ------- -------
Income before income taxes 14,350 15,326 7,056 58,876
Income tax expense 4,638 5,851 2,597 21,751
-------- ------- ------- -------
Net income $ 9,712 $ 9,475 $ 4,459 $37,125
======== ======= ======= =======
Basic earnings per share $ 0.13 $ 0.13 $ 0.06 $ 0.50
======== ======= ======= =======
Diluted earnings per share $ 0.13 $ 0.13 $ 0.06 $ 0.49
======== ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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PERRIGO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
April 3, June 30,
1999 1998
-------- --------
ASSETS (Unaudited)
Current assets
<S> <C> <C>
Cash and cash equivalents $ 1,520 $ 1,496
Accounts receivable, net of allowances of $3,247 and
$2,691, respectively 120,419 74,601
Inventories 205,398 181,467
Prepaid expenses and other current assets 9,282 5,817
Current deferred income taxes 41,627 42,675
Assets held for sale 68,418 66,398
-------- --------
Total current assets 446,664 372,454
Property and equipment 331,109 303,038
Less accumulated depreciation 128,008 112,394
-------- --------
203,101 190,644
Goodwill, net of accumulated amortization of $9,854 and
$9,094, respectively 19,980 20,741
Other 14,836 12,022
-------- --------
$684,581 $595,861
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 91,417 $ 78,791
Notes payable 6,865 5,379
Payrolls and related taxes 17,772 13,266
Accrued expenses 40,196 40,791
Income taxes 2,225 3,293
-------- --------
Total current liabilities 158,475 141,520
Deferred income taxes 28,111 27,264
Long-term debt 164,727 81,619
Minority interest 515 380
Shareholders' equity
Preferred stock, without par value, 10,000 shares authorized,
none issued - -
Common stock, without par value, 200,000 shares authorized,
73,282 and 74,692 issued, respectively 101,924 116,660
Unearned compensation (70) (42)
Retained earnings 232,919 228,460
Accumulated other comprehensive income (2,020) -
-------- --------
Total shareholders' equity 332,753 345,078
-------- --------
$684,581 $595,861
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Period From Nine
July 1, 1998 Months
Through Ended
April 3, March 31,
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 4,459 $ 37,125
Depreciation and amortization 16,458 22,497
Write-off of Russian investment 14,177 -
-------- --------
35,094 59,622
Accounts receivable (49,142) (7,075)
Inventories (25,369) (33,038)
Current and deferred income taxes 1,862 2,672
Increase in long-term licensing agreements (8,700) -
Assets held for sale (2,020) -
Accounts payable 12,626 8,863
Other 553 (4,282)
-------- --------
Net cash (for) from operating activities (35,096) 26,762
-------- --------
Cash Flows For Investing Activities:
Additions to property and equipment (28,071) (49,007)
Business acquisitions, net of cash acquired - (15,827)
Other (6,667) (2,877)
-------- --------
Net cash for investing activities (34,738) (67,711)
-------- --------
Cash Flows From (For) Financing Activities:
Borrowings of long-term debt, net 83,108 58,428
Borrowings of short-term debt, net 1,486 -
Issuance of common stock 84 496
Repurchase of common stock (14,820) (30,195)
-------- --------
Net cash from financing activities 69,858 28,729
-------- --------
Net Decrease in Cash and Cash Equivalents 24 (12,220)
Cash and Cash Equivalents, at Beginning of Period 1,496 14,356
-------- --------
Cash and Cash Equivalents, at End of Period $ 1,520 $ 2,136
======== ========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 6,459 $ 1,966
Income taxes paid $ 299 $ 18,603
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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PERRIGO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 1999
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 changed its fiscal year end from June 30 to the 52 or
53-week period that ends on the Saturday closest to June 30, effective for
fiscal year 1999. After the transition year of fiscal year 1999, the Company's
quarters will each be comprised of 13 weeks and end on a Saturday, except in
certain years when the Company will have one quarter comprised of 14 weeks.
During fiscal year 1999, the first quarter includes the period from July 1
through October 3, 1998. The second through fourth quarters will each be
comprised of 13 weeks ending on January 2, April 3, and July 3, 1999,
respectively. Prior to fiscal year 1999, the Company's quarters were comprised
of three calendar months ending on September 30, December 31, March 31 and June
30.
Operating results for the period from July 1, 1998 through April 3,
1999 are not necessarily indicative of the results that may be expected for the
year ending July 3, 1999. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended June 30, 1998.
INTERNATIONAL OPERATIONS
The Company has a Russian investment that is accounted for using the
equity method. Due to the collapse of the Russian economy, the Company wrote off
its net investment of $1,640 and also wrote off inventory of $1,663 and accounts
and notes receivable of $10,874 related to this Russian investment for a total
of $14,177 in the first quarter of fiscal year 1999. The net investment amount
is included in other income and expense; the inventory amount is included in
cost of goods sold; and the accounts and notes receivable amount is included in
selling and administrative expense.
In January 1999, the Company began to translate its Mexican operation's
foreign currency denominated assets and liabilities into U.S. dollars at current
rates of exchange as of the balance sheet date, and income and expense items at
the average exchange rate for the reporting period. Prior to January 1999, the
Mexican economy was considered "highly inflationary" under the provisions of
SFAS No. 52, "Foreign Currency Translation." Accordingly, a combination of
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current and historical exchange rates were used in remeasuring the local
currency financial statements of the Company's Mexican operations, and the
resulting exchange adjustments were included in income. The one-time translation
adjustment associated with this change was a translation gain of $371, that was
recorded as an increase in the cumulative translation adjustment account, a
component of Other comprehensive income. The balance in the cumulative
translation account, which is included in Other comprehensive income, was a net
translation loss of $99 as of April 3, 1999.
EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the "basic"
and "diluted" Earnings per Share ("EPS") calculations follows:
<TABLE>
<CAPTION>
Third Quarter Year-To-Date
-------------------------------- -----------------------------
Period From
Thirteen-Week Three Months July 1, 1998 Nine Months
Period Ended Ended Through Ended
April 3, March 31, April 3, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income used for both "basic"
and "diluted" EPS calculation $ 9,712 $ 9,475 $ 4,459 $37,125
======= ======= ======= =======
Denominator:
Weighted average shares outstanding
For the period - used for "basic"
EPS calculation 73,265 74,622 73,662 74,960
Dilutive effect of stock options 254 699 295 982
------- ------- ------- -------
Weighted average shares outstanding
For the period - used for "diluted"
EPS calculation 73,519 75,321 73,957 75,942
======= ======= ======= =======
</TABLE>
NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". Comprehensive income is defined as the total change in
shareholders' equity during the period other than from transactions with
shareholders. For the Company, comprehensive income is comprised of net income,
the net change in the accumulated foreign currency translation adjustment
account and the net change in unrealized gains and losses on securities
classified for SFAS No. 115 purposes as held available for sale. Total
comprehensive income for the third quarter of fiscal year 1999 was $7,692
compared to $9,475 for the same period in fiscal year 1998. Total comprehensive
income for the period from July 1 through April 3, 1999 was $2,439 compared to
$37,125 for the nine months ended March 31, 1998.
Also in 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information, which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." This Statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and
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requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company has reviewed this Statement and determined
that it has one reportable segment - store brand health and beauty care.
Accordingly, the adoption of SFAS No. 131 will not significantly impact the
Company's current disclosures with respect to products, services, geographic
areas and major customers.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Historically, the Company has not entered into
derivative contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard on July 4,
1999 to affect its financial statements.
NOTE B - INVENTORIES
The components of inventories consist of the following:
<TABLE>
<CAPTION>
April 3, June 30,
1999 1998
---- ----
<S> <C> <C>
Finished goods $ 88,578 $ 70,206
Work in process 75,873 76,015
Raw materials 40,947 35,246
-------- --------
$205,398 $181,467
======== ========
</TABLE>
NOTE C - RESTRUCTURING AND REDESIGN COSTS
In April, 1999 the Company announced plans to implement cost reduction
initiatives to improve operating results and financial performance. The cost
reduction will be achieved through a workforce reduction that will affect
corporate and over-the-counter ("OTC") professional, managerial, administrative
and support staff personnel. The workforce reduction will be accomplished
through a combination of early retirements, normal attrition, redeployments and
job eliminations. No production job losses are anticipated. The Company expects
that 120-150 positions will be eliminated and that after attrition,
redeployments and early retirements, 80-100 persons will be terminated. The
Company anticipates that the workforce reduction will be completed by June 30,
1999 and expects to record a pre-tax restructuring charge in the fourth quarter
of fiscal year 1999 for severance related costs of approximately $3,000 to
$4,000 in accordance with Emerging Issues Task Force 94-3. The Company estimates
that it will realize operating income improvement of approximately $5,000 to
$6,000 for fiscal year 2000 related to
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this workforce reduction.
During the fourth quarter of fiscal year 1998, the Company announced
the decision to divest its personal care business in order to reallocate
resources to its more profitable OTC pharmaceutical and nutritional business.
This action is more fully described in the Company's annual report on Form 10-K
for the year ended June 30, 1998, under the caption "1998 Restructuring". The
Company is still in the process of completing the divestiture and expects to
have the sale completed by June 30, 1999. In the third quarter of fiscal year
1999 the Company completed the sale of its manufacturing facility in Missouri.
No gain or loss was recorded in the Consolidated Income Statement for this sale.
There have been no other changes in the net assets held for sale that have
resulted in gains or losses during the period from July 1, 1998 through April 3,
1999. Net sales for the personal care business were $50,536 and $54,942 for the
third quarters ended April 3, 1999 and March 31, 1998, respectively. Net sales
for the personal care business were $143,620 and $153,816 for the period from
July 1, 1998 through April 3, 1999 and the nine months ended March 31, 1998,
respectively. The Company does not maintain operating income information by its
three main product lines, however, based on the incremental approach, the
Company estimates that the pre-tax operating income including plant
inefficiencies for the personal care business was approximately $5,000 for the
third quarter of fiscal year 1999 compared to a pre-tax operating loss of $4,000
for the third quarter of fiscal year 1998. The Company estimates that the
personal care pre-tax operating income was approximately $2,000 for the period
from July 1, 1998 through April 3, 1999 and the pre-tax operating loss for the
nine months ended March 31, 1998 was approximately $7,000. The effect of
suspending depreciation was $1,700 for the third quarter of fiscal year 1999 and
$5,300 for the period from July 1, 1998 through April 3, 1999. The Company does
not anticipate that it will incur any pre-tax operating losses or losses related
to plant inefficiencies in the fourth quarter for the closing of plant
facilities and the intention to divest the personal care business. During the
period from July 1, 1998 through April 3, 1999, $3,288 was paid for costs
primarily related to severance costs, relocation costs and professional fees for
the 1998 restructuring. One hundred sixty three employees were terminated during
the period. The costs incurred were charged against a reserve of $12,259, which
was established in fiscal year 1998. As of April 3, 1999, a total restructuring
reserve balance of $8,971 remains in accrued liabilities.
NOTE D - COMMITMENTS AND CONTINGENCIES
For the period from July 1 through April 3, 1999, the condensed
consolidated statement of income includes $3,628 of unusual litigation costs
related to a purported class action and other legal matters as described in the
Company's annual report on Form 10-K for the year ended June 30, 1998. In
October 1998, the class action lawsuit was dismissed against all defendants. In
November 1998, the plaintiffs appealed the dismissal of their case. In April
1999, the plaintiffs withdrew their appeal. The dismissal of the appeal and the
subsequent entering of the final judgment ends any further action against the
Company. Under the agreement reached with the plaintiffs, no money or other
compensation will be paid to the plaintiffs or their attorneys. In April 1999,
the plaintiffs in the related shareholder derivative lawsuit agreed to dismiss
that suit based upon the dismissal of the class action. Under the terms agreed
to with the plaintiff, no money or other compensation will be paid to the
plaintiff or his attorneys. The Company anticipates that it will receive
reimbursement under provisions of its liability insurance coverage in the fourth
quarter of fiscal year 1999 for a significant portion of the legal fees and
expenses
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incurred for this class action lawsuit and the related derivative lawsuit. The
payment will be included on the Unusual litigation line of the Consolidated
Income Statement.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER AND NINE MONTHS OF FISCAL YEARS 1999 AND 1998
RESULTS OF OPERATIONS
THIRD QUARTER OF FISCAL YEARS 1999 AND 1998
The Company's net sales increased by $27,750 or 12.4% to $251,426 for
the third quarter of fiscal year 1999, from $223,676 during the third quarter of
fiscal year 1998. The increase was primarily due to an increase in shipments to
existing customers and to the replenishment of customer inventories for both OTC
and vitamin products. In addition, the Company's speed of recovery from its
conversion to a new integrated software package in the first quarter was slower
than expected resulting in a backlog of orders that were filled in the third
quarter. The increase was also due to a later peak to the cough/cold/flu season,
resulting in lower sales in the second quarter of fiscal year 1999 compared to
last year and higher sales in the third quarter of fiscal year 1999 of OTC
pharmaceutical products. For the quarter, sales of OTC pharmaceutical products
were up over 20 percent from the third quarter last year. On a year-to-date
basis, the Company experienced a modest increase in OTC pharmaceutical product
sales. The increase in sales of OTC and vitamin products during the quarter was
partially offset by a decrease in unit sales to existing customers of personal
care products.
The Company anticipates sales to be around $200,000 for the fourth
quarter of fiscal year 1999 (assuming Personal Care sales are included for the
entire fourth quarter), compared to $214,450 for the fourth quarter of fiscal
year 1998. Several factors are anticipated to contribute to this sales
shortfall; record sales in the third quarter of fiscal year 1999 helped by
several large retailers building inventory levels; record vitamin sales in the
fourth quarter of fiscal year 1998; partially offset by additional sales from
new products in the fourth quarter of fiscal year 1999.
Gross profit increased $1,655 or 2.9% for the third quarter of fiscal
year 1999 compared to the third quarter of fiscal year 1998. The gross profit
percentage for the third quarter of fiscal year 1999 was 23.0% compared to 25.1%
for the third quarter of fiscal year 1998. The decrease in gross profit
percentage was primarily due to outsourcing costs incurred to meet customer
service requirements and an increase in reserves established for possible
inventory obsolescence. Gross profit for the quarter also reflected increased
sales of higher margin OTC products.
Operating expenses increased $318 or 0.8% for the third quarter of
fiscal year 1999 compared to the third quarter of fiscal year 1998. Operating
expenses, as a percentage of net sales, decreased to 16.1% for the third quarter
of fiscal year 1999 compared to 18.0% for the third quarter of fiscal year 1998.
Operating expenses consist of distribution, research and development, selling
and administrative, restructuring and redesign and unusual litigation costs.
Distribution expenses increased $1,502 or 18.4% from the third quarter of fiscal
year 1998 primarily due to higher sales and expediting shipments to meet
customer service requirements and higher warehousing costs. Distribution
expense, as a percentage of net sales, was 3.8% of net sales for the third
quarter of fiscal year 1999 compared to 3.6% of net sales for the third quarter
of fiscal year 1998. Research and development expenses increased $123 or 3.6%
from the third quarter of fiscal year 1998 primarily due to costs associated
with the development of new products which are approved through the Food and
Drug Administration's ("FDA") Abbreviated
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New Drug Application ("ANDA") process. Research and development expense, as a
percentage of net sales, was 1.4% for the third quarter of fiscal year 1999
compared to 1.5% for the third quarter of fiscal year 1998. Selling and
administrative expense decreased $1,531 or 5.7% from the third quarter of fiscal
year 1998 primarily due to reductions in promotional expense and sales and
marketing expenses partially offset by an increase in MIS expenses related to
the Company's new integrated software package. Restructuring and redesign and
unusual litigation costs increased $224 from the third quarter of fiscal year
1998. See Notes C and D to the condensed consolidated financial statements.
Interest and other expense increased $2,313 from the third quarter of
fiscal year 1998. Interest expense increased $2,400 to $3,196 for the third
quarter of fiscal year 1999 compared to $796 for the third quarter of fiscal
year 1998 primarily due to higher borrowing levels. Other income was $195 for
the third quarter of fiscal year 1999 compared to $108 for the same period in
fiscal year 1998.
The effective tax rate was 32.3% for the third quarter of fiscal year
1999, compared to 38.2% for the third quarter of fiscal year 1998. The effective
tax rate for the third quarter of fiscal year 1999 was affected by adjustments
to permanent differences in the quarter.
NINE MONTHS ENDED APRIL 3, 1999 AND MARCH 31, 1998
The Company's net sales increased $1,658 or 0.2% to $689,845 for the
first nine months of fiscal year 1999, from $688,187 during the same period in
fiscal year 1998. The slight increase was primarily due to increases in antacid,
analgesic and cough & cold products and an increase in international sales,
offset by a decrease in personal care and vitamin products.
During the first quarter of fiscal year 1999, the Company wrote off
inventory of $1,663, accounts and notes receivable of $10,874 and the balance of
its Russian investment of $1,640 for a total of $14,177 due to the collapse of
the Russian economy. The inventory amount is included in cost of sales; the
accounts and notes receivable amount is included in selling and administrative
expense; and the investment amount is included in other income and expense. The
discussion below excludes the effect of these charges.
Gross profit decreased $32,839 or 18.0% for the first nine months of
fiscal year 1999 compared to the same period in fiscal year 1998. The gross
profit percentage for the first nine months of fiscal year 1999 was 21.6%
compared to 26.4% for the same period in fiscal year 1998. The decrease in gross
profit percentage was primarily due to inefficiencies resulting from the
Company's conversion to its new software system and outsourcing costs incurred
to meet customer service requirements.
Operating expenses decreased $842 for the first nine months of fiscal
year 1999 compared to the first nine months of fiscal year 1998. Operating
expenses as a percentage of net sales, were 17.5% of net sales for the first
half of fiscal year 1999 compared to 17.6% for the same period in fiscal year
1998. Distribution expenses increased $2,729 or 11.5% from the first nine months
of fiscal year 1998 primarily due to expedited shipment costs and higher
warehousing costs incurred to meet customer service requirements. Distribution
expense, as a percentage of net sales, was 3.8% for the first nine months of
fiscal year 1999 compared to 3.4% for the same period in fiscal year 1998.
Research and development expenses increased $1,639 or 17.5% from the first nine
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months of fiscal year 1998 primarily due to costs associated with the
development of new products, which are approved through the FDA's ANDA process.
Research and development expenses for fiscal year 1999 are expected to be higher
than the fiscal year 1998 expenses. Research and development expense, as a
percentage of net sales, was 1.6% for the first nine months of fiscal year 1999
compared to 1.4% for the same period in fiscal year 1998. Selling and
administrative expense decreased $2,890 or 3.5% from the first nine months of
fiscal year 1998, primarily due to reductions in sales, marketing and
promotional expenses partially offset by an increase in MIS expenses related to
the Company's new integrated software package. Selling and administrative
expense was 11.5% of net sales for the first nine months of fiscal year 1999
compared to 12.0% for the same period in fiscal year 1998. Restructuring and
redesign and unusual litigation costs decreased $2,320 from the first nine
months of fiscal year 1998. See Notes C and D to the condensed consolidated
financial statements.
Interest and other expense increased $5,646 from the first nine months
of fiscal year 1998. Interest expense increased $6,684 to $8,169 for the first
nine months of fiscal year 1999 from $1,485 for the same period of fiscal year
1998 primarily due to higher borrowing levels. Other income was $771 for the
first nine months of fiscal year 1998 compared to other expense of $267 for the
same period in fiscal year 1998.
The effective tax rate was 36.8% for the first nine months of fiscal year
1999 compared to 36.9% for the same period in fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal year 1999, working capital
increased $57,255 and cash flow for operating activities was $35,096. Accounts
receivable increased $49,142, inventories increased $25,369 and accounts payable
increased $12,626. These increases were primarily due to customer service
requirements and inefficiencies caused by the Company's conversion to a new
software system in September 1998.
Capital expenditures for facilities and equipment were $28,071 for the
first nine months of fiscal year 1999. A significant portion of these
expenditures was for the construction of a new distribution facility in Allegan,
Michigan and expansion of the manufacturing facility for nutritional products.
Capital expenditures, originally planned at approximately $60,000 for fiscal
year 1999, will decrease to approximately $40,000 due to deferral or
cancellation of certain projects. Planned capital expenditures are primarily for
the expenditures as noted above and additional manufacturing and packaging
equipment required to support the OTC pharmaceutical and nutritional product
categories.
The Company entered into long-term licensing agreements in fiscal year
1999 to manufacture and/or sell certain OTC products that would have otherwise
been unavailable. Certain payments related to these agreements in the amount of
$8,700 are included in other assets and will be amortized over the terms of the
agreements.
The Company has a Russian investment that is accounted for using the
equity method. Due to the collapse of the Russian economy, the Company wrote off
its net investment of $1,640 and also wrote off inventory of $1,663 and accounts
receivable and notes receivable of $10,874 related to this Russian investment in
the first quarter of fiscal year 1999.
-13-
<PAGE> 14
During the first nine months of fiscal year 1999, the Company purchased
1,550 shares of common stock for $14,820 under its common stock repurchase
program. The common stock was retired.
Long-term debt increased $83,108 during the first nine months of fiscal
year 1999 as the Company drew on its $150,000 line of credit and its $55,000
uncommitted lines of credit to fund, primarily, working capital requirements,
the common stock repurchase program and capital expenditures. At April 3, 1999
the Company had $10,000 available on the line of credit and $30,273 available
from the uncommitted credit facilities with two financial institutions.
YEAR 2000 READINESS DISCLOSURE
The Company continues to implement the plan set forth in the Year 2000
Compliance section of the MDA in its annual report on Form 10-K for the year
ended June 30, 1998. The plan involves (1) becoming Year 2000 compliant in all
of its critical software systems, infrastructure systems, manufacturing systems,
security systems and office equipment, (2) reviewing insurance, regulatory and
legal implications as they relate to the year 2000 and (3) determining the year
2000 compliance status of the Company's key suppliers and customers. The plan
has not changed substantially from June 30, 1998 and its status is summarized
below. The Company is within its timeline for having the plan completed prior to
the year 2000.
The Company believes it has completed the identification of systems
that need to be reviewed for Year 2000 Compliance and has prioritized each
system as "critical", "important" or "non-critical". The following procedures
are being followed for all systems in order to gain assurance that they are year
2000 compliant: (1) Obtain the Year 2000 compliance status from the
manufacturer. If the system is not considered Year 2000 compliant by the
manufacturer it will be updated, replaced or eliminated; (2) Test each system to
determine year 2000 compliance; (3) Remediate and retest noncompliant systems
until year 2000 compliance is obtained. Critical systems are the highest
priority. Important systems are being tested and remediated, non-critical
systems will be tested as time permits. Y2K compliance testing of our core
business system, SAP R/3, has revealed no Y2K related problems. Critical systems
requiring remediation are scheduled for completion in the third quarter of
calendar year 1999. The Company expects to prepare contingency plans for all
critical systems in the second quarter of calendar year 1999. Based on the
information received to date, the Company currently anticipates the cost of its
year 2000 compliance program to be approximately $2,000 to $2,500 for calendar
year 1999. There can be no assurance that the Company will be able to identify
and correct all aspects of the year 2000 problem that affect it in sufficient
time, and if it cannot, the failure would have a material negative impact on the
Company's business, operations or financial condition. The Company, however,
does not currently expect that the year 2000 problem as it relates to its
internal systems will have a material negative impact on the Company.
The Company is monitoring the insurance, regulatory and legal
implications as they relate to the year 2000. The Company at this time does not
anticipate that the costs associated with this review will be material to the
Company's financial condition or results of operations.
The Company's plan to determine the year 2000 compliance status of its
key suppliers and
-14-
<PAGE> 15
customers is in progress. The plan involves soliciting information from
suppliers and customers through use of surveys and follow-up discussions and
testing where needed. The Company has sent out surveys to all of its current key
suppliers and customers and received back a majority of these surveys. The
survey responses have been rated by the Company to establish the stated level of
compliance by the respondent. While the Company cannot guarantee year 2000
compliance by its key suppliers and customers, and in many cases will be relying
on statements from outside vendors without independent verification, preliminary
surveys indicate that current key suppliers and customers are aware of the
issues and are working on a solution to achieve compliance on or before the year
2000. The next steps will be to obtain more detailed information from certain
key suppliers and customers, follow-up with those companies who did not respond
satisfactorily to the survey and test systems where needed. The Company is also
in the process of developing a contingency plan to deal with those key suppliers
and customers who may not be year 2000 compliant prior to the year 2000. If
certain key suppliers or customers were not year 2000 compliant and the Company
was unaware of the noncompliance, the Company's results of operations and
financial condition could be significantly negatively impacted. However, at this
time the Company is not aware of any key suppliers or customers who will be
significantly hampered from conducting normal business because of internal year
2000 problems.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this quarterly report are forward looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended and are subject to the safe harbor created thereby. Please
refer to pages 27-31 of the Company's Form 10-K for the year ended June 30, 1998
for a discussion of certain important factors that relate to forward looking
statements contained in this quarterly report. Although the Company believes
that the expectations reflected in any such forward looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct.
The Company converted to a new integrated software package in the first
quarter of fiscal year 1999. The Company's recovery from this software
conversion was slower than expected; resulting in unacceptable customer service
levels during the first half of fiscal year 1999. It is uncertain as to the
impact lower customer service levels could have on future sales. Should the
Company's future sales be adversely affected by this software conversion, there
could be a material impact on the Company's results of operations or financial
position.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Not currently applicable to the Company.
-15-
<PAGE> 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description
-------------- -----------
3(a) Amended and Restated Articles of Incorporation
of Registrant, incorporated by reference from
Amendment No. 2 to Registration Statement No.
33-43834 filed by the Registrant on September
23, 1993.
3(b) Restated Bylaws of Registrant, dated April 10,
1996, incorporated by reference from the
Registrant's Form 8-K filed on April 10, 1996.
4(a) Shareholders' Rights Plan, incorporated by
reference from the Registrant's Form 8-K filed
on April 10, 1996.
10(a) Credit Agreement, dated June 30, 1996, between
the Registrant and NBD Bank, N.W., Sanwa Bank,
Comerica Bank-Detroit, PNC Bank, Westdeutsche
Landesbank Girozentrale and Old Kent Bank and
Trust Company, incorporated by reference from
the Registrant's 1996 Form 10-K filed on
September 25, 1996.
10(b) Registrant's Management Incentive Plan,
incorporated by reference from Registration
Statement No. 33-69324 filed by the Registrant
on September 23, 1993.
10(c) Registrant's 1988 Employee Incentive Stock
Option Plan as amended, incorporated by
reference to Exhibit A of the Registrant's 1997
proxy statement.
10(d) Registrant's 1989 Non-Qualified Stock Option
Plan for Directors, as amended, incorporated by
reference from Exhibit B of the Registrant's
1997 Proxy Statement as amended at the Annual
Meeting of Shareholders on November 6, 1997.
10(e) First Amendment to Registrant's Credit
Agreement, dated June 29, 1998, incorporated by
reference from the Registrant's Form 10-K filed
on October 6, 1998.
10(f) Registrant's Restricted Stock Plan for
Directors, dated November 6, 1997, incorporated
by reference from Registrant's Form 10-K filed
on October 6, 1998.
-16-
<PAGE> 17
10(g) Second Amendment to Registrant's Credit
Agreement, dated November 20, 1998,
incorporated by reference from Registrant's
Form 10-Q filed on November 23, 1998.
10(h) Credit Agreement, dated December 8, 1998,
between Registrant and National City Bank,
incorporated by reference from Registrant's
Form 10-Q filed on February 11, 1999.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the
thirteen-weeks ended April 3, 1999.
-17-
<PAGE> 18
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 11, 1999 /s/ Michael J. Jandernoa
------------------- -------------------------
Michael J. Jandernoa
Chairman of the Board and
Chief Executive Officer
Date: May 11, 1999 /s/ Thomas J. Ross
------------------- -------------------------
Thomas J. Ross
Vice President Finance -
Principal Accounting and
Financial Officer
-18-
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