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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 29, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-19725
PERRIGO COMPANY
(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 26, 2007 the registrant had 93,473,011 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 29, 2007 and September 30, 2006 2
Condensed consolidated balance sheets -- September 29, 2007,
June 30, 2007 and September 30, 2006 3
Condensed consolidated statements of cash flows -- For the quarters
ended September 29, 2007 and September 30, 2006 4
Notes to condensed consolidated financial statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risks 20
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 6. Exhibits 23
SIGNATURES 24
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 June 30, 2007 and item 1A of this Form 10-Q for a discussion of
certain important risk factors that relate to forward-looking statements
contained in this report. The Company has based these forward-looking statements
on its current expectations, assumptions, estimates and projections. While the
Company believes these expectations, assumptions, estimates and projections are
reasonable, such forward-looking statements are only predictions and involve
known and unknown risks and uncertainties, many of which are beyond the
Company's control. These and other important factors may cause actual results,
performance or achievements to differ materially from those expressed or implied
by these forward-looking statements. The forward-looking statements in this
report are made only as of the date hereof, and unless otherwise required by
applicable securities laws, the Company disclaims any intention or obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
-1-
Item 1. Financial Statements (Unaudited)
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
First Quarter
-------------------
2008 2007
-------- --------
Net sales $382,740 $340,215
Cost of sales 266,022 247,400
-------- --------
Gross profit 116,718 92,815
-------- --------
Operating expenses
Distribution 7,074 7,384
Research and development 16,320 13,047
Selling and administration 47,275 46,672
-------- --------
Total 70,669 67,103
-------- --------
Operating income 46,049 25,712
Interest, net 4,655 4,586
Other income, net (1,183) (61)
-------- --------
Income before income taxes 42,577 21,187
Income tax expense 8,558 4,305
-------- --------
Net income $ 34,019 $ 16,882
======== ========
Earnings per share
Basic $ 0.37 $ 0.18
Diluted $ 0.36 $ 0.18
Weighted average shares outstanding
Basic 93,142 92,168
Diluted 94,884 93,273
Dividends declared per share $ 0.045 $ 0.043
See accompanying notes to condensed consolidated financial statements.
-2-
PERRIGO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 29, June 30, September 30,
2007 2007 2006
------------- ---------- -------------
(unaudited) (unaudited)
Assets
Current assets
Cash and cash equivalents $ 46,837 $ 30,305 $ 33,027
Investment securities 32,487 49,110 27,922
Accounts receivable 283,443 282,045 230,239
Inventories 314,597 295,114 326,538
Current deferred income taxes 41,372 41,400 52,215
Income taxes refundable 5,596 -- --
Assets held for sale 2,746 2,746 --
Prepaid expenses and other current assets 20,264 18,340 21,068
---------- ---------- ----------
Total current assets 747,342 719,060 691,009
Property and equipment 665,239 664,096 617,813
Less accumulated depreciation 343,033 333,024 298,260
---------- ---------- ----------
322,206 331,072 319,553
Restricted cash 400,000 422,000 400,000
Goodwill 199,730 196,218 183,205
Other intangible assets 187,467 159,977 137,876
Non-current deferred income taxes 49,184 54,908 43,380
Other non-current assets 40,723 41,919 40,651
---------- ---------- ----------
$1,946,652 $1,925,154 $1,815,674
========== ========== ==========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 170,639 $ 164,318 $ 172,680
Notes payable 11,677 11,776 5,740
Payroll and related taxes 38,425 46,226 41,458
Accrued customer programs 48,638 48,218 45,084
Accrued liabilities 44,142 47,333 41,164
Accrued income taxes -- 29,460 17,501
Current deferred income taxes 15,214 17,125 9,837
Current portion of long-term debt 15,314 15,381 --
---------- ---------- ----------
Total current liabilities 344,049 379,837 333,464
Non-current liabilities
Long-term debt 642,629 650,762 678,272
Non-current deferred income taxes 101,424 103,775 105,427
Other non-current liabilities 87,324 36,311 36,922
---------- ---------- ----------
Total non-current liabilities 831,377 790,848 820,621
Shareholders' equity
Preferred stock, without par value, 10,000 shares
authorized -- -- --
Common stock, without par value, 200,000 shares
authorized 521,117 519,419 510,132
Accumulated other comprehensive income 47,864 56,676 17,461
Retained earnings 202,245 178,374 133,996
---------- ---------- ----------
Total shareholders' equity 771,226 754,469 661,589
---------- ---------- ----------
$1,946,652 $1,925,154 $1,815,674
========== ========== ==========
Supplemental Disclosures of Balance Sheet Information
Allowance for doubtful accounts $ 8,622 $ 9,421 $ 12,195
Allowance for inventory $ 34,947 $ 36,210 $ 40,992
Working capital $ 403,293 $ 339,223 $ 357,545
Preferred stock, shares issued -- -- --
Common stock, shares issued 93,566 93,395 92,556
See accompanying notes to condensed consolidated financial statements.
-3-
PERRIGO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
First Quarter
-------------------
2008 2007
-------- --------
Cash Flows From (For) Operating Activities
Net income $ 34,019 $ 16,882
Adjustments to derive cash flows
Depreciation and amortization 15,570 13,502
Share-based compensation 1,958 2,434
Deferred income taxes 2,120 (1,157)
-------- --------
Sub-total 53,667 31,661
-------- --------
Changes in operating assets and liabilities
Accounts receivable (3,389) 8,550
Inventories (21,356) (25,211)
Accounts payable 7,665 (5,785)
Payroll and related taxes (7,437) (12,423)
Accrued customer programs 420 (4,450)
Accrued liabilities (3,584) (4,203)
Accrued income taxes 2,276 3,474
Other (563) 1,983
-------- --------
Sub-total (25,968) (38,065)
-------- --------
Net cash from (for) operating activities 27,699 (6,404)
-------- --------
Cash Flows (For) From Investing Activities
Purchase of securities (73,418) (52,340)
Proceeds from sales of securities 89,182 51,074
Asset acquisition (12,401) --
Additions to property and equipment (4,364) (8,113)
-------- --------
Net cash for investing activities (1,001) (9,379)
-------- --------
Cash (For) From Financing Activities
Repayments of short-term debt, net (99) (14,331)
Borrowings of long-term debt 30,000 55,000
Repayments of long-term debt (38,000) --
Tax (expense) benefit of stock transactions (135) 616
Issuance of common stock 4,155 2,222
Repurchase of common stock (4,280) (11,238)
Cash dividends (4,214) (3,939)
-------- --------
Net cash (for) from financing activities (12,573) 28,330
-------- --------
Net increase in cash and cash equivalents 14,125 12,547
Cash and cash equivalents, at beginning of period 30,305 19,018
Effect of exchange rate changes on cash 2,407 1,462
-------- --------
Cash and cash equivalents, at end of period $ 46,837 $ 33,027
======== ========
Supplemental Disclosures of Cash Flow Information
Cash paid/received during the period for:
Interest paid $ 10,019 $ 8,309
Interest received $ 5,189 $ 4,700
Income taxes paid $ 588 $ 1,797
Income taxes refunded $ 672 $ --
See accompanying notes to condensed consolidated financial statements.
-4-
PERRIGO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 29, 2007
(in thousands, except per share amounts)
Perrigo Company is a leading global healthcare supplier that develops,
manufactures and distributes over-the-counter (OTC) and prescription
pharmaceuticals, nutritional products, active pharmaceutical ingredients (API)
and consumer products. The Company is the world's largest manufacturer of OTC
pharmaceutical products for the store brand market. The Company's primary
markets and locations of manufacturing and logistics operations are the United
States, Israel, Mexico and the United Kingdom.
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 prior years
to conform to the current year presentation. The amounts reclassified had no
effect on retained earnings or net income.
Operating results for the quarter ended September 29, 2007 are not necessarily
indicative of the results that may be expected for a full year. The unaudited
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes included in the Company's
annual report on Form 10-K for the year ended June 30, 2007.
New Accounting Pronouncements
The Company adopted the provisions of Financial Accounting Standards Board
(FASB) Interpretation 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement 109, "Accounting for Income Taxes" (FIN 48) on
July 1, 2007. 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.
Upon adoption of FIN 48 on July 1, 2007, the Company's total unrecognized tax
benefits amounted to $43,833, all of which was included in other non-current
liabilities. A portion of this liability, $5,934, was accounted for as a
reduction to the July 1, 2007 balance of retained earnings and $6,108 was
accounted for as an increase to goodwill, as further discussed in Note E. The
remaining $31,791 was reclassified from current accrued income taxes to other
non-current liabilities. During the first quarter of fiscal year 2008, the
liability for uncertain tax positions increased by $5,298 related to current
year activity, bringing the Company's total unrecognized tax benefits to $49,131
as of September 29, 2007. The Company recognizes accrued interest and penalties
related to unrecognized tax benefits in tax expense. Total interest and
penalties included in non-current liabilities at July 1, 2007 amounted to $9,216
(net of tax
-5-
benefit). As of July 1, 2007, the Company had unrecognized tax benefits of
$37,725, which if recognized would favorably affect the effective income tax
rate in future periods. Tax years subject to examination in the U.S. by the IRS
include all fiscal years after 2004. Additionally, the Israeli Tax Authority is
currently auditing the Company for years ended December 2003, December 2004 and
May 2005. The Company anticipates that the total amount of liability for
unrecognized tax benefits may change due to the settlement of audits and the
expiration of statutes of limitations in the next 12 months. However, given the
status of examinations the Company cannot reliably estimate the range of a
potential change at this time.
In February 2007, the FASB issued SFAS 159, "Establishing the Fair Value Option
for Financial Assets and Liabilities", to give companies the option to measure
eligible financial instruments at fair value. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. An entity is prohibited from
retrospectively applying SFAS 159 unless it chooses early adoption in
conjunction with SFAS 157 "Fair Value Measurements". The Company does not expect
the adoption of this statement to have a material impact on its consolidated
results of operations or its financial position.
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 fiscal years
beginning after November 15, 2007. The Company has not yet determined if the
adoption of this statement will have a material impact on its consolidated
results of operations or its financial position.
NOTE B - ASSET ACQUISITIONS
Qualis, Inc. - On March 7, 2007, the Company announced it entered into a
purchase agreement to acquire the stock of Qualis, Inc., a privately-owned
manufacturer of store brand pediculicide products, for $12,000. The assets
acquired in this transaction consist of the intangible assets attributable to
the products acquired, which include primarily store brand over-the-counter
product formulations that compare to Rid(R) and Nix(R) brand products. The
transaction closed on July 3, 2007. Accordingly, the acquired assets and
operating results related to these products are included in the Company's
consolidated financial statements for the first quarter of fiscal 2008.
The total allocated purchase price for accounting purposes through September 29,
2007 was $12,401. The Company has allocated the entire purchase price to
intangible assets - developed product technology. Management assigned fair value
to the identifiable intangible assets by estimating the discounted forecasted
cash flows of the products acquired. The average estimated useful life of the
developed product technology is 12 years and will be amortized on a
straight-line basis. Assumptions used in the valuation included a discount rate
of 11%.
Glades Pharmaceuticals, Inc. - On March 26, 2007, the Company acquired certain
generic prescription dermatological products from Glades Pharmaceuticals, Inc.
(Glades) for approximately $57,000 in cash plus $2,500 of consideration for
future research and development collaborations. The operating results related to
these products were included in the Rx Pharmaceuticals segment of the Company's
consolidated results of operations beginning in the fourth quarter of fiscal
2007.
-6-
The total allocated purchase price for accounting purposes through June 30, 2007
was $37,538. In addition, the Company placed $22,000 in an escrow account
pending the resolution of a contingency with respect to a single product. As of
September 29, 2007, this contingency has been satisfactorily resolved and the
escrow funds have been released to the seller, increasing the purchase price by
$22,000. The new total purchase price for accounting purposes through September
29, 2007 was $59,538, allocated as follows:
Intangible assets - developed product technology $45,617
Intangible assets - in-process research and development 8,252
Inventory 5,669
-------
Total assets acquired $59,538
=======
NOTE C - EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the basic and
diluted earnings per share (EPS) calculation follows:
First Quarter
-----------------
2008 2007
------- -------
Numerator:
Net income used for both basic and diluted EPS $34,019 $16,882
======= =======
Denominator:
Weighted average shares outstanding for basic EPS 93,142 92,168
Dilutive effect of share-based awards 1,742 1,105
------- -------
Weighed average shares outstanding for diluted EPS 94,884 93,273
======= =======
Share-based awards outstanding that are anti-dilutive were 128 and 2,787 for the
first quarter of fiscal 2008 and 2007, respectively. These share-based awards
were excluded from the diluted EPS calculation.
NOTE D - INVENTORIES
Inventories are summarized as follows:
September 29, June 30, September 30,
2007 2007 2006
------------- -------- -------------
Finished goods $150,772 $135,974 $163,793
Work in process 78,702 77,241 77,220
Raw materials 85,123 81,899 85,525
-------- -------- --------
$314,597 $295,114 $326,538
======== ======== ========
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 $34,947 at September 29, 2007, $36,210 at June 30, 2007
and $40,992 at September 30, 2006.
-7-
NOTE E - GOODWILL
There were no acquisitions, dispositions or impairments of goodwill during the
first quarter of fiscal 2008. Changes in the carrying amount of goodwill, by
reportable segment, were as follows:
Consumer Rx Pharma-
Healthcare ceuticals API Total
---------- ---------- ------- --------
Balance as of June 30, 2007 $47,048 $72,426 $76,744 $196,218
Goodwill adjustment -- 3,332 2,776 6,108
Currency translation adjustment 696 (1,598) (1,694) (2,596)
------- ------- ------- --------
Balance as of September 29, 2007 $47,744 $74,160 $77,826 $199,730
======= ======= ======= ========
Upon adoption of FIN 48 on July 1, 2007, as discussed in Note A, the Company
recorded an adjustment to goodwill for the Rx Pharmaceuticals and API segments.
Because the adjustment reflects additional unrecognized tax benefits related to
pre-acquisition tax uncertainties associated with the acquisition of Agis, it
was recorded as additional goodwill, rather than as a charge to retained
earnings in accordance with EITF 93-7, "Uncertainties Related to Income Taxes in
a Purchase Business Combination."
NOTE F - INTANGIBLE ASSETS
Intangible assets and related accumulated amortization consist of the following:
September 29, 2007 June 30, 2007
----------------------- -----------------------
Accumulated Accumulated
Gross Amortization Gross Amortization
-------- ------------ -------- ------------
Developed product technology /
formulation $186,566 $24,407 $154,923 $21,490
Distribution and license
agreements 24,645 8,314 24,790 7,593
Customer relationships 4,900 4,192 4,900 4,018
Trademarks 10,201 1,932 10,235 1,770
-------- ------- -------- -------
Total $226,312 $38,845 $194,848 $34,871
======== ======= ======== =======
The Company recorded amortization expense of $4,379 and $3,100 for the first
quarter of fiscal 2008 and 2007, respectively, for intangible assets subject to
amortization.
The estimated amortization expense for each of the following five years is as
follows:
Fiscal Year Amount
----------- -------
2008(1) $13,300
2009 17,200
2010 15,700
2011 14,600
2012 14,600
(1) Reflects remaining nine months of fiscal 2008.
-8-
NOTE G - OUTSTANDING DEBT
Total borrowings outstanding are summarized as follows:
September 29, June 30, September 30,
2007 2007 2006
------------- -------- -------------
Short-term debt:
Swingline loan $ 11,677 $ 11,776 $ 5,740
Current portion of long-term debt 15,314 15,381 --
-------- -------- --------
Total 26,991 27,157 5,740
-------- -------- --------
Long-term debt:
Revolving line of credit 112,000 120,000 135,000
Term loan 100,000 100,000 100,000
Letter of undertaking - Israel subsidiary 400,000 400,000 400,000
Debenture - Israel subsidiary 30,629 30,762 43,272
-------- -------- --------
Total 642,629 650,762 678,272
-------- -------- --------
Total debt $669,620 $677,919 $684,012
======== ======== ========
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 restricted cash.
NOTE H - SHAREHOLDERS' EQUITY
The Company has a common stock repurchase program. Purchases are made on the
open market, subject to market conditions, and are funded by available cash or
borrowings. All common stock repurchased by the Company becomes authorized but
unissued stock and is available for reissuance in the future for general
corporate purposes. 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 202 shares of its common stock for $4,280 and 710 shares
for $11,238 during the first quarter of fiscal 2008 and 2007, respectively.
There were no private party transactions in the first quarter of fiscal 2008.
Private party transactions accounted for 13 shares in the first quarter of
fiscal 2007.
-9-
NOTE I - COMPREHENSIVE INCOME
Comprehensive income is comprised of all changes in shareholders' equity during
the period other than from transactions with shareholders. Comprehensive income
consists of the following:
First Quarter
-------------------
2008 2007
-------- --------
Net income $34,019 $ 16,882
Other comprehensive income (loss):
Change in fair value of derivative instruments, net of tax (1,662) (1,786)
Foreign currency translation adjustments (7,578) 16,297
Change in fair value of investment securities, net of tax 428 (643)
------- --------
Comprehensive income $25,207 $ 30,750
======= ========
NOTE J - COMMITMENTS AND CONTINGENCIES
Several Arkansas counties, including Independence County, have filed a lawsuit
against the Company and various manufacturers and distributors of products
containing pseudoephedrine, which is used to produce methamphetamine, an illegal
drug. The Company has been informed that other counties in Arkansas may join in
the lawsuit as plaintiffs. Through this lawsuit, the plaintiff counties seek to
recoup as damages some of the expenses they have incurred to combat
methamphetamine use and addiction. They also seek punitive damages, disgorgement
of profits and attorneys' fees. The Company believes that any such lawsuit is
without merit and intends to vigorously defend against it. At this early stage,
the Company cannot predict whether this issue will have a material impact on its
results of operations.
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 $500, 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 29, 2007.
-10-
NOTE K - SEGMENT INFORMATION
The Company has three reportable segments, aligned primarily by product:
Consumer Healthcare, Rx Pharmaceuticals and API, as well as an Other category.
The majority of corporate expenses, which generally represent shared services,
are charged to operating segments as part of a corporate allocation. Unallocated
expenses relate to certain corporate services that are not allocated to the
segments. Fiscal 2008 unallocated expenses include a $1,900 reduction in
administrative costs due to the settlement of a pre-acquisition legal claim
related to Agis.
Consumer Rx Pharma- Unallocated
Healthcare ceuticals API Other expenses Total
---------- ---------- ------- ------- ----------- --------
First Quarter 2008
Net sales $268,259 $34,960 $38,814 $40,707 -- $382,740
Operating income $ 29,549 $ 7,445 $ 7,276 $ 2,489 $ (710) $ 46,049
Amortization of intangibles $ 853 $ 2,762 $ 450 $ 314 -- $ 4,379
First Quarter 2007
Net sales $241,809 $31,425 $29,779 $37,202 -- $340,215
Operating income $ 17,100 $ 5,787 $ 4,658 $ 2,664 $(4,497) $ 25,712
Amortization of intangibles $ 847 $ 1,584 $ 429 $ 240 -- $ 3,100
-11-
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER FISCAL YEARS 2008 AND 2007
(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. Certain segment information for prior periods has been reclassified to
conform to the current year presentation. The amounts reclassified had no effect
on retained earnings or net income on either a consolidated or reportable
segment basis. 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 2008 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 2008 were
$382,740, an increase of $42,525 or 12% over fiscal 2007. The increase spanned
all of the Company's segments and included new product sales of approximately
$10,900. Gross profit was $116,718, an increase of 26% over fiscal 2007, driven
primarily by the Consumer Healthcare and API segments. The gross profit
percentage in the first quarter of fiscal 2008 was 30.5%, up from 27.3% last
year. Operating expenses were $70,669, an increase of 5% over fiscal 2007, but
as a percent of net sales were slightly lower than in fiscal 2007. Net income
was $34,019, an increase of 102% over fiscal 2007, due primarily to an increase
in operating income from the Consumer Healthcare, Rx Pharmaceutical and API
segments. Further details for each reportable segment are included in the
following Results of Operations.
-12-
RESULTS OF OPERATIONS
CONSUMER HEALTHCARE
First Quarter
-------------------
2008 2007
-------- --------
Net sales $268,259 $241,809
Gross profit $ 71,887 $ 56,201
Gross profit % 26.8% 23.2%
Operating expenses $ 42,338 $ 39,101
Operating expenses % 15.8% 16.2%
Operating income $ 29,549 $ 17,100
Operating income % 11.0% 7.1%
Net Sales
First quarter net sales for fiscal 2008 increased 11% or $26,450 compared to
fiscal 2007. The increase was comprised of $19,330 domestic and $7,120 of
international sales. The domestic increase resulted from $6,800 of new product
sales, primarily in the smoking cessation and cough/cold categories, along with
a $23,800 increase from higher unit sales of existing products in the smoking
cessation, analgesics and cough/cold categories. A large portion of this
increase is the result of an absence in the OTC marketplace of a key competitor
during the quarter. These combined domestic increases were partially offset by a
$10,000 sales decline in the gastrointestinal, feminine hygiene and nutrition
categories. Of this decrease, approximately $7,400 was due to the Company's
strategic exit of both fiber laxative and effervescent cough/cold product lines
in the second quarter of fiscal 2007. The increase in international sales was
driven primarily by new product sales of $3,000 and favorable foreign currency
exchange of $2,300.
Gross Profit
First quarter gross profit for fiscal 2008 increased 28% or $15,686 compared to
fiscal 2007. The increase resulted from higher gross margins attributed to new
products and a favorable mix of products sold, both domestically and
internationally. In addition, first quarter 2007 included higher inventory
obsolescence costs as well as costs related to the product recall described
below. The gross profit percentage for first quarter fiscal 2008 increased 3.6
percentage points over fiscal 2007 due primarily to lower inventory obsolescence
costs and the fiscal 2007 product recall.
On November 9, 2006, the Company initiated a voluntary retail-level recall of
certain lots of its acetaminophen 500 mg caplets containing raw material
purchased from a third-party supplier. The total cost of the recall was
approximately $6,500, of which $1,026 was recorded in the first quarter of
fiscal 2007. The charge included sales returns and refunds, handling of on-hand
inventories, disposal of inventory and management of consumer inquiries. There
were no additional charges recorded for this recall during the first quarter of
fiscal 2008 as it has been essentially completed.
-13-
Operating Expenses
First quarter operating expenses for fiscal 2008 increased 8% or $3,237 compared
to fiscal 2007. The increase was primarily related to research and development
costs of approximately $2,600 and selling expense of approximately $1,600,
partially offset by employee-related expenses of $900. The research and
development increase was due to the timing of clinical studies. The majority of
the increase in selling costs related to the timing of promotional activities.
RX PHARMACEUTICALS
First Quarter
------------------
2008 2007
------- -------
Net sales $34,960 $31,425
Gross profit $15,118 $13,787
Gross profit % 43.2% 43.9%
Operating expenses $ 7,673 $ 8,000
Operating expenses % 21.9% 25.5%
Operating income $ 7,445 $ 5,787
Operating income % 21.3% 18.4%
Net Sales
First quarter net sales for fiscal 2008 increased 11% or $3,535 compared to
fiscal 2007. This increase was due primarily to $6,600 in sales of products
acquired from Glades Pharmaceuticals, Inc., increased sales volumes on the
Company's existing portfolio of products of approximately $2,000 and new product
sales of $600. These increases were substantially offset by pricing pressure due
to increased competition on existing products.
Gross Profit
First quarter gross profit for fiscal 2008 increased 10% or $1,331 compared to
fiscal 2007. The increase was due primarily to the strong gross margin on
products acquired from Glades, as well as lower inventory related costs. These
increases were partially offset by pricing pressure on existing products.
Operating Expenses
First quarter operating expenses for fiscal 2008 decreased 4% or $327 compared
to fiscal 2007, due primarily to slightly lower research and development
spending, as well as lower distribution costs.
-14-
API
First Quarter
-----------------
2008 2007
------- -------
Net sales $38,814 $29,779
Gross profit $15,332 $10,077
Gross profit % 39.5% 33.8%
Operating expenses $ 8,056 $ 5,419
Operating expenses % 20.8% 18.2%
Operating income $ 7,276 $ 4,658
Operating income % 18.7% 15.6%
Net Sales
First quarter net sales for fiscal 2008 increased 30% or $9,035 compared to
fiscal 2007. The increase was due primarily to increased volume of certain key
products and customer demand requirements. 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 2008 increased 52% or $5,255 compared to
fiscal 2007, due primarily to favorable changes in the sales mix of products, as
well as fixed overhead costs spread over increased production levels. The fiscal
2007 first quarter gross profit amount includes a reduction of $1,802 to
reclassify from operating expenses within the API segment certain costs relating
to a profit sharing arrangement. The reclassification had no effect on this
segment's or the Company's consolidated operating income.
Operating Expenses
First quarter operating expenses for fiscal 2008 increased 49% or $2,637
compared to fiscal 2007. The increase was due primarily to research and
development costs and higher employee-related costs. Fiscal 2007 first quarter
operating expenses include a reduction of $1,802 to reclassify certain costs
relating to a profit sharing arrangement to cost of sales. The reclassification
had no effect on this segment's or the Company's consolidated operating income.
-15-
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
-----------------
2008 2007
------- -------
Net sales $40,707 $37,202
Gross profit $14,380 $12,750
Gross profit % 35.3% 34.3%
Operating expenses $11,891 $10,086
Operating expenses % 29.2% 27.1%
Operating income $ 2,489 $ 2,664
Operating income % 6.1% 7.2%
First quarter net sales for fiscal 2008 increased 9% or $3,505 compared to
fiscal 2007. The increase was due primarily to changes in the sales mix of
products and customers, as well as higher sales in the U.S. cosmetics market.
First quarter gross profit for fiscal 2008 increased 13% or $1,630 compared to
fiscal 2007, due primarily to increased sales volume and favorable product mix.
First quarter operating expenses for fiscal 2008 increased 18% or $1,805
compared to fiscal 2007 due mainly to increased promotional activities and
higher employee-related costs.
UNALLOCATED EXPENSES
Unallocated expenses for the first quarter were $710 for fiscal 2008 and $4,497
for fiscal 2007. These expenses were comprised of certain corporate services
that were not allocated to the segments. The decrease in fiscal 2008 was due
primarily to a $1,900 settlement of a pre-acquisition legal claim related to
Agis, along with one-time employee-related expenses of $900 in fiscal 2007 not
repeated in fiscal 2008.
INTEREST AND OTHER (CONSOLIDATED)
Interest expense for the first quarter was $9,844 for fiscal 2008 and $9,340 for
fiscal 2007. Interest income for the first quarter was $5,189 for fiscal 2008
and $4,754 for fiscal 2007. Other income, net for the first quarter was $1,183
for fiscal 2008 compared to $61 for fiscal 2007.
INCOME TAXES (CONSOLIDATED)
The effective tax rate for the first quarter was 20.1% for fiscal 2008 and 20.3%
for fiscal 2007. Foreign derived income before tax for the first quarter was
fifty-four percent in fiscal 2008 down from sixty-eight percent in the same
period of fiscal 2007. Foreign source income is generally derived from
jurisdictions with a lower tax rate than the U.S. statutory rate. During the
first quarter of fiscal 2008, the Company received a favorable tax ruling in
Israel. This ruling, which the Company had projected to receive during fiscal
2008, resulted in a one-time benefit of $4,222, or a 10 percentage point impact
on the effective tax rate. The effective tax rate for succeeding quarters is
expected to be higher as the Company's U.S.
-16-
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 2008
is between 25% and 28%.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investment securities increased $18,375 to $79,324 at
September 29, 2007 from $60,949 at September 30, 2006. Working capital,
including cash, increased $45,747 to $403,293 at September 29, 2007 from
$357,545 at September 30, 2006.
Cash provided from operating activities was $27,699 for fiscal 2008 compared to
cash used for operating activities of $6,404 for fiscal 2007. The increase in
cash from operations was related primarily to increased earnings for fiscal 2008
compared to fiscal 2007 and general fluctuations in the timing of the overall
procurement-to-pay cycle on inventory and accounts payable versus last year.
Cash used for investing activities decreased $8,378 to $1,001 for fiscal 2008
compared to $9,379 for fiscal 2007 due primarily to a net increase in the sale
of investment securities and lower capital expenditures, partially offset by the
Qualis, Inc. asset acquisition.
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 2008.
Cash used for financing activities was $12,573 for fiscal 2008 compared to cash
provided from financing activities of $28,330 for fiscal 2007. The increase in
cash used for financing activities was due primarily to net repayments of
long-term debt, slightly offset by lower repurchases of common stock and lower
net repayments of short-term debt.
The Company repurchased 202 shares of its common stock for $4,280 and 710 shares
for $11,238 during the first quarter of fiscal 2008 and 2007, respectively.
There were no private party transactions in the first quarter of fiscal 2008.
Private party transactions accounted for 13 shares in the first quarter of
fiscal 2007.
The Company paid quarterly dividends in the first quarter of $4,214 and $3,939,
or $0.045 and $0.043 per share, for fiscal 2008 and 2007, 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 adopted FIN 48 as of July 1, 2007. At September 29, 2007 the
liability of unrecognized tax benefits for uncertain tax positions was $49,100
and was recorded in other non-current liabilities. We do not expect a
significant tax payment related to these obligations within the next year. Any
future payments related to the settlement of uncertain tax positions cannot be
reasonably estimated at this time.
During the first quarter of fiscal 2008, no other material change in contractual
obligations occurred.
The Company's Israeli subsidiary has provided a guaranty to a bank to secure the
debt of a 50% owned joint venture for approximately $500, 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 29, 2007.
-17-
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 June 30, 2007.
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.
-18-
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:
Year-to-Date Year-to-Date
2008 2007
------------ ------------
CUSTOMER RELATED ACCRUALS
Balance, beginning of period $ 51,656 $ 54,456
Provision recorded 55,595 41,834
Credits processed (56,158) (48,497)
-------- --------
Balance, end of the period $ 51,093 $ 47,793
======== ========
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 $8,622
at September 29, 2007, $9,421 at June 30, 2007 and $12,195 at September 30,
2006.
Inventory - The Company maintains an allowance for estimated obsolete or
unmarketable inventory based on the difference between the cost of the inventory
and its estimated market value. In estimating the allowance, management
considers factors such as excess or slow moving inventories, product expiration
dating, products on quality hold, current and future customer demand and market
conditions. Changes in these conditions may result in additional allowances. The
allowance for inventory was $34,947 at September 29, 2007, $36,210 at June 30,
2007 and $40,992 at September 30, 2006.
Goodwill - Goodwill is tested for impairment annually or more frequently if
changes in circumstances or the occurrence of events suggest impairment exists.
The test for impairment requires the Company to make several estimates about
fair value, most of which are based on projected future cash flows. The
estimates associated with the goodwill impairment tests are considered critical
due to the judgments required in determining fair value amounts, including
projected future cash flows. Changes in these estimates may result in the
recognition of an impairment loss. Goodwill allocated to the Consumer Healthcare
segment is tested annually for impairment in the second quarter of the fiscal
year. The goodwill allocated to the API and Rx Pharmaceuticals segments is
tested annually for impairment in the third quarter of the fiscal year. The
Company's API business is heavily dependent on new products currently under
development. Although not anticipated at this time, the termination of certain
key product development projects could have a materially adverse impact on the
future results of the API segment, which may include a charge for goodwill
impairment. Goodwill was $199,730 at September 29, 2007, $196,218 at June 30,
2007 and $183,205 at September 30, 2006.
Other Intangible Assets - Other intangible assets subject to amortization
consist of developed product technology / formulation, distribution and license
agreements, customer relationships and trademarks. Most of these assets are
related to the Agis acquisition and are amortized over their estimated useful
economic lives using the straight-line method. An accelerated method of
amortization is used for customer relationships. For intangible assets subject
to amortization, an impairment analysis is performed whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
recoverable. An impairment loss is recognized if the carrying amount of the
asset is not recoverable and
-19-
its carrying amount exceeds its fair value. Other intangible assets had a net
carrying value of $187,467 at September 29, 2007, $159,977 at June 30, 2007 and
$137,876 at September 30, 2006.
Product Liability and Workers' Compensation - The Company maintains accruals to
provide for claims incurred that are related to product liability and workers'
compensation. In estimating these accruals, management considers actuarial
valuations of exposure based on loss experience. These actuarial valuations
include significant estimates and assumptions, including, but 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
$2,531 at September 29, 2007, $2,641 at June 30, 2007 and $2,069 at September
30, 2006. The accrual for workers' compensation claims was $1,411 at September
29, 2007, $1,391 at June 30, 2007 and $2,016 at September 30, 2006.
Income Taxes - The Company's effective income tax rate is based on income,
statutory tax rates, special tax benefits and tax planning opportunities
available to the Company in the various jurisdictions in which it operates. Tax
laws are complex and subject to different interpretations by the taxpayer and
respective governmental taxing authorities. Significant judgment is required in
determining the Company's tax expense and in evaluating tax positions. Tax
positions are reviewed quarterly and balances are adjusted as new information
becomes available.
The Company has established valuation allowances against a portion of the
non-U.S. net operating losses and state-related net operating losses to reflect
the uncertainty of its ability to fully utilize these benefits given the limited
carryforward periods permitted by the various jurisdictions. The evaluation of
the realizability of the Company's net operating losses requires the use of
considerable management judgment to estimate the future taxable income for the
various jurisdictions, for which the ultimate amounts and timing of such
realization may differ. The valuation allowance can also be impacted by changes
in the tax regulations.
Significant judgment is required in determining the Company's contingent tax
liabilities. The Company has established contingent tax liabilities using
management's best judgment and adjusts these liabilities as warranted by
changing facts and circumstances. A change in tax liabilities in any given
period could have a significant impact on the Company's results of operations
and cash flows for that period.
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 29, 2007, the Company had invested cash, cash equivalents
and investment securities of $79,324 and short and long-term debt, net of
restricted cash, of $269,620.
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
-20-
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 foreign operations in the U.K., Israel, Germany and Mexico.
These operations transact business in their local currency and foreign
currencies, thereby creating exposure to changes in exchange rates. Significant
currency fluctuations could adversely impact foreign revenues; however, the
Company cannot predict future changes in foreign currency exposure.
Item 4. Controls and Procedures
As of September 29, 2007, the Company's management, including its Chief
Executive Officer and its Chief Financial Officer, has performed an interim
review on the effectiveness of the Company's disclosure controls and procedures
pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934. Based on that
review, 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.
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 pursuant to Rule 13a-15(d) of the
Securities Exchange Act of 1934, no changes during the quarter ended September
29, 2007 were identified that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
-21-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material changes to Legal Proceedings in the current quarter.
Item 1A. Risk Factors
The Company's Annual Report on Form 10-K filed for the fiscal year ended June
30, 2007 includes a detailed discussion of the Company's risk factors. Other
than the items noted below, there have been no material changes to the risk
factors that were included in the Form 10-K during the first quarter of fiscal
2008.
Regulatory Environment
The Non-Prescription Drug Advisory Committee ("NDAC") met on October 18-19, 2007
in response to a March 2007 Citizen's Petition that recommended, among other
things, the withdrawal of cough and cold products for use in children six years
of age and younger. At the NDAC meeting, the panel recommended to the FDA that
cough and cold products not be used for children under two years of age.
Manufacturers, including Perrigo, withdrew these products from the market prior
to the NDAC meeting. The impact on the Company of withdrawing these products
from the market was immaterial. In addition, the panel recommended clinical
studies be conducted on the use of these products for children ages two to
twelve and that certain label changes be made for cough and cold products. The
Panel was divided on the issue of whether or not cough and cold products should
be marketed to children under six years of age. The recommendations by the NDAC
are not binding on the FDA. It is not known at this time what, if any, action
the FDA or industry will take in response to recommendations of the NDAC.
Certain actions by the FDA, such as removing children's cough and cold products
from the marketplace, or mandating label and packaging changes, could have an
adverse effect on the operating results of the Company. The Company's fiscal
2007 revenues for cough and cold products marketed specifically for use in
children ages two to twelve years old were approximately $12,000.
The FDA announced a public meeting for November 14, 2007 to explore the public
health benefit of creating a new Behind-The-Counter ("BTC") class of drugs.
Drugs placed in this category would be available without a prescription but,
only after intervention by a pharmacist. It is not known at this time what, if
any, action the FDA will take in response to this issue. Certain actions by the
FDA, such as moving certain OTC products to BTC, could have a material adverse
effect on the operating results of the Company.
Dextromethorphan
The Company manufactures several products that contain the active ingredient
dextromethorphan which is indicated for cough suppression. Dextromethorphan has
come under scrutiny because of its potential to be abused. Some states have
introduced legislation that, if passed, could require restricted access to
dextromethorphan in finished dosage forms. Such legislation placing age
restrictions on the purchase of OTC products containing dextromethorphan was
passed at the local level by Suffolk County, New York and by the City of
Jerseyville, Illinois. Although at least one state has passed legislation
restricting the bulk sale of dextromethorphan, no state legislation has yet been
enacted restricting the sale of dextromethorphan in finished dosages and
concentrations for use as an OTC drug. Similarly, on the federal level, the U.S.
House of Representatives passed H.R. 970, the Dextromethorphan Distribution Act
-22-
of 2007, which prohibits the illicit distribution of bulk, unfinished
dextromethorphan to any person other than FDA-registered producers of drugs and
devices. The legislation is now pending consideration by the U.S. Senate, where
a companion bill has been introduced. Due to the recent scrutiny of
dextromethorphan, it is possible that any of the states or the federal
government could introduce and pass legislation imposing restrictions on the
sale of dextromethorphan in finished dosage form, including but not limited to,
requiring a minimum age to purchase product, limiting the amount a consumer may
purchase, requiring a prescription and/or placing the product in a more
controlled position of sale behind the pharmacy counter of a retailer. Products
containing dextromethorphan generated revenues of approximately $19,000 in the
first quarter of fiscal 2008 and $68,000 in the full 2007 fiscal year. The
Company cannot predict whether any of the proposed legislation will be passed,
or if it is passed, its impact on future revenues attributable to these
products.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On February 8, 2007, the Board of Directors approved an additional plan to
repurchase shares of common stock with a value of up to $60,000. This plan will
expire on February 9, 2009. The Company has a 10b5-1 plan that allows brokers
selected by the Company to repurchase shares on behalf of the Company at times
when it would ordinarily not be in the market because of the Company's trading
policies. The amount of common stock repurchased in accordance with the 10b5-1
plan on any given day is determined by the plan's formula, which is generally
based on the market price of the Company's stock. All common stock repurchased
by the Company becomes authorized but unissued stock and is available for
reissuance in the future for general corporate purposes.
The table below lists the Company's repurchases of shares of common stock during
its most recently completed quarter:
Value of
Total Average Total Number of Shares Shares
Number of Shares Price Paid Purchased as Part of Available
Fiscal 2008 Purchased per Share Publicly Announced Plans for Purchase
----------- ---------------- ----------- ------------------------ ------------
$56,856
July 1 to August 4 5 $19.17 5 $56,756
August 5 to September 1 50 $20.59 50 $55,727
September 2 to September 29 147 $21.42 147 $52,582
--- ---
Total 202 202
Item 6. Exhibits
Exhibit Number Description
-------------- -----------
31 Rule 13a-14(a) Certifications.
32 Section 1350 Certifications.
-23-
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 1, 2007 By: /s/ Joseph C. Papa
------------------------------------
Joseph C. Papa
President and Chief Executive
Officer
Date: November 1, 2007 By: /s/ Judy L. Brown
------------------------------------
Judy L. Brown
Executive Vice President and
Chief Financial Officer
(Principal Accounting and Financial
Officer)
-24-