January 20, 2005
Mr. Jim B. Rosenberg
Senior Assistant Chief Accountant
United States Securities and Exchange Commission
Division of Corporate Finance
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Perrigo Company
Form 10-K for the year ended June 26, 2004
File No. 000-19725
Dear Mr. Rosenberg,
This letter will serve as the response of Perrigo Company (the "Company") to the
comments as set forth in the Commission's letter dated January 7, 2005.
Form 10-K for the year ended June 26, 2004
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies
Revenue Recognition
STAFF COMMENT:
1. We believe that your disclosure related to estimates that reduce gross
revenue such as product returns, chargebacks, customer rebates and other
discounts and allowances could be improved as follows:
a) Disclose the nature and amount of each accrual at the balance sheet
date and the effect that could result from using other reasonably
likely assumptions than what you used to arrive at each accrual such
as a range of reasonably likely amounts or other type of sensitivity
analysis.
b) Disclose the factors that you consider in estimating each accrual such
as historical return of products, levels of inventory in the
distribution channel, estimated remaining shelf life, price changes
from competitors and introductions of generics and/or new products.
c) To the extent that information you consider in b) is quantifiable,
disclose both quantitative and qualitative information and discuss to
what extent information is from external sources (e.g., end-customer
prescription demand, third-party market research data comparing
wholesaler inventory levels to end-customer demand). For example, in
discussing your estimate of product that may be returned, consider
disclosing and discussing, preferably by product and in tabular
format, the total amount of product (in sales dollars) that could
potentially be returned as of the balance sheet date and disaggregated
by expiration period.
d) If applicable, discuss any shipments made as a result of incentives
and/or in excess of your customer's ordinary course of business
inventory level. Discuss your revenue recognition policy for such
shipments.
e) You should consider disclosing a roll forward of the accrual for each
estimate for each period presented showing the following:
o Beginning balance,
1
o Current provision related to sales made in current period,
o Current provision related to sales made in prior periods,
o Actual returns or credits in current period related to sales made
in current period,
o Actual returns or credits in current period related to sales made
in prior periods, and
o Ending balance.
f) In your discussion of results of operations for the period to period
revenue comparisons, discuss the amount of and reason for fluctuations
for each type of reduction of gross revenue, such as product returns,
chargebacks, customer rebates and other discounts and allowances,
including the effect that changes in your estimates of these items had
on your revenues and operations.
MANAGEMENT RESPONSE:
As of June 26, 2004, the Company's revenues were predominantly derived from
sales of over-the-counter pharmaceutical and nutritional products. Generally,
sales from these types of products are not subject to significant estimation for
discounts, price discrepancies, returned goods and other items. The provision
for these types of items, as discussed in Note A - Summary of Significant
Accounting Policies of the Company's financial statements, is developed from
known customer claims as well as a small percentage of open trade accounts
receivable. The balance in this claims allowance account was approximately $3.7
million at June 26, 2004 and $4.1 million at June 28, 2003. The Company believes
that neither the balance of this allowance nor the process by which it is
derived warrants specific disclosure. Revenue, less this provision, is
appropriately recognized at the time that title and risk transfers to the
customer. Other than the claims allowance discussed above, gross revenue is not
reduced by any other allowances that require significant judgement. Therefore.
the Company does not currently believe that its revenue recognition policy meets
the criteria of a critical accounting policy.
In addition, many of the factors listed in the Commission's comment are not
relevant to the Company's general business as of June 26, 2004. These factors
tend to relate to sales of prescription drug products. The Company announced its
intent to enter the generic prescription drug market in August 2003; however,
the Company had not generated any revenues related to sales of prescription drug
products as of June 26, 2004. Additionally, the Company announced its intent to
acquire Agis Industries (Agis) in November 2004 and filed a Form S-4 on December
22, 2004 related to this transaction. A significant portion of Agis' revenues is
from sales of prescription drug products. Once the Company' generates revenues
from prescription drug products and closes the transaction with Agis, the
Company will, as appropriate, revise its disclosures relating to critical
accounting policies in its future filings. Until such time, the Company will
continue to include its revenue recognition policy in Note A - Summary of
Significant Accounting Policies in its Notes to Consolidated Financial
Statements.
Allowance for Doubtful Accounts, page 26
STAFF COMMENT:
2. It appears your bad debt provision and reserves for bad debt have decreased
compared to prior year despite increasing net sales. Please expand your
disclosures so as to provide readers better insight into this critical
accounting estimate and its impact on results of operations.
MANAGEMENT RESPONSE:
The Company's critical accounting policy for Allowance for Doubtful Accounts
indicates the basis for the estimate of this allowance. The balance of this
allowance is included in the description of the policy to facilitate the
investor's understanding of the Company's policy on accounting for bad debt. In
the Management Discussion and Analysis of Financial Condition and Results of
2
Operations, the Company notes that operating expenses in fiscal 2003 were
reduced because of lower bad debt expense due to the settlement of a large
customer's bankruptcy during fiscal 2003. A review of Schedule II - Valuation
and Qualifying Accounts - provides additional evidence of the relationship
between the settlement of the bankruptcy and the reduction in the balance of
Allowance for Doubtful Accounts. The Company feels that the reference in
Management's Discussion and Analysis, coupled with a review of Schedule II,
adequately discloses the reason related to the reduction in the account balance
in spite of an increase in net sales.
Notes to Consolidated Financial Statements
Accrued Expenses
STAFF COMMENT:
3. Accrued expenses approximate 23% of total current liabilities as of June
26, 2004. Please disaggregate this amount consistent with Rule 5-02-20 of
Regulation S-X.
MANAGEMENT RESPONSE:
The Company will review its disclosure of balance sheet accounts pursuant to
Rule 5-02-20 of Regulation of S-X and revise its future filings accordingly.
Note F - Retirement Plans, page 48
STAFF COMMENT:
4. Please provide the disclosures required by paragraph 5 of SFAS 132(R).
MANAGEMENT RESPONSE:
Prior to filing its Form 10-K for fiscal 2004, the Company concluded that the
intent of the disclosure requirements of SFAS 132(R) was not relevant to the
Company's postretirement plan because of the nature and materiality of the
plan's potential impact on the Company's results of operations and financial
position. Consequently, the Company decided to disclose only the unfunded
accumulated postretirement benefit obligation and the expense associated with
this benefit. In accordance with your comment, however, the Company will review
its disclosure related to the postretirement plan pursuant to SFAS 132(R) and
revise its future filings accordingly.
Note G - Income Taxes, page 48
STAFF COMMENT:
5. We note your valuation allowance for carry forwards. Please provide us your
analysis as to why this allowance continues to increase and is necessary.
In your response, please consider your reported pre-tax income for all
years presented since 2000, as well as the guidance of SFAS 109, paragraph
17(e) and the applicable paragraphs thereafter.
MANAGEMENT RESPONSE:
Please note that, as disclosed in Note G, the carry forwards are primarily
related to state net operating losses. In fiscal 1998, the Company divested its
personal care business. This transaction gave rise to state net operating losses
for the legal entity Perrigo Company of Tennessee, Inc. in several states
including; Tennessee, New Jersey, Michigan and South Carolina. Because the
Company no longer has operations in this legal entity, management
3
believes realization of the deferred tax asset related to the net operating loss
carry forward is not assured. In accordance with SFAS 109, paragraph 17(e), a
valuation allowance was established to reduce the deferred tax asset to an
amount that is more likely than not to be realized. During the course of routine
Internal Revenue Service audits, the net operating losses attributed to this
legal entity increased, which resulted in a related increase in the valuation
allowances. Additionally, as a result of the Company's entrance into the generic
prescription drug market, the recent operating results of the Company's
Michigan-based legal entity, Perrigo Pharmaceuticals, Inc., have created
additional state operating losses that may be carried forward but which require
a valuation allowance since the utilization of the carry forward is not assured.
Management's Closing Response
As applicable, the Company will revise its disclosure in future Forms 10-Q and
10-K in accordance with your comments. If you have further questions or need
additional information, please contact Douglas R. Schrank at (269) 686-1057.
Thank you for your time and consideration.
Sincerely,
/s/ Douglas R. Schrank
----------------------------------------------------
Douglas R. Schrank
Executive Vice President and Chief Financial Officer
4