<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
___X___ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
_______ 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 1-11885
--------------------
ALLEGIANCE CORPORATION.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 36-4095179
-------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1430 Waukegan Road, McGaw Park, Illinois 60085
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(847) 689-8410
------------------------------
(Registrant's telephone number,
including area code)
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 (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
---
The number of shares of the registrant's Common Stock, $1 par value, outstanding
as of May 5, 1997, the latest practicable date, was 57,842,660 shares.
<PAGE>
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Allegiance Corporation
Condensed Consolidated Statements of Income (Unaudited)
(in millions, except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Net sales $1,055.9 $1,115.0
Costs and expenses
Cost of goods sold 836.1 889.3
Selling, general and administrative
expenses 161.0 165.8
Research & development 2.0 2.0
Goodwill amortization 5.3 9.2
Interest expense 18.9 -
Other (income) expense 0.2 (1.0)
- ------------------------------------------------------------------------------
Total costs and expenses 1,023.5 1,065.3
- ------------------------------------------------------------------------------
Income before income taxes 32.4 49.7
Income tax expense 11.4 19.1
- ------------------------------------------------------------------------------
Net income $ 21.0 $30.6
- ------------------------------------------------------------------------------
Net income per common share $0.38 N/A
Average number of common shares outstanding 55.3 N/A
==============================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
-3-
Allegiance Corporation
Condensed Consolidated Balance Sheets
(in millions, except par value and shares)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
(Unaudited)
<S> <C> <C> <C>
Current assets Cash and equivalents $ 26.3 $ 22.9
Accounts receivable (net
of allowance for doubtful accounts
of $26.6 and $26.4 at March 31,
1997 and December 31, 1996,
respectively) 489.5 515.1
Notes and other current
receivables 17.3 32.4
Inventories 626.4 628.5
Deferred income taxes 119.7 122.8
Prepaid expenses 23.4 13.8
---------------------------------------------------------------------------------------
Total current assets 1,302.6 1,335.5
---------------------------------------------------------------------------------------
Property, At cost 1,530.9 1,519.1
plant and Accumulated depreciation and
equipment amortization (707.1) (681.2)
---------------------------------------------------------------------------------------
Net property, plant and equipment 823.8 837.9
- ------------------------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 547.8 514.5
Other 118.9 111.3
---------------------------------------------------------------------------------------
Total other assets 666.7 625.8
- ------------------------------------------------------------------------------------------------------------------
Total assets $2,793.1 $2,799.2
==================================================================================================================
Current
liabilities Accounts payable and accrued liabilities 688.0 698.1
- ------------------------------------------------------------------------------------------------------------------
Long-term debt 1,086.8 1,106.6
- ------------------------------------------------------------------------------------------------------------------
Deferred income taxes 109.9 107.4
- ------------------------------------------------------------------------------------------------------------------
Other non-current liabilities 55.9 59.4
- ------------------------------------------------------------------------------------------------------------------
Equity Common stock, par value $1.00,
authorized 200,000,000 shares,
outstanding 55,442,766 shares at
March 31, 1997 and 54,977,000
December 31, 1996 55.4 55.0
Additional contributed capital 11.0 1.5
Retained earnings 784.8 769.2
Cumulative foreign currency adjustment 1.3 2.0
---------------------------------------------------------------------------------------
Total equity 852.5 827.7
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $2,793.1 $2,799.2
==================================================================================================================
</TABLE>
The accompany notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
-4-
Allegiance Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in millions)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1996
---- ----
<S> <C> <C> <C>
(Brackets denote cash outflows)
Cash flow provided Net income $21.0 $30.6
by operations Adjustments
Depreciation and amortization 31.2 37.3
Deferred income taxes 5.1 12.8
Other 2.1 1.1
Changes in balance sheet items
Accounts and notes receivable 44.7 13.6
Inventories 2.1 (29.2)
Accounts payable and other current liabilities (3.1) (9.3)
Restructuring program payments (8.3) (11.2)
Other (11.9) (1.9)
--------------------------------------------------------------------------------
Cash flow provided by operations 82.9 43.8
- ----------------------------------------------------------------------------------------------------------------
Investment Capital expenditures (14.8) (14.6)
transactions Acquisitions (net of cash received) (36.5) (9.2)
Proceeds from asset dispositions - (5.2)
--------------------------------------------------------------------------------
Investment transactions, net (51.3) (29.0)
- ----------------------------------------------------------------------------------------------------------------
Financing Payments to Baxter International Inc. - (11.8)
transactions Decrease in debt with maturities of three
months or less, net (47.0) -
Issuances of debt 25.0 -
Common stock cash dividends (5.6) -
Common stock issued under employee benefit plans 2.0 -
Purchase of treasury stock (2.6) -
--------------------------------------------------------------------------------
Financing transactions, net (28.2) (11.8)
- ----------------------------------------------------------------------------------------------------------------
Increase in cash and equivalents 3.4 3.0
Cash and equivalents at beginning of period 22.9 0.8
- ----------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $26.3 $3.8
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
-5-
Allegiance Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Company background
- -----------------------
Allegiance Corporation ("Allegiance" or the "company") was incorporated in
Delaware in June 1996. On September 30, 1996 (the "Distribution Date"), Baxter
International Inc. ("Baxter") and its subsidiaries transferred to Allegiance and
its subsidiaries the United States health-care distribution business, surgical
and respiratory therapy business and health-care cost management business, as
well as certain foreign operations (the "Allegiance Business") in connection
with a spin-off of the Allegiance Business by Baxter. The spin-off was effected
on the Distribution Date through a distribution of common stock of Allegiance to
Baxter stockholders (the "Distribution"). The Distribution of approximately 54.8
million shares of Allegiance stock, based on an exchange ratio of one for five,
was made to those who were Baxter stockholders on the record date of September
26, 1996. No historical earnings per share data is presented prior to October 1,
1996, as the Allegiance Business' earnings were part of Baxter's consolidated
results through the close of business on September 30, 1996.
2. Financial information
- --------------------------
The unaudited interim condensed consolidated financial statements of Allegiance
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These interim
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
company's 1996 Annual Report to Stockholders and Annual Report on Form 10-K for
the year ended December 31, 1996..
In the opinion of management, the interim condensed consolidated financial
statements reflect all adjustments necessary for a fair presentation of the
interim periods. All such adjustments are of a normal, recurring nature. The
results of operations for the interim period are not necessarily indicative of
the results of operations to be expected for the full year.
<PAGE>
-6-
3. Pro forma financial information
- ------------------------------------
The following unaudited pro forma combined statement of income presents the
combined results of Allegiance assuming that the transactions contemplated by
the Distribution had been completed as of January 1, 1996. The unaudited pro
forma information has been prepared utilizing the historical consolidated
financial statements of Allegiance. All pro forma adjustments were substantially
consistent with those disclosed in the company's 1996 Annual Report to
Stockholders and Annual Report on Form 10-K for the year ended December 31, 1996
(in millions, except per share data).
<TABLE>
<CAPTION>
Three months ended
March 31, 1996
----------------------
<S> <C>
Net sales $1,112.1
Costs and expenses
Cost of goods sold 887.2
Selling, general and administrative expenses 168.0
Research & development 2.0
Interest, net 22.5
Goodwill amortization 9.2
Other (income) expense (1.0)
Total costs and expenses 1,087.9
----------
Pretax income 24.2
Income tax expense 9.1
Net income $15.1
==========
Net income per common share $0.28
==========
Average number of common
shares outstanding 54.9
==========
</TABLE>
4. Inventories
- ----------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
March 31, December 31,
(in millions) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $55.3 $ 52.8
Work in process 55.2 46.4
Finished products 515.9 529.3
- ------------------------------------------------------------------------------
Total inventories $626.4 $628.5
==============================================================================
</TABLE>
<PAGE>
-7-
5. Restructuring charges
- --------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Divestitures
Employee- and asset Other
(in millions) related costs write-downs costs Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1996 balance $24.0 $22.0 $20.1 $66.1
- ----------------------------------------------------------------------------------------------------
Utilization:
Cash (4.0) - (4.3) (8.3)
Non-cash - (0.5) - (0.5)
- ----------------------------------------------------------------------------------------------------
March 31, 1997 balance $20.0 $21.5 $15.8 $57.3
====================================================================================================
</TABLE>
Cash outflows pertain primarily to employee-related costs for severance,
outplacement assistance, relocation, implementation teams and facility
consolidations. Since the inception of the restructuring program, approximately
2,200 of the 2,300 positions that are expected to be affected by the program
have been eliminated. The remaining reductions will occur throughout 1997 and
1998, as facility closures and consolidations are completed as planned.
6. Legal proceedings
- ---------------------
Upon the Distribution, Allegiance assumed the defense of litigation involving
claims related to the Allegiance Business, including certain claims of alleged
personal injuries as a result of exposure to natural rubber latex gloves
described below. Allegiance will be defending and indemnifying Baxter
Healthcare Corporation ("BHC"), as contemplated by the agreements between Baxter
and Allegiance, for all expenses and potential liabilities associated with
claims pertaining to this litigation. It is expected that Allegiance will be
named as a defendant in future litigation and may be added as a defendant in
existing litigation.
BHC was one of ten defendants named in a purported class action filed in August
1993, KENNEDY, ET AL., V. BAXTER HEALTHCARE CORPORATION, ET AL., (Sup. Ct.,
Sacramento Sacremento Co., Cal., #535632), on behalf of all medical and dental
personnel in the State of California who allegedly suffered allergic reactions
to natural rubber latex gloves and other protective equipment or who allegedly
have been exposed to natural rubber latex products. The case alleged that users
of various natural rubber latex products, including medical gloves made and sold
by BHC and other manufacturers, suffered allergic reactions to the products
ranging from skin irritation to systemic anaphylaxis. The Court granted
defendants' demurer to the class action allegations. On February 29, 1996, the
California Appellate Court upheld the trial court's ruling and the case was
dismissed. In April 1994, a similar purported class action, GREEN, ET AL., V.
BAXTER HEALTHCARE CORPORATION, ET AL., (Cir. Ct., Milwaukee Co., WI,
94CV004977), was filed against BHC and three other defendants. The class action
allegations have been withdrawn, but additional plaintiffs added individual
claims. On July 1, 1996, BHC was served with a similar purported class action,
WOLF V. BAXTER HEALTHCARE CORP., ET AL., (Circuit Court, Wayne County, MI, 96-
617844NP). BHC is the only named defendant in that suit. On January 3, 1997, BHC
was served with a similar, nationwide proposed class action, MURRAY, ET AL., V.
BAXTER HEALTHCARE CORPORATION, ET AL., (U.S.D.C. Southern District of Indiana,
IP96-1889C). BHC and three other companies are defendants. On April 11, 1997, a
similar proposed statewide class action, DELPIT, ET AL. V. ANSELL, INC., ET AL.,
(U.S.D.C. Eastern District of Louisiana, 97-1112), was filed on behalf of users
of latex gloves in the State of Louisiana. BHC and five other companies are
defendants. On October 9, 1996, the plaintiff in one such case pending in
federal court filed a petition with the Judicial Panel on Multi District
Litigation, IN RE LATEX GLOVES PRODUCTS LIABILITY LITIGATION, (MDL Docket No.
1148), seeking to transfer and
<PAGE>
-8-
consolidate the cases pending in federal court for pretrial proceedings and/or
trial. On February 26, 1997, the Panel granted the petition and ordered all
cases pending in federal court to be transferred to the Eastern District of
Pennsylvania for coordinated or consolidated pretrial proceedings. As of May 9,
1997, 95 additional lawsuits have been served on BHC and/or the company
containing similar allegations of sensitization to natural rubber latex
products. Allegiance intends to vigorously defend against these actions. Since
none of these cases has proceeded to a hearing on the merits, Allegiance is
unable to evaluate the extent of any potential liability, and unable to estimate
any potential loss.
Because of the increase in claims filed and the ongoing defense costs that
will be incurred, the company believes it is probable that Allegiance will incur
significant expenses related to the defense of cases involving natural rubber
latex gloves. During the fourth quarter of 1996, the company was able to
determine the minimum amount of the potential range of defense costs expected to
be incurred related to existing cases. Consequently, the company recorded a
charge of $19.5 million in the fourth quarter of 1996 to provide the minimum
amount of the potential range of legal defense costs.
Allegiance believes a substantial portion of any potential liability and
remaining defense costs related to natural rubber latex gloves cases and claims
will be covered by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency. In 1996, Baxter
notified its insurance companies that it believes that these cases and claims
are covered by Baxter's insurance. Most of the insurers have reserved their
rights (i.e., neither admitted nor denied coverage), and may attempt to reserve
in the future, the right to deny coverage, in whole or in part, due to differing
theories regarding, among other things, the applicability of coverage and when
coverage may attach. Upon resolution of any of the uncertainties concerning
these cases, the company may incur charges in excess of presently established
reserves. It is not expected that the outcome of these matters will have a
material adverse effect on Allegiance's overall business, cash flow, results of
operations or financial condition.
Under the U.S. Superfund statute and many state laws, generators of hazardous
waste sent to a disposal or recycling site are liable for cleanup of the site if
contaminants from that property later leak into the environment. The law
provides that potentially responsible parties may be held jointly and severally
liable for the cost of investigating and remediating a site. This liability
applies to the generator even if the waste was handled by a contractor in full
compliance with the law.
As of March 31, 1997, BHC had been identified as a potentially responsible party
for cleanup costs at ten hazardous waste sites, for which Allegiance has assumed
responsibility. Allegiance's largest assumed exposure is at the Thermo-Chem site
in Muskegon, Michigan. Allegiance expects the total cleanup costs for this site
to be between $44.0 million and $65.0 million, of which Allegiance's share would
be approximately $5.4 million. This amount, net of payments of approximately
$1.4 million, has been accrued and is reflected in Allegiance's consolidated
financial statements. The estimated exposure for the remaining nine sites is
approximately $3.9 million, which has been accrued and reflected in Allegiance's
consolidated financial statements.
The company is a defendant in, or has assumed the defense of, a number of other
claims, investigations and lawsuits. Upon resolution of any of these
uncertainties, the company may incur charges in excess of presently established
reserves. Based on the advice of counsel, management does not believe the
outcome of these matters or the environmental matters, individually or in the
aggregate, will have a material adverse effect on Allegiance's overall business,
cash flow, results of operations or financial condition.
<PAGE>
-9-
7. Subsequent Events
- ----------------------
In April 1997, Allegiance sold substantially all of its investment in
MedManagement, L.L.C. which generated net proceeds of approximately $16.0
million.
On May 2, 1997, the company received $54.8 million in cash from 141 members of
Allegiance's management who purchased approximately 2.4 million shares of
the company's stock. This plan was designed to directly align management and
stockholder interests. Under the terms of the voluntary program, Allegiance
managers used personal full-recourse loans to purchase the newly issued shares
at the closing price per share on May 2, 1997 of $23 1/4. The loans, borrowed
from several banks, are at market interest rates and are the personal
obligations of the participants. Allegiance has agreed to guarantee repayment to
the banks in the event of default by a participant. Allegiance may take all
actions necessary to obtain full reimbursement from the participant for amounts
paid by Allegiance, if any, to the banks in the future under its guarantee.
<PAGE>
-10-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following management discussion and analysis describes material changes in
the company's financial condition since December 31, 1996. Trends of a material
nature are discussed to the extent known and considered relevant. This
discussion should be read in conjunction with the consolidated financial
statements, related notes thereto and management's discussion and analysis of
financial condition and results of operations included in the company's 1996
Annual Report to Stockholders and Annual Report on Form 10-K for the year ended
December 31, 1996.
Certain statements in this discussion constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Statements indicating the company "plans," "expects," estimates" or "believes"
are forward-looking statements that involve known and unknown risks, including,
but not limited to, general economic and business conditions, changing trends in
the health-care industry and customer profiles, competition, changes in
governmental regulations, and unfavorable foreign currency fluctuations.
Although Allegiance believes its expectations with respect to the forward-
looking statements are based upon reasonable assumptions within the bounds of
its knowledge of its business and operations, there can be no assurance that
actual results, performance or achievements of Allegiance will not differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. The company undertakes no
obligation to update publicly any forwarding-looking statement whether as a
result of new information, future events or otherwise.
RESULTS OF OPERATIONS
Sales
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three months ended
March 31,
Percent
(in millions, except percentages) 1997 1996 (decrease)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Geographic region
United States 990.5 $1,047.0 (5.4%)
International 65.4 68.0 (3.8)
- --------------------------------------------------------------------------------
Total net sales $1,055.9 $1,115.0 (5.3%)
- --------------------------------------------------------------------------------
Product Category
Distributed product $680.9 $732.4 (7.0%)
Self-manufactured product 375.0 382.6 (2.0)
- --------------------------------------------------------------------------------
Total net sales $1,055.9 $1,115.0 (5.3%)
- --------------------------------------------------------------------------------
</TABLE>
The decline in Allegiance's domestic and distributed product net sales for the
three months ended March 31, 1997 as compared to the same period in the prior
year principally resulted from the ongoing execution of plans to improve
profitability by reducing sales in lower-margin, distributed products in the
United States.
International sales during the three months ended March 31, 1997 as compared to
the same period in the prior year continued to be reduced slightly by
unfavorable foreign-exchange rates. In addition, the comparison to the prior
year continues to be unfavorably impacted by Allegiance's selling arrangements
in international markets: as part of Baxter, the company sold products directly
to customers. Subsequent to becoming an independent public company, Allegiance
sells products through Baxter as a distributor.
<PAGE>
-11-
The decline of self-manufactured product sales during the three months ended
March 31, 1997 as compared to the same period in the prior year resulted from
decreased volume and on-going pricing pressures in the U.S. Additionally, the
decline in international sales discussed above, contributed to the decline.
<TABLE>
<CAPTION>
Three months ended March 31,
Pro forma
(as a percentage of sales) 1997 1996 1996/(1)/
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross margin 20.8% 20.2% 20.2%
Selling, general and administrative expenses 15.2 14.9 15.1
- ----------------------------------------------------------------------------------------------------
</TABLE>
/(1)/Refer to Note 3 to "Notes to Condensed Consolidated Financial Statements"
for pro forma financial information.
Gross margin increased by 0.6 percentage points for the three months ended March
31, 1997 as compared to the same period in the prior year. This increase is
consistent with the company's planned reduction in sales of lower-margin,
distributed products discussed earlier and reflects the company's ability to
offset pricing pressures with cost efficiencies. Allegiance plans to continue
its efforts to improve its gross margin by offsetting pricing pressures with
manufacturing and other cost efficiencies, managing its product mix more
effectively, and, when possible, instituting price increases.
In 1996, selling, general, and administrative expense in the first quarter
benefited from a $5.7 million non-recurring reversal of excess reserves.
Excluding this item, selling, general and administrative expenses as a percent
of sales for the three months ended March 31, 1996, would have been 15.4% on a
historical basis and 15.6% on a pro forma basis. The reduction in selling,
general and administrative expenses as a percent of sales during the first
quarter of 1997 as compared to both the historical and pro forma expenses in the
same period of the prior year, resulted principally from lower headcount, lower
benefit costs and overall expense control initiatives implemented by management
in both current and prior periods. Management plans to continue to improve this
ratio through continued expense reduction initiatives.
Goodwill
Goodwill expense for the three months ended March 31, 1996 does not reflect the
benefit of $4.7 million of lower goodwill amortization that resulted from the
company's $550.0 million write-down of goodwill during the fourth quarter of
1996.
Restructuring Program
In November 1993, Baxter initiated a restructuring program to improve
stockholder value and reduce costs. These strategic actions were designed in
part to make the Allegiance Business more efficient and responsive in addressing
the changes occurring in the U.S. health-care system. See Note 5 to "Notes to
the Condensed Consolidated Financial Statements" for discussions related to cash
and non-cash utilization of the reserves and headcount reductions to date.
Management believes that the program is on target to achieve anticipated direct
savings of approximately $155 million in 1997 and exceeding $155 million in
1998. The company anticipates that these savings will continue to partially
offset potential future gross margin erosion and investments into cost-
management initiatives. Management further believes that its remaining
restructuring reserves are adequate to complete the actions contemplated by the
restructuring program and that future cash expenditures related to the program
will be funded from cash generated from operations.
<PAGE>
-12-
Interest Expense
Prior to September 30, 1996, Allegiance participated in a centralized cash-
management program administered by Baxter. No interest was charged by Baxter.
Upon the spin-off, amounts were borrowed to fund a $1,147.3 million distribution
to Baxter and for working capital requirements.
Other Income And Expense
The change in other income and expense for the three months ended March 31, 1997
as compared to the three months ended March 31, 1996 was caused by unfavorable
foreign exchange rates and losses related to certain equity investments of the
company.
Pretax Income
<TABLE>
<CAPTION>
Three months ended Percent
March 31, increase
(in millions, except percentages) 1997 1996 (decrease)
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Pretax income $32.4 49.7 (34.8%)
Adjust for goodwill expense - 4.7
Adjust for interest expense 18.9 -
Adjust for non-recurring item - (5.7)
- ----------------------------------------------------------------------
Adjusted pretax income $51.3 48.7 5.3%
======================================================================
</TABLE>
Excluding the $5.7 million non-recurring reversal of excess reserves
during the three months ended March 31, 1996, and adjusting for the goodwill
write-down and interest expense discussed previously which did not impact
earnings until the fourth quarter of 1996, pretax income increased as a result
of the improved gross margins and reduction in selling, general and
administrative expenses noted above.
Income Taxes
Allegiance's effective tax rate during the period ended March 31, 1997 was
3.2 percentage points lower than the same period in the prior year.
This decrease was caused principally by the positive impact on earnings of lower
goodwill amortization, which is a non-taxable item, reflected in first quarter
1997 earnings.
Net Income
Excluding the non-recurring reversal of excess reserves and adjusting for
goodwill and interest expense, the change in net income during the three months
ended March 31, 1997 as compared to the same period in the prior year is
consistent with the changes in pretax income and income taxes discussed
previously.
ADOPTION OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No. 128
requires presentation on the face of the income statement of both basic and
diluted earnings per share ("EPS"). SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, and requires
restatement of all prior period EPS data presented. The adoption of this
statement is not expected to materially affect either future or prior period
EPS data.
<PAGE>
-13-
LIQUIDITY AND CAPITAL RESOURCES
Allegiance's current assets exceeded current liabilities by $ 614.6 million at
March 31, 1997 versus an excess of $637.4 million at December 31, 1996. Current
assets at March 31, 1997 included accounts, notes and other current receivables
of $506.8 million and inventories of $626.4 million. These sources of liquidity
are convertible into cash over a relatively short period of time and, thus,
could be available to help Allegiance satisfy normal operating cash
requirements.
The company intends to fund its short- and long-term obligations as they mature
through cash flow from operations, existing credit facilities or issuance of
debt or equity. Management believes the company has credit facilities adequate
to support ongoing operational, capital, restructuring and litigation
requirements. Beyond that, Allegiance believes it has sufficient financial
flexibility to attract long-term capital on acceptable terms as may be needed to
support its growth objectives.
Cash Flow
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three months ended
March 31,
(brackets denote cash outflows, in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash flow provided by operations as stated in the
company's Condensed Consolidated Statements
of Cash Flows $ 82.9 $ 43.8
Capital expenditures (14.8) (14.6)
Common stock cash dividends (5.6) -
- --------------------------------------------------------------------------------
"Free cash flow" $ 62.5 $ 29.2
================================================================================
</TABLE>
This increase in cash flow provided by operations during 1997 resulted primarily
from improved balance sheet management (primarily accounts and notes
receivable), partially offset by the unadjusted decrease in earnings discussed
previously.
Management emphasizes "free cash flow" as an internal measure of operating cash
flow after capital expenditures and dividends as reconciled in the table above.
Management's objective is to maximize "free cash flow", and incentive
compensation programs throughout the company include emphasis on management of
working capital and "free cash flow" targets. The level of "free cash flow"
during the three months ended March 31, 1997 enabled the company to pay down
$22.0 million of long-term debt and funded the acquisition of West Hudson & Co.
Inc., which is discussed below.
<PAGE>
-14-
Investment Transactions
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three months ended
March 31,
(brackets denote cash outflows, in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Capital expenditures $(14.8) $(14.6)
Acquisitions (36.5) (9.2)
Proceeds from asset dispositions - (5.2)
- --------------------------------------------------------------------------------
Total investment transactions, net $(51.3) $(29.0)
================================================================================
</TABLE>
Capital expenditure levels during the three months ended March 31, 1997 as
compared to the same period in 1996 are relatively consistent. Allegiance
management expects to invest in capital expenditures throughout 1997 at levels
consistent with 1996, principally for improvements to existing facilities,
system upgrades, productivity-enhancing equipment and other cost reduction
projects.
Consistent with Allegiance's strategic direction of providing cost-management
services, Allegiance acquired West Hudson & Co. Inc., a privately-owned health-
care consulting firm, on January 2, 1997 for $30.5 million in cash and $10.5
million in stock with contingent payments to be paid over the next four years.
The remaining acquisitions during the three months ended March 31, 1997, as well
as the acquisitions during the same period in 1996, are consistent with
Allegiance's strategic direction, and were made to broaden product lines and
service offerings or expand market coverage.
The net use of cash related to asset dispositions for the three months ended
March 31, 1996 primarily related to cash payments associated with the settlement
of certain programs arising from the divestitures of the Industrial and Life
Sciences division and the diagnostics manufacturing businesses.
In April 1997, Allegiance sold substantially all of its investment in
MedManagement, L.L.C., which generated net proceeds of approximately $16.0
million.
On May 2, 1997, the company received $54.8 million in cash from 141 members of
Allegiance's management who purchased approximately 2.4 million shares of the
company's stock. This plan was designed to directly align management and stock
holder interests. See Note 7 to "Notes to Condensed Consolidated Financial
Statements" for additional information.
<PAGE>
15
LITIGATION
See Note 6 to "Notes to Condensed Consolidated Financial Statements" for a
detailed description of the status of Allegiance's litigation.
Under the U.S. Superfund statute and many state laws, generators of hazardous
waste sent to a disposal or recycling site are liable for cleanup of the site if
contaminants from that property later leak into the environment. The law
provides that potentially responsible parties may be held jointly and severally
liable for the cost of investigating and remediating a site. This liability
applies to the generator even if the waste was handled by a contractor in full
compliance with the law.
As of March 31, 1997, BHC had been identified as a potentially responsible party
for cleanup costs at ten hazardous waste sites, for which Allegiance has assumed
responsibility. Allegiance's largest assumed exposure is at the Thermo-Chem site
in Muskegon, Michigan. Allegiance expects the total cleanup costs for this site
to be between $44.0 million and $65.0 million, of which Allegiance's share would
be approximately $5.4 million. This amount, net of payments of approximately
$1.4 million, has been accrued and is reflected in Allegiance's consolidated
financial statements. The estimated exposure for the remaining nine sites is
approximately $3.9 million, which has been accrued and reflected in Allegiance's
consolidated financial statements.
The company is a defendant in, or has assumed the defense of, a number of other
claims, investigations and lawsuits. Upon resolution of any of the uncertainties
described in Note 6 to "Notes to Condensed Consolidated Financial Statements",
Allegiance may incur charges in excess of presently established reserves. Based
on the advice of counsel, management does not believe the outcome of these
matters individually or in the aggregate, will have a material adverse effect on
Allegiance's overall business, cash flow, results of operations or financial
condition.
<PAGE>
-16-
PART II. OTHER INFORMATION
Allegiance Corporation
Item 1. Legal Proceedings
Note 6 to "Notes to Condensed Consolidated Financial Statements" (Part I, Item I
of this Report) and "Litigation" set forth in Management's Discussion and
Analysis of Financial Condition and Results of Operations (Part I, Item 2 of
this Report) are incorporated herein by reference.
Item 2(c). Changes in Securities
In connection with the acquisition of West Hudson & Co. Inc. on January 2, 1997,
Allegiance issued approximately 450,000 shares, valued at approximately $10.5
million, of unregistered common stock to the owners of West Hudson & Co. Inc.
The shares of common stock were issued upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. On January 29, 1997,
Allegiance repurchased approximately 100,000 shares, valued at approximately
$2.6 million, of this unregistered common stock.
<PAGE>
-17-
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index hereto.
(b) Report on Form 8-K
Not applicable.
<PAGE>
-18-
Signature
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.
ALLEGIANCE CORPORATION
----------------------------------------
(Registrant)
Date: May 14, 1997 By: /s/Peter B. McKee
----------------------------------------
Peter B. McKee
Senior Vice President and
Chief Financial Officer
<PAGE>
-19-
Exhibits Filed with Securities and Exchange Commission
<TABLE>
<CAPTION>
Number Description of Exhibit
- ------ ----------------------
<S> <C>
11.1 Statement re computation of primary earnings
per common share.
11.2 Statement re computation of fully diluted
earnings per common share.
27 Financial Data Schedule. *
</TABLE>
(All other exhibits are inapplicable.)
* Shown only in the original filed with the Securities and Exchange Commission.
-----------------------------------------------------------------------------
Copies of the above exhibits not contained herein are available at a charge of
35 cents per page upon written request to the Investor Relations Department,
Allegiance Corporation, 1430 Waukegan Road, McGaw Park, IL 60085. Copies are
also available at a charge of at least 25 cents per page from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street
N.W., Washington, D.C., 20549.
<PAGE>
EXHIBIT 11.1
COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE
(In Millions, Except Per Share Data)
<TABLE>
<CAPTION>
March 31,
1997
---------
<S> <C>
HISTORICAL COMPUTATION/(1)/
Net income available for common stock.......................... $21.0
Average common shares outstanding.............................. 55.3
Primary net income per common share............................ $0.38
=====
</TABLE>
___________
/(1)/Historical computation of primary earnings per common share for the three
months ended March 31, 1996 is not considered meaningful as Allegiance was
not a public company during this historical period.
<PAGE>
EXHIBIT 11.2
COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE
(In Millions, Except Per Share Data)
<TABLE>
<CAPTION>
March 31,
1997
---------
<S> <C>
HISTORICAL COMPUTATION/(1)/
Net income available for common stock........................ $21.0
Weighted average number of common shares outstanding......... 55.3
Additional shares assuming conversion of excercise of
stock options and stock purchase plan subscriptons......... 1.1
-----
Average common shares outstanding............................ 56.4
Fully diluted net income per common share.................... $0.37
=====
</TABLE>
___________
/(1)/Historical computation of fully diluted earnings per common share for the
three months ended March 31, 1996 is not considered meaningful as
Allegiance was not a public company during this historical period.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 26
<SECURITIES> 0
<RECEIVABLES> 516<F1>
<ALLOWANCES> 27
<INVENTORY> 626
<CURRENT-ASSETS> 1,303
<PP&E> 1,531
<DEPRECIATION> 707
<TOTAL-ASSETS> 2,793
<CURRENT-LIABILITIES> 688
<BONDS> 1,087
0
0
<COMMON> 55
<OTHER-SE> 797
<TOTAL-LIABILITY-AND-EQUITY> 2,793
<SALES> 1,056
<TOTAL-REVENUES> 1,056
<CGS> 836
<TOTAL-COSTS> 1,024
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 32
<INCOME-TAX> 11
<INCOME-CONTINUING> 21
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0<F2>
<FN>
<F1>GROSS
<F2>INFORMATION NOT APPLICABLE
</FN>
</TABLE>
