UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q/A No. 1
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
---
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-483
______________________________
MALLINCKRODT INC.
(Exact name of registrant as specified in its charter)
New York 36-1263901
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
675 McDonnell Boulevard
St. Louis, Missouri 63134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 314-654-2000
______________________________
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.
Applicable Only To Issuers Involved In Bankruptcy
Proceedings During The Preceding Five Years:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes .
No .
Applicable Only To Corporate Issuers:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
73,014,162 shares excluding 14,102,127 treasury shares as of January
31, 1998.
<PAGE>
Pursuant to Rule 12b-15 of the Securities and Exchange Act of 1934,
as amended (the "Exchange Act"), this Form 10-Q/A No. 1 is hereby
filed with respect to that certain Quarterly Report on Form 10-Q for
the three months ended December 31, 1997 of Mallinckrodt Inc. filed
with the Securities and Exchange Commission on February 12, 1998 (the
"Form 10-Q"). In accordance therewith, Part I, Items 1 and 2
"Financial Information" of the Form 10-Q are hereby restated in their
entirety to provide additional disclosure as follows.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
The accompanying interim condensed consolidated financial statements
of Mallinckrodt Inc. (the Company or Mallinckrodt) do not include all
disclosures normally provided in annual financial statements. These
financial statements, which should be read in conjunction with the
consolidated financial statements contained in Mallinckrodt's 1997
Annual Report to Shareholders, are unaudited but include all
adjustments which Mallinckrodt's management considers necessary for a
fair presentation. These adjustments consist of normal recurring
accruals except as discussed in Notes 1, 2, 3, 4 and 5 of the Notes
to Condensed Consolidated Financial Statements. Interim results are
not necessarily indicative of the results for the fiscal year. All
references to years are to fiscal years ended June 30 unless
otherwise stated.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
December 31, December 31,
------------------- -------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
-------- -------- -------- --------
Net sales $ 656.2 $ 453.1 $1,154.3 $ 895.1
Operating costs and expenses:
Cost of goods sold 430.8 248.8 739.8 490.8
Selling, administrative and
general expenses 183.2 109.0 308.5 214.8
Purchased research and
development 398.3
Research and development
expenses 38.2 27.1 67.7 55.9
Other operating (income)
expense, net (16.7) 1.1 (18.4) .2
-------- -------- --------- --------
Total operating costs and
expenses 635.5 386.0 1,495.9 761.7
-------- -------- --------- --------
Operating earnings (loss) 20.7 67.1 (341.6) 133.4
Interest income and other
nonoperating income, net 2.3 6.3 11.5 10.8
Interest expense (29.0) (11.9) (47.4) (24.6)
-------- -------- --------- --------
Earnings (loss) from continuing
operations before income taxes (6.0) 61.5 (377.5) 119.6
Income tax provision (benefit) (1.3) 22.4 8.6 43.9
-------- -------- --------- --------
Earnings (loss) from continuing
operations (4.7) 39.1 (386.1) 75.7
Discontinued operations 4.4 3.2
-------- -------- --------- --------
Net earnings (loss) (4.7) 43.5 (386.1) 78.9
Preferred stock dividends (.1) (.1) (.2) (.2)
-------- -------- --------- --------
Available for common
shareholders $ (4.8) $ 43.4 $ (386.3) $ 78.7
======== ======== ========= ========
Basic earnings per common
share:
Earnings (loss) from
continuing operations $ (.07) $ .53 $ (5.31) $ 1.02
Earnings from discontinued
operations .06 .04
-------- -------- --------- --------
Net earnings (loss) $ (.07) $ .59 $ (5.31) $ 1.06
======== ======== ========= ========
Earnings per common share -
assuming dilution:
Earnings (loss) from
continuing operations $ (.07) $ .51 $ (5.31) $ 1.00
Earnings from discontinued
operations .06 .04
-------- -------- --------- --------
Net earnings (loss) $ (.07) $ .57 $ (5.31) $ 1.04
======== ======== ========= ========
(See Notes to Condensed Consolidated Financial Statements on pages 5 through
10.)
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 110.7 $ 808.5
Trade receivables, less allowances
of $15.0 at December 31 and $8.4
at June 30 476.8 356.0
Inventories 508.1 315.9
Deferred income taxes 68.3 36.8
Other current assets 83.3 99.6
------------ ------------
Total current assets 1,247.2 1,616.8
Investments and long-term receivables,
less allowances of $14.9 at December 31
and $14.1 at June 30 168.2 145.1
Property, plant and equipment, net 984.5 827.9
Goodwill, net 902.6 226.2
Technology, net 389.0 24.2
Other intangible assets, net 290.2 146.7
Deferred income taxes 23.5 .8
------------ ------------
Total assets $4,005.2 $2,987.7
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $1,154.5 $ 11.7
Accounts payable 183.3 169.3
Accrued liabilities 444.2 396.1
Income taxes payable 20.6 76.4
Deferred income taxes .2 .2
------------ ------------
Total current liabilities 1,802.8 653.7
Long-term debt, less current
maturities 547.9 545.2
Deferred income taxes 471.0 248.7
Postretirement benefits 168.0 161.9
Other noncurrent liabilities and
deferred credits 168.5 127.0
------------ ------------
Total liabilities 3,158.2 1,736.5
------------ ------------
Shareholders' equity:
4 Percent cumulative preferred stock 11.0 11.0
Common stock, par value $1, authorized
300,000,000 shares; issued
87,116,289 shares 87.1 87.1
Capital in excess of par value 313.1 305.9
Reinvested earnings 882.3 1,292.6
Foreign currency translation (67.1) (49.9)
Treasury stock, at cost (379.4) (395.5)
------------ ------------
Total shareholders' equity 847.0 1,251.2
------------ ------------
Total liabilities and shareholders'
equity $4,005.2 $2,987.7
============ ============
(See Notes to Condensed Consolidated Financial Statements on pages 5 through
10.)
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash Flows - Operating Activities
Net earnings (loss) $ (386.1) $ 78.9
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 58.8 57.1
Amortization 36.0 20.7
Postretirement benefits 6.1 6.3
Undistributed equity in earnings of
joint venture (9.6)
Gains on disposals of assets (15.9) (.7)
Deferred income taxes (22.2) (2.6)
Write-off of purchased research and
development 398.3
Sale of inventory stepped up to fair
value at acquisition 75.4
--------- ---------
150.4 150.1
Changes in operating assets and
liabilities:
Trade receivables 27.2 (4.2)
Inventories ( 25.8) (2.3)
Other current assets 47.7 (5.7)
Accounts payable, accrued liabilities
and income taxes payable, net (213.5) (19.2)
Net current liabilities of
discontinued operations .3
Other noncurrent liabilities and
deferred credits 23.0 (14.3)
Other, net (.6) 23.7
--------- ---------
Net cash provided by operating activities 8.4 128.4
--------- ---------
Cash Flows - Investing Activities
Capital expenditures (70.0) (56.4)
Acquisition spending (1,786.4) (13.2)
Proceeds from asset disposals 29.5 35.2
Other, net 1.7 7.3
--------- ---------
Net cash used by investing activities (1,825.2) (27.1)
--------- ---------
Cash Flows - Financing Activities
Increase in short-term debt 1,121.1 7.4
Proceeds from long-term debt .4
Payments on long-term debt (1.6) (6.9)
Issuance of Mallinckrodt common stock 33.0 21.6
Acquisition of treasury stock (9.7) (66.0)
Dividends paid (24.2) (23.8)
--------- ---------
Net cash provided (used) by financing
activities 1,119.0 (67.7)
--------- ---------
Increase (decrease) in cash and cash
equivalents (697.8) 33.6
Cash and cash equivalents at beginning
of period 808.5 496.1
--------- ---------
Cash and cash equivalents at end of period $ 110.7 $ 529.7
========= =========
(See Notes to Condensed Consolidated Financial Statements on pages 5 through
10.)
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In millions, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
4 Percent cumulative preferred stock:
Balance at June 30 and December 31 $ 11.0 $ 11.0
Common stock:
Balance at June 30 and December 31 87.1 87.1
Capital in excess of par value:
Balance at June 30 305.9 283.5
Stock option exercises 1.6 4.9
Restricted stock award 3.2
Investment plan match 2.4
Issuance of stock related to an acquisition 10.0
--------- ---------
Balance at December 31 313.1 298.4
--------- ---------
Reinvested earnings:
Balance at June 30 1,292.6 1,150.7
Net earnings (loss) (386.1) 78.9
Dividends:
4 Percent cumulative preferred
stock ($2.00 per share) (.2) (.2)
Common stock ($.33 per share in fiscal
1998 and $.32 per share in fiscal 1997) (24.0) (23.6)
--------- ---------
Balance at December 31 882.3 1,205.8
--------- ---------
Foreign currency translation:
Balance at June 30 (49.9) (15.3)
Translation adjustment (17.2) 16.3
--------- ---------
Balance at December 31 (67.1) 1.0
--------- ---------
Treasury stock:
Balance at June 30 (395.5) (284.8)
Acquisition of treasury stock (9.7) (66.0)
Stock option exercises 11.6 16.7
Investment plan match 7.3
Restricted stock award 6.9
Issuance of stock related to an acquisition 12.0
--------- ---------
Balance at December 31 (379.4) (322.1)
--------- ---------
Total shareholders' equity $ 847.0 $1,281.2
========= =========
(See Notes to Condensed Consolidated Financial Statements on pages 5 through
10.)
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. On August 28, 1997, the Company acquired Nellcor Puritan Bennett
Incorporated (Nellcor) through an agreement to purchase for cash
all the outstanding shares of common stock of Nellcor for $28.50
per share. The aggregate purchase price of the Nellcor
acquisition was approximately $1.9 billion. Nellcor, based in
Pleasanton, California, is a developer and manufacturer of
products to diagnose, monitor and treat respiratory impaired
patients in all healthcare settings. The acquisition has been
accounted for by the purchase method and accordingly, the
results of Nellcor have been included in the Company's
consolidated statements from September 1, 1997.
The purchase price has been allocated based upon the estimated
fair value of the assets acquired. Identifiable intangible
assets are purchased research and development, technology,
trademarks and trade names, and the assembled work force. The
purchased research and development of $398.3 million, which
represents the value of medical devices still in the development
stage and not considered to have reached technical feasibility,
was written off in the first quarter of fiscal 1998. See Note 2
for additional information. Technology, also referred to as
core or base technology and which represents that portion of the
existing technology that provides a basis for future generation
products as well as existing products, was recorded at $374.2
million and is being amortized on a straight-line basis over 15
years. Other intangible assets of $152.9 million are being
amortized on a straight-line basis over 10 to 25 years (weighted
average life of 24 years). Goodwill, which represents the
excess of acquisition costs over the fair value of the net
assets acquired, was $695.1 million at December 31, 1997 and is
being amortized on a straight-line basis over 30 years. The
amortization of identifiable intangible assets and goodwill
directly associated with the Nellcor acquisition was $15.0
million and $20.7 million for the quarter and six-month period
ended December 31, 1997. Since the results of Nellcor have only
been included in the Company's consolidated results since
September, the year-to-date amortization represents only four
months of activity. The Company has also recorded a deferred
tax liability of approximately $224.6 million, representing the
tax effect of timing differences recorded as part of the
acquisition.
Immediately after the acquisition was consummated, management of
the combined Company began to formulate an integration plan to
combine Mallinckrodt and Nellcor into one successful company.
Eleven transition teams comprised of employees of Mallinckrodt
and Nellcor were established in the second quarter to focus on
business strategy, revenue enhancement, global development,
sales force integration, product development, operations and
administrative consolidation. All segments of the employee work
force could be impacted by these efforts. The transition teams
are expected to complete their work during fiscal 1998. Since
both companies (Mallinckrodt and Nellcor) have global healthcare
operations, senior management, through the transition teams, is
assessing which activities should be consolidated, including
customer service, logistics and sales. In addition, from a
physical and legal perspective, assessment of the need for
existing regional sales offices, country operations and
headquarters are being evaluated.
Upon the approval of exit plans, the resulting costs, which will
include involuntary severance of Nellcor employees as a result
of work force reduction, relocation of Nellcor employees, and
the elimination of contractual obligations of Nellcor which will
have no future economic benefit when the plan is complete, will
be recognized as a liability assumed as of the acquisition
date. The contractual obligations include facility leases and
consulting arrangements which are no longer required for
software implementation and other projects which may be
stopped. Termination and relocation arrangements will be (and,
in some cases, have been) communicated in sufficient detail for
the affected Nellcor employee groups to determine the types and
amounts of benefits they will receive if terminated or
relocated.
Nellcor corporate staff functions, which were performed at the
Nellcor headquarters located in Pleasanton, California, will now
be performed at the Mallinckrodt headquarters in St. Louis,
Missouri. The Nellcor corporate staff employees in legal,
treasury, human resources, corporate accounting, financial
services, communications and investor relations have been
notified.
Integrating these two large international organizations is a
complex process. The most complex undertaking for the
transition teams is the determination of whether certain
functions should be consolidated and where they should be
located. The breadth of international operations creates
logistic, legal and tax structural issues which must be assessed
to derive the greatest value for the Company going forward.
Decisions that result from the transition team recommendations
will impact the valuation of assets acquired as determinations
are made to end product lives and shut down or consolidate
operations. Significant actions needed to complete the plan
include determination of the legal ramifications of closing
operations in certain countries, assessment of the tax
implications of various alternative strategies, and analysis of
the costs associated with the various activities to be exited
and employees to be terminated. The evaluations of alternative
Nellcor integration actions are still in preliminary stages of
development. At December 31, 1997, the costs of exit activities
which will be approved are not estimable but are expected to be
significant.
As of December 31, 1997, $26.9 million has been accrued and
included in the acquisition cost allocation, and $1.6 million
has been paid and charged against this accrual. The primary
component of this balance relates to severance agreements in
place prior to the acquisition date which provide certain
employees with specified benefits in the event that their
employment with Nellcor is terminated or there is an adverse
change, based upon the employee's judgment, in the employee's
status, title, position or responsibilities. As additional
accruals are recorded for Nellcor integration actions, there
will be a corresponding increase in goodwill.
Allocations of the purchase price have been determined based
upon preliminary estimates of value, and therefore, are subject
to change. As refinements are made, goodwill will be adjusted
accordingly. The most significant refinement of the purchase
price allocation will result from the integration plan being
formulated by management. Based upon information currently
available regarding actions under consideration, the differences
between the preliminary and final allocations are not expected
to have a material impact on either the results of operations or
financial position.
The integration plan will also identify exit activities related
to the operations of Mallinckrodt prior to the acquisition of
Nellcor. Costs of these exit activities will include severance
of Mallinckrodt employees. A liability for these costs will be
recognized at the time management commits to the plan and
communicates termination arrangements in sufficient detail for
the affected Mallinckrodt employee groups to determine the types
and amounts of benefits they will receive if terminated. In
addition, integration costs of the combined Company, such as
transition bonuses and consulting costs, will generally be
expensed as incurred. At December 31, 1997, costs of exit
activities related to the operations of Mallinckrodt prior to
the acquisition of Nellcor plus integration costs of the
combined Company, which will be a nonrecurring charge to fiscal
1998 operating results, are expected to be material but are not
estimable. During the first half of fiscal 1998, the actions
taken have resulted in pre-tax charges to operations of $6.8
million, consisting of $3.8 million for transition bonuses, $1.5
million for involuntary severance, and $1.5 million for other
integration costs. As of December 31, 1997, payments made
relating to the above totaled $0.1 million for involuntary
severance and $1.5 million for other integration costs.
The following unaudited pro forma financial information presents
the combined results of operations of Mallinckrodt and Nellcor
as if the acquisition had occurred as of the beginning of fiscal
1997, after giving effect to certain adjustments, including
amortization of goodwill, additional depreciation expense,
increased interest payments on debt related to the acquisition,
reduced interest income from cash utilized to complete the
acquisition and the related tax effects. The pro forma
financial information does not necessarily reflect the results
of operations that would have occurred had Mallinckrodt and
Nellcor operated as a combined entity during such periods.
Six Months Ended
December 31,
--------------------
(In millions, except per share amounts) 1997 1996
-------- --------
Net sales $1,255.4 $1,252.3
Net income $ 36.2 $ 35.9
Net income per share
Basic $ .50 $ .48
Diluted $ .49 $ .47
The pro forma financial information presented above does not
include noncash charges for purchased research and development
and the sale of inventory stepped up to fair value at date of
acquisition. These charges are included in the actual results
of operations for the quarter and six months ended December 31,
1997. See Note 2 for additional information.
The Company utilized cash and cash equivalents and borrowed
funds to complete the acquisition of Nellcor. The borrowing was
obtained through a $2.0 billion credit facility established in
July 1997, and amended and restated in September 1997. The
credit facility consists of a $400 million term loan and a $1.6
billion five-year revolving credit facility. Under this
agreement, interest rates on borrowing are based on the London
Interbank Offered Rate (LIBOR) plus a margin dependent on the
Company's senior debt rating.
2. Included in operating earnings for the six months ended
December 31, 1997 are one-time noncash acquisition-related costs
of $398.3 million for the write-off of Nellcor purchased
research and development. Of this amount, $396.3 million
relates to the healthcare segment and $2.0 million relates to
the specialty chemicals segment. The purchased research and
development represents the value of numerous new medical devices
and other products/technologies in all major product lines
(e.g., sensors, monitors and ventilators) that are in various
stages of development and have significant technological hurdles
remaining as of the transaction date. Medical devices are
subjected to significant clinical analysis and screening to
validate their safety and efficacy as well as determine their
commercial viability. Accordingly, medical devices are
considered technologically feasible upon FDA (or international
regulatory body) market approval. The steps required to
introduce these products include both research and development
and clinical and regulatory costs and efforts to be expended
over the next one to four years. Clinical and regulatory costs
and efforts relate primarily to the costs and efforts associated
with receiving FDA approval (and/or international regulatory
body approval, where applicable), specifically costs and efforts
incurred for clinical trials and preparation of FDA submission
and interaction with the FDA (and international regulatory
bodies, where applicable). None of these medical devices or
products had received FDA (or international regulatory body)
market approval as of the acquisition date, and therefore all
were identified as in-process research and development that had
not reached technological feasibility. No alternative future
uses were identified prior to reaching technological feasibility
because of the uniqueness of the projects. Additionally, no
identifiable alternate markets were established for projects
that were in such early stages of development. The same
methodology (income approach) was utilized to evaluate purchased
research and development as was utilized to evaluate the other
Nellcor identifiable intangible assets acquired, except the cost
approach was utilized to evaluate the assembled work force.
The sale of Nellcor inventories, which were stepped up to fair
value in connection with allocation of purchase price, decreased
earnings by $56.6 million, $35.0 million net of taxes, and $75.4
million, $46.7 million net of taxes, for the quarter and six
months ended December 31, 1997, respectively. Pre-tax charges
to the healthcare segment were $55.8 million and $74.4 million
for the quarter and six months ended December 31, 1997,
respectively. Specialty chemicals charges were $.8 million and
$1.0 million for the respective periods.
In addition, results of operations for the second quarter
included Nellcor integration-related charges of $6.8 million,
$4.3 million net of taxes, related to the healthcare segment.
3. Included in the results of operations for the quarter and six
months ended December 31, 1997 is a gain of $15.9 million, $10.2
million after taxes, resulting from the sale of specialty
chemical product lines.
4. Included in earnings from continuing operations for the six
months ended December 31, 1996 is a one-time research and
development expense of $6.0 million, $3.8 million after taxes,
resulting from a strategic alliance to develop new magnetic
resonance imaging technology.
5. Included in discontinued operations are the results of the
animal health segment which was divested June 30, 1997 and the
results of Fries & Fries, Inc., a wholly owned subsidiary which
owned the Company's 50 percent interest in Tastemaker, the
flavors joint venture with Hercules Incorporated, which was
divested March 31, 1997.
6. On October 6, 1994, Augustine Medical, Inc. (Augustine)
commenced a patent infringement litigation against Mallinckrodt
Inc. and its wholly owned subsidiary, Mallinckrodt Medical, Inc.
(collectively, the Company) in the U.S. District Court for the
District of Minnesota. Specifically, Augustine alleged that the
Company's sale of all five (5) models of its convective warming
blankets infringes certain claims of one or more of its patents.
The Company filed counterclaims against Augustine in connection
with the above actions alleging unfair competition, antitrust
violations, and invalidity of the asserted patents, among other
things.
The liability phase of the case was tried to a jury in August
1997 and the verdict was that the Company's blankets infringe
certain Augustine patents under the doctrine of equivalents, but
do not literally infringe the patents. There was also a finding
of no willful infringement. On September 22, 1997, the jury
awarded damages in the amount of $16.8 million for the period
ended September 30, 1997 and the judge put in place an
injunction which stopped the Company from manufacturing and
selling blankets in the United States. The Company appealed the
jury verdicts of liability and damages to the Court of Appeals
for the Federal Circuit (a special court for patent appeals that
does not involve a jury). The Court of Appeals has stayed the
injunction pending the outcome of the Company's appeal, and the
Company continues to sell and manufacture blankets in the United
States. With the advice of outside counsel, the Company
believes there was insufficient evidence of equivalents
presented and, consequently, for this and other reasons the
verdicts were in error. The Company is working vigorously in
the Appeals Court to overturn the verdicts and believes that it
has strong arguments that its blankets do not infringe
Augustine's patents. Based on all the facts available to
management, the Company believes that it is probable that the
jury verdict and the trial court injunction will be overturned
on appeal. If damages were assessed in the same manner as
determined by the jury for sales subsequent to September 30,
1997 plus interest on the estimated total, payment would
approximate $18.6 million at December 31, 1997. The Company has
not recorded an accrual for payment of the damages, because an
unfavorable outcome in this litigation is, in management's
opinion, reasonably possible but not probable. See Part II,
Item 1 "Legal Proceedings" for additional information about this
claim by Augustine against the Company.
7. Provisions for income taxes were based on estimated annual
effective tax rates for each fiscal year. Excluding the one-
time $398.3 million write-off of purchased research and
development which has no tax benefit, discussed in Notes 1 and
2, the Company's effective tax rate for the first six months was
41.3 percent, compared to last year's 36.7 percent.
8. The Company is subject to various investigations, claims and
legal proceedings covering a wide range of matters that arise in
the ordinary course of its business activities. In addition,
the Company is in varying stages of investigation or remediation
of alleged or acknowledged contamination at currently or
previously owned or operated sites and at off-site locations
where its waste was taken for treatment or disposal.
Once the Company becomes aware of its potential environmental
liability at a particular site, the measurement of the related
environmental liabilities to be recorded is based on an
evaluation of currently available facts such as the extent and
types of hazardous substances at a site, the range of
technologies that can be used for remediation, evolving
standards of what constitutes acceptable remediation, presently
enacted laws and regulations, engineers and environmental
specialists' estimates of the range of expected clean-up costs
that may be incurred, prior experience in remediation of
contaminated sites, and the progress to date on remediation in
process. While the current law potentially imposes joint and
several liability upon each party at a Superfund site, the
Company's contribution to clean up these sites is expected to be
limited, given the number of other companies which have also
been named as potentially responsible parties and the volumes of
waste involved. A reasonable basis for apportionment of costs
among responsible parties is determined and the likelihood of
contribution by other parties is established. If it is
considered probable that the Company will only have to pay its
expected share of the total clean-up, the recorded liability
reflects the Company's expected share. In determining the
probability of contribution, the Company considers the solvency
of the parties, whether responsibility is disputed, existence of
an allocation agreement, status of current action, and
experience to date regarding similar matters. Current
information and developments are regularly assessed by the
Company, and accruals are adjusted on a quarterly basis, as
required, to provide for the expected impact of these
environmental matters.
The Company has established accruals for matters that are in its
view probable and estimable. Based upon information currently
available, management believes that existing accruals are
sufficient and that it is not reasonably possible at this time
that any additional liabilities will result from the resolution
of these matters that would have a material adverse effect on
the Company's consolidated financial position and results of
operations.
9. In 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share. Statement 128 replaced
the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented
and, where necessary, restated to conform to the Statement 128
requirements.
10. The following table sets forth the computation of basic and
diluted earnings (loss) from continuing operations per common
share (in millions, except shares and per share amounts).
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
December 31, December 31
-------------------- --------------------
1997 1996 1997 1996
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator:
Earnings (loss)
from continuing
operations $ (4.7) $ 39.1 $ (386.1) $ 75.7
Preferred stock
dividends (.1) (.1) (.2) (.2)
-------- --------- --------- ---------
Numerator for
basic earnings
(loss)per share
and earnings
(loss) per share
assuming
dilution--income
(loss) available
to common
shareholders $ (4.8) $ 39.0 $ (386.3) $ 75.5
======== ========= ========= =========
Denominator:
Denominator for
basic earnings
per share--
weighted-average
shares 72,957,721 74,114,694 72,716,625 74,173,030
Potential dilutive
common shares--
employee stock
options 1,679,359 1,484,960
---------- ---------- ---------- ----------
Denominator for
diluted earnings
(loss) per
share--adjusted
weighted-average
shares and
assumed
conversions 72,957,721 75,794,053 72,716,625 75,657,990
========== ========== ========== ==========
Basic earnings
(loss) from
continuing
operations
per common share $ (.07) $ .53 $ (5.31) $ 1.02
======= ===== ======== ======
Earnings (loss)
from continuing
operations per
common share--
assuming dilution $ (.07) $ .51 $ (5.31) $ 1.00
======= ===== ======== ======
</TABLE>
The diluted share bases for the quarter and six months ended
December 31, 1997 exclude incremental shares related to employee
stock options of 770,593 and 729,735, respectively, for each
period. These shares are excluded due to their antidilutive
effect as a result of the Company's loss from continuing
operations during these periods.
11. The components of inventory included the following as of
December 31, 1997:
(In millions)
Raw materials and supplies $199.7
Work in process 63.3
Finished goods 245.1
------
$508.1
======
12. As of December 31, 1997, the Company has authorized and issued
100,000 shares, par value $100, 4 Percent cumulative preferred
stock of which 98,330 shares are outstanding. Mallinckrodt also
has authorized 1,400,000 shares, par value $1, of series
preferred stock, none of which is outstanding.
Shares included in treasury stock were:
December 31, June 30,
1997 1997
-------------- --------------
Common stock 14,125,225 14,843,847
4 Percent cumulative
preferred stock 1,670 1,670
13. At December 31, 1997, common shares reserved were:
Exercise of common stock purchase rights 82,045,737
Exercise of stock options and granting of
stock awards 9,054,673
--------------
Total 91,100,410
==============
14. Supplemental cash flow information for the six months ended
December 31 included:
(In millions)
1997 1996
------- -------
Interest paid $ 39.2 $ 38.0
Income taxes paid $ 57.8 $ 34.8
Noncash investing and financing
activities:
Assumption of liabilities related
to an acquisition $458.1 $ 4.7
Issuance of stock related to an
acquisition $ 22.0
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. [1]
Results of Operations
General
- - -------
The Company recorded a loss from continuing operations and a net loss
of $4.7 million, or 7 cents loss per share on a basic and diluted
basis for the quarter ended December 31, 1997. The loss includes
certain charges related to the acquisition of Nellcor and gains
associated with the sale of two specialty chemical product lines.
The acquisition-related charges include a noncash cost of goods sold
charge of $56.6 million, $35.0 million net of taxes, related to the
sale of inventories stepped up to fair value and integration charges
of $6.8 million, $4.3 million net of taxes. The divestiture of the
specialty chemical product lines resulted in a gain of $15.9 million,
$10.2 million net of taxes. Excluding the acquisition- and
divestiture-related items, the Company had earnings from continuing
operations of $24.4 million, or 33 cents per share on a basic and
diluted basis for the second quarter of fiscal 1998. Earnings from
continuing operations for the same quarter last year were $39.1
million, or 53 cents per share on a basic earnings per share basis,
51 cents per share on a diluted basis. Net earnings for the second
quarter last year were $43.5 million or 59 cents per share on a basic
earnings per share basis, 57 cents per share on a diluted basis,
which included income of $4.4 million from discontinued operations.
Net sales for the quarter rose 45 percent to $656.2 million, compared
to $453.1 million a year earlier. The current quarter includes the
results of Nellcor, which was acquired in August 1997. Excluding the
sales of Nellcor, the Company's net sales were 2 percent below the
corresponding period of last year.
For the six-month period ended December 31, 1997, the Company
recorded a loss from continuing operations and a net loss of
$386.1 million, or $5.31 loss per share on a basic and diluted basis.
This loss included certain charges related to the Nellcor
acquisition and a gain associated with the second quarter divestiture
of two specialty chemical product lines. The acquisition-
- - --------------------------------------
[1] "Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995: With the exception of historical information,
the matters discussed in this report to stockholders are forward-
looking statements that involve risks and uncertainties, and actual
results could differ materially from those discussed. Among the
factors that could cause actual results to differ materially are the
following: the effect of business and economic conditions; the
impact of competitive products and continued pressure on prices
realized by the Company for its products; constraints on supplies of
raw materials used in manufacturing certain of the Company's
products; capacity constraints limiting the production of certain
products; difficulties or delays in the development, production,
testing, and marketing of products; difficulties or delays in
receiving required governmental or regulatory approvals; market
acceptance issues, including the failure of products to generate
anticipated sales levels; difficulties in rationalizing acquired
businesses and in realizing related cost savings and other benefits;
the effects of and changes in trade, monetary, and fiscal policies,
laws, and regulations; foreign exchange rates and fluctuations in
those rates; the costs and effects of legal and administrative
proceedings, including environmental proceedings and patent disputes
involving the Company; and the risk factors reported from time to
time in the Company's SEC reports.
<PAGE>
related charges are a one-time $398.3 million write-off of purchased
research and development, which had no offsetting tax benefits, a
cost of goods sold charge of $75.4 million, $46.7 million net of
taxes, related to the sale of inventories stepped up to fair value,
and expenses of $6.8 million, $4.3 million net of taxes, associated
with the integration of Nellcor into the Company. Excluding the
acquisition- and divestiture-related items, the Company had earnings
from continuing operations for the six-month period of $53.0 million,
or 73 cents per share on a basic earnings per share basis, 72 cents
per share on a diluted basis. Earnings from continuing operations
for the same period last year were $75.7 million, or $1.02 per share
on a basic earnings per share basis, $1.00 per share on a diluted
basis. Net earnings for the six-month period last year were $78.9
million or $1.06 per share on a basic earnings per share basis, $1.04
per share on a diluted basis, which included income of $3.2 million
from discontinued operations.
Net sales for the first half rose 29 percent to $1.15 billion
compared to $895.1 million a year earlier. The current year sales
amount included the sales of Nellcor subsequent to acquisition in
August 1997. Excluding the sales of Nellcor, the Company's net sales
were 3 percent below the corresponding six-month period of last year.
A comparison of sales and operating earnings follows:
<TABLE>
<CAPTION>
(In millions) Quarter Ended Six Months Ended
December 31, December 31,
------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
-------- -------- --------- --------
Sales
- - -----
Healthcare $ 565.0 $ 372.4 $ 976.1 $ 734.1
Specialty chemicals 91.4 80.6 178.4 161.1
Intersegment sales (.2) .1 (.2) (.1)
-------- -------- --------- --------
$ 656.2 $ 453.1 $1,154.3 $ 895.1
======== ======== ========= ========
Operating earnings (loss)
- - -------------------------
Healthcare $ 2.1 $ 68.4 $ (359.7) $ 135.8
Specialty chemicals 25.7 6.0 30.7 11.5
Corporate (7.1) (7.3) (12.6) (13.9)
-------- -------- --------- --------
$ 20.7 $ 67.1 $ (341.6) $ 133.4
======== ======== ========= ========
Business Segments
- - -----------------
Healthcare Quarter Ended Six Months Ended
Net Sales December 31, December 31,
(In millions) ------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
Respiratory care $ 275.8 $ 79.5 $ 417.6 $ 156.8
Imaging agents 189.1 201.2 366.4 399.8
Pharmaceutical specialties 100.1 91.7 192.1 177.5
-------- -------- -------- --------
$ 565.0 $ 372.4 $ 976.1 $ 734.1
======== ======== ======== ========
</TABLE>
Healthcare reported operating earnings for the quarter of $2.1
million, including the respiratory care product results of Nellcor
which was acquired in August 1997. The second quarter results of
operations include a $55.8 million fair value step-up charge related
to the sale of inventories and $6.8 million in charges for
integration activities involving Nellcor. Excluding the impact of
the Nellcor acquisition- and integration-related charges, healthcare
operating earnings would have been $64.7 million, which is 5 percent
below the $68.4 million reported for the same period last fiscal
year.
Healthcare reported an operating loss for the six-month period of
$359.7 million. These results of operations include a $396.3 million
write-off of purchased research and development, a $74.4 million fair
value step-up charge related to the sale of Nellcor inventories
acquired and $6.8 million in charges for integration activities
involving Nellcor. Excluding the impact of these charges, healthcare
operating earnings would have been $117.8 million, which is 13
percent below the $135.8 million reported by this business segment
for the same period in fiscal 1997.
The earnings declines for the quarter and six-month periods are
primarily attributable to lower selling prices, especially involving
imaging agents, which are only partially offset by volume growth.
Global efforts toward healthcare cost containment continue to exert
pressure on product pricing. The demand for price discounts from
customer buying groups has adversely impacted earnings. This
industry trend is expected to continue. In response to these market
changes, the Company has entered into a seven-year contract with
Premier, Inc. (Premier), the largest healthcare purchasing group in
the U.S., to supply x-ray contrast media, tracheostomy tubes,
temperature monitoring systems, and radiopharmaceuticals and related
products. Effective July 1, 1997, Premier named Mallinckrodt a
corporate partner, and Mallinckrodt's products will be used
preferentially by Premier's 1,650 member hospitals.
Net sales of the healthcare segment in the second quarter were $565.0
million, an increase of 52 percent over the $372.4 million reported
for the same period in fiscal 1997. Excluding Nellcor, healthcare
sales were $366.4 million or 2 percent below the same quarter last
year. For the first half of the year, net sales of the healthcare
segment, which includes four months of Nellcor sales, were $976.1
million or 33 percent above the prior year period. Excluding
Nellcor, healthcare sales were $710.9 million or 3 percent below
prior year.
Respiratory care includes critical care products and Nellcor sales.
Excluding Nellcor sales, this business had sales declines for the
current quarter and the first half of the year of $2.4 million and
$4.4 million, respectively, when compared to the corresponding
periods of the prior year. Second quarter sales volumes of
respiratory therapy and anesthesiology products increased $7 million
or 10 percent, offset by the strong U.S. dollar ($5 million) and
lower selling prices of certain respiratory therapy products ($5
million). The comparison of the first six months of the current year
with the corresponding prior year period shows similar results with a
$16 million sales volume increase of respiratory therapy and
anesthesiology products, offset by the continuing negative impact of
the strong U.S. dollar ($10 million) and lower selling prices of
respiratory products ($5 million). The first half sales growth over
prior year was also negatively impacted ($5.6 million) by the
divestiture of the blood gas and electrolyte products business in
September 1996.
Imaging agent sales declined $12.1 million and $33.4 million for the
quarter and first half of the year, respectively, when compared to
the same periods last year. This sales decline is attributable to
continued erosion in selling prices of all imaging agents, in spite
of volume increases in all major product lines. For the second
quarter, sales volume of iodinated contrast media, the most
significant product line of the imaging agent business, increased by
$14 million, but total sales for these products were down $14 million
as a result of continued price erosion ($24 million) and the negative
impact of the strong U.S. dollar ($4 million). For the first six
months, iodinated contrast media sales volume increased by $27
million but total sales of these products were down $38 million as a
result of price erosion ($58 million) and the negative impact of the
strong U.S. dollar ($7 million). The price erosion is anticipated to
continue but at a moderating rate through the remainder of the year.
The seven-year agreement with Premier aligns the Company with the
largest healthcare purchasing group in the U.S., representing
approximately thirty percent of all x-ray contrast media purchased.
The Premier agreement is believed to be the largest contract ever
written for contrast media products.
Pharmaceutical specialty sales increased by $8.4 million and $14.6
million over the corresponding three-month and six-month periods of
the prior year, respectively. The sales increase for the second
quarter, which was primarily due to volume increases, consisted of
$5.7 million for dosage narcotics, including the acquisition of D.M.
Graham Laboratories, Inc. in November 1996, and $2.0 million for
acetaminophen (APAP). Sales volume growth also drove the dosage
narcotic and acetaminophen first-half sales increases of $10.1
million and $5.1 million, respectively.
Specialty Chemicals Quarter Ended Six Months Ended
Net sales December 31, December 31,
------------------ ------------------
(In millions) 1997 1996 1997 1996
------ ------ ------ ------
$ 91.4 $ 80.6 $178.4 $161.1
====== ====== ====== ======
Specialty chemicals segment operating earnings for the quarter were
$25.7 million. The results of operations include the activities of
the Nellcor Aero Systems business and its acquisition-related charges
and a $15.9 million gain on product line divestitures. Excluding
Aero Systems activity and the nonrecurring gain related to
divestitures, operating earnings for the three months were $8.6
million, 43 percent above the prior year amount of $6.0 million. The
earnings improvement is attributable to higher catalyst sales volumes
and lower expenses. Operating earnings for the first half of the
year were $30.7 million. Excluding Aero Systems results and
divestiture gains, the six-month operating earnings were $15.0
million or 30 percent greater than results for the same period of
fiscal 1997. The improvement is the result of a year-to-date decline
in expenses.
Sales for the six-month period were $178.4 million or $17.3 million
above the prior year. Excluding Aero Systems, which was part of the
Nellcor acquisition in August 1997, sales for the six-month period
were $161.7 million or flat with the prior year. For the second
quarter, sales were $91.4 million or $10.8 million above the same
period last year. Excluding the impact of Aero Systems, sales for
the three months were $78.9 million or $1.7 million below the prior
year. The sales decline in the second quarter can be attributed to
plastic additives, which had sold two product lines during the period
and therefore generated only $5.6 million in sales during the current
quarter compared with $14.4 million in the corresponding period of
the prior year, partially offset by catalyst volume increases of $6
million.
Corporate Matters
- - -----------------
Corporate expense is down 3 percent and 9 percent for the second
quarter and six-month periods as compared to the respective periods
of the prior year. Excluding the one-time noncash write-off of
purchased research and development which had no tax benefit, the
Company's effective tax rate for the six months was 41.3 percent,
compared to last year's 36.7 percent. This rate increase is
primarily due to nondeductible goodwill amortization directly
associated with the acquisition of Nellcor on August 28, 1997.
Financial Condition
The Company's financial resources are expected to continue to be
adequate to support existing businesses. Since June 30, 1997, cash
and cash equivalents decreased $697.8 million, primarily as a result
of the acquisition of the outstanding common shares of Nellcor in
August 1997. Operations provided $8.4 million of cash, while
acquisition and capital spending totaled $1,856.4 million. The
Company received $29.5 million in proceeds from asset disposals. The
Company's current ratio at December 31, 1997 was .7:1. Debt as a
percentage of invested capital was 66.8 percent.
The current ratio has declined to its current level as a result of
short-term borrowings during the first quarter of fiscal 1998 to
acquire the outstanding shares of Nellcor. The Company is in the
process of restructuring its debt in order to reduce short-term
borrowings. The first step in this effort involved the $200 million
borrowing completed in January 1998, as discussed below, and another
issuance of long-term debt is planned for later in this fiscal year.
In addition, the Company recently announced plans to divest its
specialty chemicals segment which, when completed, will provide
additional cash which the Company anticipates will be used to further
reduce short-term borrowings.
On August 28, 1997, the Company acquired Nellcor through an agreement
to purchase for cash all the outstanding shares of common stock of
Nellcor for $28.50 per share. The aggregate purchase price of the
Nellcor acquisition was approximately $1.9 billion. The acquisition
was completed utilizing cash and cash equivalents and borrowed funds.
The borrowing of approximately $1.1 billion, reported as a current
liability, was obtained through a $2.0 billion credit facility
established in July 1997, and amended and restated in September 1997.
The credit facility consists of a $400 million term loan and a $1.6
billion five-year revolving credit facility. Under this agreement,
interest rates on borrowings are based upon the London Interbank
Offered Rate, plus a margin dependent on the Company's senior debt
rating.
In January 1998, the Company issued $200 million aggregate principal
amount of notes maturing January 14, 2010. The notes bear interest
at 5.99 percent until January 14, 2000, at which time the interest
rate will be reset at a fixed annual rate of 5.64 percent plus the
Company's then incremental borrowing rate above the rate quoted on
U.S. Treasury ten-year notes. The notes are redeemable at the
election of the holder, in whole but not in part, at 100 percent of
the principal amount on January 14, 2000.
During the second quarter, the Company entered into two contracts of
$100 million each to hedge against a potential rise in interest rates
on its anticipated financing activities. One hedge was terminated in
January 1998 effective with the issuance of the notes maturing in
2010 discussed above. The second contract will be closed concurrent
with the issuance of additional debt later this year. Any gain or
loss realized on the termination of the contracts will be deferred
and recognized as an adjustment to interest expense over the term of
the anticipated underlying debt. The market value of the contracts
at December 31, 1997 was not material to the Company's financial
position.
In December 1997, the Company filed a $500 million shelf debt
registration statement. The unused portions of shelf registrations
filed in 1995 and 1992 have been canceled.
At December 31, 1997, the Company has a $1.0 billion private-
placement commercial paper program. The program is backed by the
$1.6 billion five-year U.S. revolving credit facility available until
September 2002. At December 31, 1997, there was $732.3 million
commercial paper borrowings outstanding. There was no borrowing
outstanding under the revolving credit facility at December 31, 1997.
Non-U.S. lines of credit totaling $138.3 million were also available
and borrowings under these lines amounted to $17.2 million at
December 31, 1997. The non-U.S. lines are cancelable at any time.
The Company's Board of Directors previously authorized repurchase of
47 million shares of common stock and additional repurchases not to
exceed cash outlays of $250 million. Share repurchases have totaled
36.8 million shares, including 240 thousand shares during the six
months ended December 31, 1997.
Estimated capital spending for the year ending June 30, 1998 is
approximately $190 million.
Impact of Year 2000
- - -------------------
The Year 2000 issue is the result of computer programs that were
written using two digits rather than four to define the applicable
year. Any such computer programs that have time-sensitive software
may recognize a year containing "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations
causing disruptions of operations including, among other things, a
temporary inability to process transactions or engage in similar
normal business activities.
The Company has completed an assessment and will have to modify or
replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and
thereafter. Both internal and external resources will be used to
reprogram or replace non-compliant software, and to appropriately
test Year 2000 modifications. Such modifications are being funded
through operating cash flows and are estimated to be immaterial to
current or future results of operations and financial position.
The project to address Year 2000 modifications has been underway
since February 1997 and is estimated to be substantially completed no
later than January 1999, which is prior to any anticipated
significant impact on Mallinckrodt's operations. The Company
believes that with modifications to existing software and conversions
to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems. However, if such
modifications and conversions are not made or are not completed
timely, the Year 2000 issue could have a material impact on the
operations of the Company.
The cost of the project and the date on which the Company believes it
will substantially complete Year 2000 modifications are based on
management's best estimates. Such estimates were derived using
software surveys and programs to evaluate calendar date exposures and
numerous assumptions of future events, including the continued
availability of certain resources and other factors. Because none of
these estimates can be guaranteed, actual results could differ
materially from those anticipated. Specific factors that might cause
such differences include, but are not limited to, the availability
and cost of personnel trained in this area, the ability to locate and
correct all relevant computer codes, and similar uncertainties.
***************
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.
Mallinckrodt Inc.
- - ---------------------------
Registrant
By: MICHAEL A. ROCCA By: DOUGLAS A. MCKINNEY
---------------------------- ------------------------
Michael A. Rocca Douglas A. McKinney
Senior Vice President and Vice President and
Chief Financial Officer Controller
Date: June 12, 1998
