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 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>
(*) Indicates registered trademark
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 9.)
</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 9.)
</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 9.)
</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 9.)
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. On August 28, 1997, the Company acquired all the outstanding
shares of common stock of Nellcor Puritan Bennett Incorporated
(Nellcor) for approximately $1.9 billion in cash. 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 preliminarily 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 commonly
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 22 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 goodwill amount will increase as a result of adjustments
involving the final determination of the fair value of assets and
liabilities acquired and the recording of costs to exit certain
Nellcor activities. 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.
Adjustments will be recorded during the allocation period based
upon the planned future use of assets acquired in the combined
company and the adequacy of reserves for environmental, warranty
and product liability. The final assessments are expected to be
completed during fiscal 1998, but no later than August 1998.
With the consummation of the acquisition of Nellcor completed in
August 1997, management of the combined company began to
formulate plans regarding the activities of Nellcor to be exited.
Some actions are in the implementation stage while others will
require additional time to assess. However, the exit plan will
be finalized within the first year following the date of
acquisition and will be carried out as quickly as possible. The
issues under discussion primarily concern how and where the
Company will perform key business activities. The size and
diversity of Nellcor make the development and implementation of
integration efforts complex.
Upon the approval of exit plans, the resulting costs, which will
include exiting certain activities of Nellcor, involuntary
severance as a result of work force reduction, personnel
relocation, 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
consummation date. 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.
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, which are expected to
be material but are not yet estimable, will be charged to
operating results. These costs will include severance and
relocation which will be recognized as a liability at the time
management commits to the plan. In addition, integration costs
of the combined Company, such as transition bonuses and
consulting costs, will generally be expensed as incurred. During
the second quarter and first half of fiscal 1998, the actions
taken have resulted in a pre-tax charge to operations of $6.8
million, consisting of $3.8 million for integration bonuses, $1.5
million for involuntary severance, and $1.5 million for other
integration costs. As of December 31, 1997, payments made and
charged against the above accruals totaled $.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 $ 36.5 $ 36.7
Net income per share
Basic $ .50 $ .49
Diluted $ .49 $ .48
The pro forma financial information presented above does not
include non-cash 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
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 then 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 non-cash 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 sale of Nellcor inventories stepped up to fair value at
acquisition resulted in charges of $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 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 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, and which was divested March
31, 1997.
6. On October 6, 1994, Augustine Medical, Inc. (Augustine) commenced
a patent infringement litigation against Mallinckrodt Group Inc.
and Mallinckrodt Medical, Inc. (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 infringe
certain claims of one or more of their 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.
The Company's sales of the convective warming blankets in the
United States in fiscal 1997 were $8 million. 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).
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. The Company has
not recorded a reserve for payment of the damages. See Part II,
Item 1 Legal Proceedings for additional information.
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 existing
technology, engineering studies, presently enacted laws and
regulations, and prior experience in remediation of contaminated
sites. 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 any additional liabilities that may result from
the resolution of these matters is not expected to 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
Non-cash 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 for the quarter ended
December 31, 1997. The loss includes certain charges related to the
acquisition of Nellcor Puritan Bennett (Nellcor) and gains associated
with the sale of two specialty chemical product lines. The
acquisition-related charges include a non-cash 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 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.
Net earnings for the second quarter last year were $43.5 million or
59 cents per share, which included income of $4.4 million from
discontinued operations.
__________________________________
[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>
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. This loss included certain charges
related to the Nellcor acquisition and gains associated with the
second quarter divestiture of two specialty chemical product lines.
The acquisition-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 associated with the integration of
Nellcor into the Company. Excluding the acquisition- and
divestiture-related items, the Company had earnings from continuing
operations of $53.0 million, or 73 cents per share for the six-month
period. Earnings from continuing operations for the same period last
year were $75.7 million, or $1.02 per share. Net earnings for the
six-month period last year were $78.9 million or $1.06 per share,
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 results
include 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:
(In millions)
<TABLE>
<CAPTION>
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
Net sales Quarter Ended Six Months Ended
(In millions) December 31, December 31,
------------------- -------------------
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 product results of Nellcor which
was acquired in August 1997. The second quarter results 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-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 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 inventories 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.
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 results, 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 of
3 percent for both the current quarter and first half when compared
to the same periods last year. The year-to-year comparisons are
negatively impacted by the strong U.S. dollar, lower selling prices
in certain respiratory therapy products and, for the six-month
period, the divestiture of the blood gas and electrolyte business on
September 30, 1996.
Imaging agent sales declined 6 percent and 8 percent 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.
Pharmaceutical specialty sales increased 9 percent and 8 percent over
the three-month and six-month periods of the prior year,
respectively. The sales increases are attributable to volume growth
in dosage products, partially the result of the acquisition of D.M.
Graham Laboratories, Inc. in November 1996, and acetaminophen
products.
Specialty Chemicals
Net sales Quarter Ended Six Months Ended
(In millions) December 31, December 31,
----------------- --------------------
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 include the activities of the Puritan
Bennett Aerosystems business and its acquisition-related charges and
a $15.9 million gain on product line divestitures. Excluding
Aerosystems 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 and
lower expenses. Operating results for the first half of the year
were $30.7 million. Excluding Aerosystem 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 11 percent
above prior year, and are almost entirely related to Aerosystems,
which was part of the Nellcor acquisition in August 1997. Sales for
the second quarter were 13 percent above the corresponding period in
the prior year. Excluding sales of Aerosystems, specialty chemical
sales were 2 percent below the same period last year. The sales
decline in the second quarter is the result of the divestiture of two
specialty chemical product lines during this period.
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 offsetting tax
benefit, the Company's effective tax rate for the six months is 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 all the outstanding shares
of common stock of Nellcor for 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 then amended 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 spread to the ten-year treasury rate at such time. 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.
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 cancelled.
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 futures 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.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company has determined that its market risk exposures, which
arise primarily from exposures to fluctuations in interest rates and
foreign currency rates, are not material to its future earnings, fair
value and cash flows.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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 connection with laws
and regulations pertaining to the protection of the environment, the
Company is a party to several environmental remediation
investigations and clean-ups and, along with other companies, has
been named a "potentially responsible party" for certain waste
disposal sites. Each of these matters is subject to various
uncertainties, and it is possible that some of these matters will be
decided unfavorably against the Company. See Part I, Item 1, "Notes
to Condensed Consolidated Financial Statements" for information about
the manner in which the Company establishes accruals for financial
contingencies, including contingencies related to legal proceedings
involving the Company.
Previously Reported Matters
- ---------------------------
The following is a discussion of material developments in proceedings
previously reported in the Company's Form 10-K for its year ended
June 30, 1997, as amended by the Company's report on Form 10-Q for
the quarter ended September 30, 1997:
Environmental Matters
- ---------------------
St. Louis, MO/CT Decommissioning -- The Company submitted a Phase I
Decommissioning and Decontamination Plan for this site to the Nuclear
Regulatory Commission in November 1997.
Other Litigation
- ----------------
Augustine Medical, Inc. -- On November 18, 1997, the Court of Appeals
for the Federal Circuit decided, in this previously reported
proceeding, that the stay of the order should remain in place pending
the appeal. The order issued by the U.S. District Court judge for
the District of Minnesota would have stopped the Company from
manufacturing and selling in the U.S. its convective warming blankets
that infringe. Thus, the Company can continue to manufacture and
sell its convective warming blankets during the appeal process.
The Court of Appeals indicated that the Company had raised a
"substantial question" meriting review by the Court. The Company
believes this action is a positive development and supports the
Company's belief as to the ultimate reversal of the jury's verdict.
Nycomed Imaging AS/Sonus Pharmaceuticals, Inc. -- In early January
1998, the judge in the U.S. District Court for the District of
Columbia, in this previously reported proceeding, dismissed the
complaint against (1) ImaRx Pharmaceuticals Corporation and its
marketing partner, DuPont Merck, and Bracco International BV for lack
of jurisdiction, and (2) Sonus Pharmaceuticals, Inc. for improper
venue. The complaint alleged that each of the defendants' patents
are invalid or not infringed by the manufacture and sale of
Optison(*) ultrasound contrast agent. The Company and MBI have
decided not to appeal the judge's decision. Thus, the Company and
MBI's action against Nycomed will proceed in the District Court in
the District of Columbia and Sonus' action against the Company and
MBI, which was filed on August 4, 1997 and has been previously
reported, will proceed in the U.S. District Court in the State of
Washington.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
See Mallinckrodt's Form 10-Q for the three months ended September 30,
1997 for information about the Annual Meeting of Shareholders held on
October 15, 1997.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Filed with
Exhibit Incorporated Herein Electronic
Number Description by Reference to: Submission
- ------- ---------------- ------------------------------ -----------
10.25 Directors Stock Appendix A to Definitive Proxy
Award Plan of Statement (Schedule 14A) for the
Mallinckrodt the Company's 1997 Annual Meeting
Inc., effective of Stockholders, filed with the
October 15,1997 Commission on September 12, 1997
10.26 The Mallinckrodt Appendix B to Definitive Proxy
Inc. Equity Statement (Schedule 14A) for the
Incentive Plan, Company's 1997 Annual Meeting
effective of Stockholders, filed with the
April 16, 1997 Commission on September 12, 1997
27 Financial Data
Schedule X
(b) Reports on Form 8-K.
During the quarter and through the date of this report, the
following reports on Form 8-K were filed.
- Report dated October 7, 1997 under Item 5 regarding
Mallinckrodt can continue to sell Warm Touch(*) Blankets in
U.S., Appeals Court stays injunction.
- Report dated October 16, 1997 under Item 5 regarding Board
declares quarterly dividend; three directors elected at
Company's annual meeting.
- Report dated October 21, 1997 under Item 5 regarding selling
additive preblend business to Ciba Specialty Chemicals.
- Report dated November 3, 1997 under Item 7 regarding pro
forma statements pertaining to tender offer for Nellcor
Puritan Bennett Incorporated.
- Report dated November 26, 1997 under Item 5 regarding
Mallinckrodt winning stay of injunction in Warm Touch(*)
blanket case.
- Report dated January 7, 1998 under Item 5 regarding new
ultrasound imaging agent, Optison(*) being cleared by the
FDA.
- Report dated January 22, 1998 under Item 5 regarding
Mallinckrodt exploring additional portfolio realignments.
- Report dated February 2, 1998 under Item 5 regarding European
approval of new ultrasound imaging agent Optison(*).
- Report dated February 3, 1998 under Item 5 regarding pro
forma statements to present the combined results of
operations of Mallinckrodt Inc. and Nellcor Puritan Bennett
Incorporated.
########
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: February 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the balance sheet and income statement, and is qualified in
its entirety by reference to such financial schedules.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 111
<SECURITIES> 0
<RECEIVABLES> 492
<ALLOWANCES> 15
<INVENTORY> 508
<CURRENT-ASSETS> 1247
<PP&E> 1520
<DEPRECIATION> 535
<TOTAL-ASSETS> 4005
<CURRENT-LIABILITIES> 1803
<BONDS> 548
0
11
<COMMON> 87
<OTHER-SE> 749
<TOTAL-LIABILITY-AND-EQUITY> 4005
<SALES> 1154
<TOTAL-REVENUES> 1154
<CGS> 740
<TOTAL-COSTS> 1496
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47
<INCOME-PRETAX> (377)
<INCOME-TAX> 9
<INCOME-CONTINUING> (386)
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<NET-INCOME> (386)
<EPS-PRIMARY> (5.31)
<EPS-DILUTED> (5.31)
</TABLE>
