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 September 30, 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.
72,934,630 shares excluding 14,181,659 treasury shares as of October
31, 1997.
<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 September 30, 1997 of Mallinckrodt Inc. filed
with the Securities and Exchange Commission on November 12, 1997 (the
"Form 10-Q"). In accordance therewith, Part I "Financial
Information" of the Form 10-Q is hereby restated in its 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 and 4 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)
Three Months Ended
September 30,
--------------------
1997 1996
-------- --------
Net sales $ 498.1 $ 442.0
Operating costs and expenses:
Cost of goods sold 309.0 242.0
Selling, administrative and
general expenses 125.3 105.8
Purchased research and development 398.3
Research and development expenses 29.5 28.8
Other operating income, net (1.7) (.9)
-------- --------
Total operating costs and expenses 860.4 375.7
-------- --------
Operating earnings (loss) (362.3) 66.3
Interest income and other
nonoperating income, net 9.2 4.5
Interest expense (18.4) (12.7)
-------- --------
Earnings (loss) from continuing
operations before income taxes (371.5) 58.1
Income tax provision 9.9 21.5
-------- --------
Earnings (loss) from continuing
operations (381.4) 36.6
Discontinued operations (1.2)
-------- --------
Net earnings (loss) (381.4) 35.4
Preferred stock dividends (.1) (.1)
-------- --------
Available for common shareholders $(381.5) $ 35.3
======== ========
Earnings (loss) per common share:
Continuing operations $ (5.21) $ .48
Discontinued operations (.01)
-------- --------
Net earnings $ (5.21) $ .47
======== ========
(See Notes to Condensed Consolidated Financial Statements on pages 5
through 8.)
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 125.1 $ 808.5
Trade receivables, less allowances
of $14.7 at September 30 and $8.4
at June 30 474.2 356.0
Inventories 568.9 315.9
Deferred income taxes 58.3 36.8
Other current assets 82.4 99.6
--------- ---------
Total current assets 1,308.9 1,616.8
Investments and long-term receivables,
less allowances of $9.6 at September 30
and $14.1 at June 30 172.5 145.1
Property, plant and equipment, net 984.7 827.9
Goodwill, net 896.4 226.2
Technology, net 396.5 24.2
Other intangible assets, net 295.2 146.7
Deferred income taxes 23.5 .8
--------- ---------
Total assets $4,077.7 $2,987.7
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $1,126.5 $ 11.7
Accounts payable 192.7 169.3
Accrued liabilities 456.8 396.1
Income taxes payable 57.4 76.4
Deferred income taxes 21.7 .2
--------- ---------
Total current liabilities 1,855.1 653.7
Long-term debt, less current maturities 550.6 545.2
Deferred income taxes 468.1 248.7
Postretirement benefits 165.2 161.9
Other noncurrent liabilities and
deferred credits 164.6 127.0
--------- ---------
Total liabilities 3,203.6 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 312.8 305.9
Reinvested earnings 899.1 1,292.6
Foreign currency translation (53.5) (49.9)
Treasury stock, at cost (382.4) (395.5)
--------- ---------
Total shareholders' equity 874.1 1,251.2
--------- ---------
Total liabilities and shareholders' equity $4,077.7 $2,987.7
========= =========
(See Notes to Condensed Consolidated Financial Statements on pages 5
through 8.)
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Three Months Ended
September 30,
------------------------
1997 1996
---------- ----------
Cash Flows - Operating Activities
Net earnings (loss) $ (381.4) $ 35.4
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 38.8 39.1
Postretirement benefits 3.3 2.8
Undistributed equity in earnings of
joint venture (5.6)
Losses on disposals of assets .1
Deferred income taxes (4.8) (3.7)
Write-off of purchased research and
development 398.3
Sale of inventory stepped up to fair
value at acquisition 18.8
---------- ----------
73.1 68.0
Changes in operating assets and
liabilities:
Trade receivables 33.8 15.5
Inventories (17.4) ( 7.4)
Other current assets 43.0 (.2)
Accounts payable, accrued liabilities
and income taxes payable, net (172.6) (21.8)
Net current liabilities of
discontinued operations (.3)
Other noncurrent liabilities and
deferred credits 18.4 (16.8)
Other, net 1.1 21.3
---------- ----------
Net cash provided (used) by operating
activities (20.6) 58.3
---------- ----------
Cash Flows - Investing Activities
Capital expenditures (30.3) (22.9)
Acquisition spending (1,734.6) (4.1)
Proceeds from asset disposals 1.3 33.6
Other, net .7 1.9
---------- ----------
Net cash provided (used) by investing
activities (1,762.9) 8.5
---------- ----------
Cash Flows - Financing Activities
Increase in short-term debt 1,091.8 .4
Proceeds from long-term debt .4 1.6
Payments on long-term debt (1.9)
Issuance of Mallinckrodt common stock 29.7 9.5
Acquisition of treasury stock (9.7) (22.5)
Dividends paid (12.1) (11.7)
---------- ----------
Net cash provided (used) by financing
activities 1,100.1 (24.6)
---------- ----------
Increase (decrease) in cash and cash
equivalents (683.4) 42.2
Cash and cash equivalents at beginning
of period 808.5 496.1
---------- ----------
Cash and cash equivalents at end
of period $ 125.1 $ 538.3
========== ==========
(See Notes to Condensed Consolidated Financial Statements on pages 5
through 8.)
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In millions, except per share amounts)
1997 1996
---------- ----------
4 Percent cumulative preferred stock:
Balance at June 30 and September 30 $ 11.0 $ 11.0
Common stock:
Balance at June 30 and September 30 87.1 87.1
Capital in excess of par value:
Balance at June 30 305.9 283.5
Stock option exercises 6.9 1.9
---------- ---------
Balance at September 30 312.8 285.4
---------- ---------
Reinvested earnings:
Balance at June 30 1,292.6 1,150.7
Net earnings (loss) (381.4) 35.4
Dividends
4 Percent cumulative preferred
stock ($1.00 per share) (.1) (.1)
Common stock ($.165 per share in
fiscal 1998 and $.155 per share
in fiscal 1997) (12.0) (11.6)
--------- ---------
Balance at September 30 899.1 1,174.4
--------- ---------
Foreign currency translation:
Balance at June 30 (49.9) (15.3)
Translation adjustment (3.6) 2.8
--------- ---------
Balance at September 30 (53.5) (12.5)
--------- ---------
Treasury stock:
Balance at June 30 (395.5) (284.8)
Acquisition of treasury stock ( 9.7) (22.5)
Stock option exercises 8.7 7.6
Investment plan match 7.3
Restricted stock award 6.8
--------- ---------
Balance at September 30 (382.4) (299.7)
--------- ---------
Total shareholders' equity $ 874.1 $1,245.7
========= =========
(See Notes to Condensed Consolidated Financial Statements on pages 5
through 8.)
<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 $674.6 million at September 30, 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 $5.7
million for the quarter ended September 30, 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 one month of activity. The Company
has also recorded a deferred tax liability of approximately
$234.6 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.
The objectives of the integration effort were to sustain and
nurture the current sales base, develop revenue enhancement
opportunities, and identify and implement profit improvements
with the impact of these actions to be substantially realized in
fiscal 1999. Management is evaluating numerous alternative
courses of action, but additional analysis is required to
determine the actions to select and the methods of
implementation. No assurances can be made as to the amount of
profit improvements that will actually be realized; however,
substantial management resources will be applied to achieve
operating efficiencies from integrating the two companies. The
Company expects the integration plan to be completed during
fiscal 1998.
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 that may be stopped.
Termination and relocation arrangements will be 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. At September 30, 1997, costs of these
exit activities are expected to be significant but are not
estimable. No accruals for Nellcor integration actions were
recorded during the first quarter. As these accruals are
recorded, 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 September 30, 1997, cost 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 quarter, no accruals or expenses
were recorded.
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.
Three Months Ended
September 30,
------------------
(In millions, except per share amounts)
1997 1996
------- -------
Net sales $599.2 $612.9
Net income $ 5.9 $ 25.3
Net income per share $ .08 $ .33
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 ended September 30, 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 three months ended
September 30, 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 $18.8 million, $11.7 million net of taxes, for the
month of September 1997. A similar inventory-related charge
will impact results for the next three months based upon current
expectations for sales of the acquired inventory.
3. Included in earnings from continuing operations for the three
months ended September 30, 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.
4. 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% interest in Tastemaker, the flavors
joint venture with Hercules Incorporated, and which was divested
March 31, 1997.
5. 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. 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.
6. 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 discussed in Notes 1 and 2, the Company's effective
tax rate for the first three months was 36.9 percent, compared
to last year's 37.0 percent.
7. 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.
8. Earnings per common share were based on the weighted average
number of common and common equivalent shares outstanding
(73,166,456 and 75,501,070 for the three months ended
September 30, 1997 and 1996, respectively).
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings per Share, which is required
to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact
of Statement No. 128 on the calculation of primary and fully
diluted earnings is not material for the quarters ended
September 30, 1997 and 1996.
9. The components of inventory included the following as of
September 30, 1997:
(In millions)
Raw materials and supplies $192.6
Work in process 68.9
Finished goods 307.4
------
$568.9
======
10. As of September 30, 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:
September 30, June 30,
1997 1997
-------------- --------------
Common stock 14,236,673 14,843,847
4 Percent cumulative
preferred stock 1,670 1,670
11. At September 30, 1997, common shares reserved were:
Exercise of common stock purchase rights 81,971,675
Exercise of stock options and granting
of stock awards 9,092,049
--------------
Total 91,063,724
==============
12. Supplemental cash flow information for the three months ended
September 30 included:
(In millions)
1997 1996
-------- --------
Interest paid $12.7 $22.2
Income taxes paid $4.8 $6.4
Noncash investing and financing
activities:
Assumption of liabilities related
to an acquisition $488.5
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 $381.4 million, or $5.21 loss per share for the quarter ended
September 30, 1997. The loss includes certain noncash charges
related to the acquisition of Nellcor which was completed at the end
of August 1997. The acquisition-related charges are a one-time
$398.3 million write-off of purchased research and development, which
had no offsetting tax benefits, and a cost of goods sold charge of
$18.8 million, $11.7 million net of taxes, related to the sale of
inventories stepped up to fair value. Excluding the noncash charges
related to the acquisition, the Company had earnings from continuing
operations of $28.6 million, or 39 cents per share. Earnings from
continuing operations for the first quarter of last year were $36.6
million, or 48 cents per share. Net earnings for the same quarter
last year were $35.4 million, or 47 cents per share, and included a
loss of $1.2 million from discontinued operations.
Net sales for the quarter were $498.1 million, up 13 percent from the
$442.0 million in the same period last year. The first quarter
results of operations include one month of sales of Nellcor, which
were $70.7 million. Excluding the sales of Nellcor, the Company's
net sales would have been 3 percent below the corresponding period of
last year.
A comparison of sales and operating earnings follows:
(In millions) Three Months Ended
September 30,
--------------------
1997 1996
-------- -------
Sales
- - -----
Healthcare $411.1 $361.7
Specialty chemicals 87.0 80.5
Intersegment sales (.2)
-------- -------
$498.1 $442.0
======== =======
Operating earnings (loss)
- - -------------------------
Healthcare $(361.8) $ 67.4
Specialty chemicals 5.0 5.5
Corporate (5.5) (6.6)
-------- -------
$(362.3) $ 66.3
======== =======
Business Segments
- - -----------------
Healthcare Three Months Ended
Net Sales September 30,
--------------------
(In millions) 1997 1996
------- -------
Imaging agents $177.3 $198.6
Respiratory care 141.8 77.3
Pharmaceutical specialties 92.0 85.8
------- -------
$411.1 $361.7
======= =======
Healthcare reported an operating loss for the quarter of $361.8
million which includes Nellcor's results for one month. These
results of operations include a $396.3 million write-off of purchased
research and development, and an $18.6 million fair value step-up
charge related to the sale of inventories. Excluding the impact of
Nellcor noncash acquisition-related charges, healthcare operating
earnings would have been $53.1 million, which is 21 percent below the
$67.4 million reported for the same period last fiscal year.
- - --------------------------------------------
[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>
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. 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.
Net sales for the first quarter were $411.1 million, an increase of
14 percent over the $361.7 million reported for the same quarter last
year. Excluding Nellcor, healthcare sales were $344.5 million. This
represents a decline of $17.2 million or 5 percent from the prior
year. Imaging agent sales were $177.3 million, which is $21.3
million or 11 percent below the corresponding period last year. This
sales decline is primarily attributable to pricing pressures which
are expected to continue. Price declines in iodinated contrast media
reduced net sales by $33 million and were partially offset by sales
volume increases of $12 million. Excluding Nellcor sales for one
month, respiratory care had sales of $75.2 million, which is $2.1
million or 3 percent below prior year. The strong U.S. dollar and
the lack of sales of the blood gas and electrolyte business divested
on September 30, 1996 have negatively affected the year-to-year
comparison of respiratory care sales by $5 million and $5.4 million,
respectively, partially offset by respiratory therapy and
anesthesiology products volume increases of $9 million.
Pharmaceutical specialties sales were $92.0 million, a $6.2 million
or 7 percent increase over the prior year. This sales increase is
attributable to $3 million in acetaminophen (APAP) volume and price
improvements and the remainder is associated with dosage narcotics
and the Company's acquisition of D.M. Graham Laboratories, Inc. in
November 1996.
Specialty Chemicals Three Months Ended
Net Sales September 30,
-------------------
(In millions) 1997 1996
------ ------
$ 87.0 $ 80.5
====== ======
Specialty chemicals operating earnings for the quarter declined 9
percent to $5.0 million from $5.5 million for the same period last
year. The current year results of operations include one month of
results of Aero Systems, which is part of Nellcor. Excluding Aero
Systems' acquisition-related charges, the specialty chemicals segment
had operating earnings of $7.2 million or 31 percent above last year
primarily as a result of benefits derived from cost containment
programs in effect. Net sales for the quarter were up 8 percent.
After excluding sales of Aero Systems, specialty chemicals sales
improved $2.3 million or 3 percent primarily the result of a $3
million volume increase in microelectronics.
Corporate Matters
- - -----------------
Corporate expenses were $5.5 million, or 17 percent below the $6.6
million reported for the same period last year. The Company's
effective tax rate was negatively impacted by the non-deductible
write-off of purchased research and development and goodwill
amortization directly associated with the August 28, 1997 acquisition
of Nellcor.
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 $683.4 million, primarily as a result
of the acquisition of Nellcor common shares outstanding. Operations
utilized $20.6 million of cash, while acquisition and capital
spending totaled $1,764.9 million. The Company's current ratio at
September 30, 1997 was .7:1. Debt as a percentage of invested
capital was 65.7 percent.
The current ratio has declined to its current level as a result of a
reduction in cash and cash equivalents and increase in short-term
borrowings to acquire the outstanding shares of common stock of
Nellcor. The Company plans to restructure its debt in the near
future in order to reduce its reliance on short-term borrowing
facilities.
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.
At September 30, 1997, the Company has a $550 million 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 September 30, 1997, no commercial paper
borrowings were outstanding. There was $705 million of borrowing
outstanding under the U.S. lines of credit at September 30, 1997.
Non-U.S. lines of credit totaling $147.7 million were also available
and borrowings under these lines amounted to $15.6 million at
September 30, 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 three
months ended September 30, 1997.
Estimated capital spending for the year ending June 30, 1998 is
approximately $200 million.
********************
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
