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 September 30, 1999
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 (Zip Code)
executive offices)
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 Corporate Registrants: Indicate the number of
shares outstanding of each of the registrant's classes of common
stock: 69,579,277 shares as of October 31, 1999.
<PAGE>
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 Annual
Report on Form 10-K for the year ended June 30, 1999, are unaudited
but include all adjustments which Mallinckrodt's management considers
necessary for a fair presentation of the results of operations for the
interim periods presented. These adjustments are of a normal
recurring nature. 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. Certain amounts
in the prior year were reclassified to conform to the current year
presentation.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Three Months Ended
September 30,
------------------------
1999 1998
--------- ---------
Net sales............................... $ 614.1 $ 591.9
Operating costs and expenses:
Cost of goods sold.................... 337.1 318.3
Selling, general and administrative
expenses............................. 170.4 173.1
Research and development expenses..... 33.1 33.9
-------- --------
Total operating costs and expenses...... 540.6 525.3
-------- --------
Operating earnings...................... 73.5 66.6
Interest and other nonoperating
income, net............................ 1.2 .9
Interest expense........................ (19.3) (20.6)
-------- --------
Earnings from continuing operations
before income taxes.................... 55.4 46.9
Income tax provision.................... 17.7 15.2
-------- --------
Earnings from continuing operations..... 37.7 31.7
Discontinued operations................. 22.6
-------- --------
Net earnings............................ 37.7 54.3
Preferred stock dividends............... (.1) (.1)
-------- --------
Available for common shareholders....... $ 37.6 $ 54.2
======== ========
Basic earnings per common share:
Earnings from continuing operations... $ .53 $ .43
Discontinued operations............... .31
-------- --------
Net earnings $ .53 $ .74
======== ========
Diluted earnings per common share:
Earnings from continuing operations... $ .53 $ .43
Discontinued operations............... .31
-------- --------
Net earnings.......................... $ .53 $ .74
======== ========
Dividends declared and paid per
common share........................... $ .165 $ .165
======== ========
(See Notes to Condensed Consolidated Financial Statements on pages 4
through 6.)
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
September 30, June 30,
1999 1999
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents............ $ 26.3 $ 32.7
Trade receivables, less allowances
of $20.4 at September 30 and
$17.9 at June 30.................... 459.4 490.9
Inventories.......................... 547.4 530.3
Deferred income taxes................ 78.0 54.7
Other current assets................. 59.6 61.3
--------- ---------
Total current assets................... 1,170.7 1,169.9
Investments and other noncurrent
assets, less allowances of $9.5 at
September 30 and $8.6 at June 30...... 81.3 67.2
Property, plant and equipment, net..... 856.5 870.7
Goodwill, net.......................... 934.9 942.3
Technology, net........................ 330.8 336.4
Other intangible assets, net........... 261.6 266.6
Deferred income taxes.................. 4.4 4.3
--------- ---------
Total assets.......................... $3,640.2 $3,657.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt...................... $ 411.9 $ 383.8
Accounts payable..................... 188.8 221.2
Accrued liabilities.................. 419.9 459.5
Income taxes payable................. 118.8 77.3
Deferred income taxes................ .9 1.2
--------- ---------
Total current liabilities.............. 1,140.3 1,143.0
Long-term debt, less current
maturities............................ 742.4 742.5
Deferred income taxes.................. 359.9 363.0
Postretirement benefits................ 167.8 166.5
Other noncurrent liabilities
and deferred credits.................. 163.0 182.0
--------- ---------
Total liabilities...................... 2,573.4 2,597.0
--------- ---------
Shareholders' equity:
4 Percent cumulative preferred
stock............................... 11.0 11.0
Common stock, par value $1,
authorized 300,000,000 shares;
issued 87,124,773 shares............ 87.1 87.1
Capital in excess of par value....... 315.3 314.7
Reinvested earnings.................. 1,214.5 1,188.4
Accumulated other comprehensive
loss................................ (94.5) (105.1)
Treasury stock, at cost.............. (466.6) (435.7)
--------- ---------
Total shareholders' equity............. 1,066.8 1,060.4
--------- ---------
Total liabilities and shareholders'
equity................................ $3,640.2 $3,657.4
========= =========
(See Notes to Condensed Consolidated Financial Statements on pages 4
through 6.)
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Three Months Ended
September 30,
------------------------
1999 1998
--------- ---------
CASH FLOWS - OPERATING ACTIVITIES
Net earnings............................ $ 37.7 $ 54.3
Adjustments to reconcile net
earnings to net cash provided (used)
by operating activities:
Depreciation.......................... 33.9 28.8
Amortization.......................... 21.3 20.9
Postretirement benefits............... 1.3 1.7
Gains on asset disposals.............. (3.0) (37.4)
Deferred income taxes................. (26.2) (7.4)
------- -------
65.0 60.9
Changes in operating assets and
liabilities:
Trade receivables................... 40.0 41.5
Inventories......................... (13.6) (33.5)
Other current assets................ 2.6 (.8)
Accounts payable, accrued
liabilities and income taxes
payable, net....................... (29.3) (112.1)
Other noncurrent liabilities and
deferred credits................... (18.7) 6.0
Other, net.......................... (4.9) 10.9
------- -------
Net cash provided (used) by
operating activities................... 41.1 (27.1)
------- -------
CASH FLOWS - INVESTING ACTIVITIES
Capital expenditures.................... (23.6) (27.3)
Acquisition spending.................... (1.0)
Proceeds from asset disposals........... 15.7 55.1
Purchase of investments and
intangible assets...................... (14.8) (4.2)
------- -------
Net cash provided (used) by
investing activities................... (23.7) 23.6
------- -------
CASH FLOWS - FINANCING ACTIVITIES
Increase in notes payable............... 24.8 60.5
Payments on long-term debt.............. (.4) (.2)
Issuance of common stock................ 1.0 .3
Acquisition of treasury stock........... (37.6) (42.5)
Dividends paid.......................... (11.6) (12.0)
------- -------
Net cash provided (used) by
financing activities................... (23.8) 6.1
------- -------
Increase (decrease) in cash
and cash equivalents................... (6.4) 2.6
Cash and cash equivalents at
beginning of period.................... 32.7 55.5
------- -------
Cash and cash equivalents at
end of period.......................... $ 26.3 $ 58.1
======= =======
(See Notes to Condensed Consolidated Financial Statements on pages 4
through 6.)
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Mallinckrodt Inc. and its subsidiaries, collectively, are called the
"Company" or "Mallinckrodt." All references to years are to fiscal
years ended June 30 unless otherwise stated. Certain amounts in the
prior year were reclassified to conform to the current year
presentation.
1. In June 1998, the Company committed to the sale of the remaining
chemical additives business of the catalysts and chemical
additives division, and closing of the sale occurred on July 31,
1998. The transaction resulted in a $37.0 million gain on sale,
$22.6 million net of taxes recorded in the quarter ended September
30, 1998. The gain on sale, net of tax, was included in
discontinued operations for the quarter ended September 30, 1998.
Earnings from operations were zero in the one month of operations
during the quarter ended September 30, 1998.
2. The following table sets forth the computation of basic and
diluted earnings from continuing operations per common share (in
millions, except share and per share amounts).
Three Months Ended
September 30,
------------------------
1999 1998
--------- ---------
Numerator:
Earnings from continuing
operations........................ $ 37.7 $ 31.7
Preferred stock dividends.......... (.1) (.1)
------- -------
Numerator for basic and diluted
earnings per share--income
available to common shareholders.. $ 37.6 $ 31.6
======= =======
Denominator:
Denominator for basic earnings
per share--weighted-average
shares............................ 70,434,766 72,917,133
Potential dilutive common
shares--employee stock options.... 445,066 86,766
---------- ----------
Denominator for diluted earnings
per share--adjusted
weighted-average shares.......... 70,879,832 73,003,899
========== ==========
Basic earnings from continuing
operations per common share........ $ .53 $ .43
===== =====
Diluted earnings from continuing
operations per common share........ $ .53 $ .43
===== =====
3. Supplemental cash flow information for the three months ended
September 30 included:
(In millions)
1999 1998
--------- ---------
Interest paid....................... $ 25.7 $ 27.7
Income taxes paid................... 2.0 43.3
Noncash investing and financing
activities:
Assumption of liabilities
related to acquisitions.......... .3 (1.2)
Issuance of stock for 401(k)
employer matching contribution... 6.3 6.0
Fair value loss adjustment
to securities.................... (.9) (3.7)
Assets acquired through
capital leases................... .1
4. The components of inventory included the following as of September
30, 1999:
(In millions)
Raw materials and supplies.......... $ 206.7
Work in process..................... 67.0
Finished goods...................... 273.7
--------
$ 547.4
========
5. The Company has authorized and issued 100,000 shares, 98,330
outstanding at September 30, 1999, of par value $100, 4 percent
cumulative preferred stock. The Company has authorized 1,400,000
shares, par value $1, of series preferred stock, none of which was
outstanding during 2000 and 1999. Shares included in treasury
stock were:
September 30, June 30,
1999 1999
------------- ------------
Common stock...................... 17,315,217 16,422,084
4 Percent cumulative
preferred stock.................. 1,670 1,670
6. Total comprehensive income for the three months ended September 30
was as follows:
(In millions)
1999 1998
--------- ---------
Net earnings........................ $ 37.7 $ 54.3
Other comprehensive income
(expense):
Foreign currency translation
adjustment....................... 11.2 21.2
Net unrealized loss on
investment securities............ (.9) (3.7)
Tax benefit related to items of
other comprehensive income....... .3 1.4
------- -------
Other comprehensive income,
net of tax......................... 10.6 18.9
------- -------
Total comprehensive income.......... $ 48.3 $ 73.2
======= =======
The foreign currency translation adjustments are not adjusted for
income taxes as they relate to indefinite investments in non-U.S.
subsidiaries. As of September 30, 1999, the cumulative balances
for foreign currency translation adjustment loss and the
unrealized loss on investment securities were $88.6 million and
$5.9 million, respectively.
7. The Company's operations are principally managed on a product and
services basis and are comprised of three reportable segments -
Respiratory, Imaging and Pharmaceuticals. The Respiratory
products primarily help diagnose, monitor and treat respiratory
disorders. The Imaging products are used in radiology, cardiology
and nuclear medicine primarily to diagnose disease. The
Pharmaceuticals products are used primarily to control pain.
The Company evaluates performance and allocates resources based
upon operating earnings. Operating earnings of a business segment
represents revenues less all operating expenses and does not
include interest and corporate expense. The accounting policies
of the reportable segments are the same as those used to determine
consolidated results of operations.
Net sales and operating earnings by segment are as follows:
(In millions)
Three Months Ended
September 30,
------------------------
1999 1998
--------- ---------
Net sales
Respiratory....................... $ 263.1 $ 256.2
Imaging........................... 182.2 183.6
Pharmaceuticals................... 168.8 152.1
-------- --------
$ 614.1 $ 591.9
======== ========
Operating earnings
Respiratory....................... $ 32.1 $ 22.4
Imaging........................... 23.0 30.7
Pharmaceuticals................... 24.2 20.5
-------- --------
$ 79.3 $ 73.6
======== ========
Reconciliations of operating earnings for reportable segments to
earnings from continuing operations before income taxes as
reported in the Condensed Consolidated Statements of Operations
follow (in millions):
Three Months Ended
September 30,
------------------------
1999 1998
--------- ---------
Total operating earnings
for reportable segments........... $ 79.3 $ 73.6
Corporate expense................... (5.8) (7.0)
------- -------
Consolidated operating earnings..... 73.5 66.6
Interest and other nonoperating
income, net........................ 1.2 .9
Interest expense.................... (19.3) (20.6)
------- -------
Earnings from continuing
operations before income taxes..... $ 55.4 $ 46.9
======= =======
Results from operations for Mallinckrodt's Respiratory and
Pharmaceuticals business segments are materially affected by
seasonal factors primarily related to the common cold and
influenza season. These seasonal factors tend to favorably impact
net sales and operating earnings in the third and fourth quarters.
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 one such matter,
German authorities seized certain records of two of the Company's
non-U.S. subsidiaries, Mallinckrodt Medical GmbH and Mallinckrodt
Radiopharma GmbH, in the fall of 1997. These seizures were part
of investigations of certain practices at these subsidiaries that
involved payments to physicians and other German healthcare
providers. The investigations, which are ongoing, appear to focus
on whether the payments in question were for research or other
services performed by the recipients, or may have been sales
incentives or discounts which could possibly be contrary to German
law.
The Company's subsidiary, Puritan-Bennett Corporation (Puritan-
Bennett), is a defendant in an action that was filed on August 29,
1997 and is currently pending in the U.S. District Court for the
District of New Mexico. This case relates to a 1996 Asset
Purchase Agreement (Agreement) whereby Puritan-Bennett agreed to
purchase certain assets of New Mexico Steel. The purchase price
of the assets was $1.2 million. Said purchase price was to be
adjusted upward or downward based upon post-closing schedules of
inventory, accounts receivable and office equipment to be provided
by Puritan-Bennett. Plaintiff alleges that Puritan-Bennett
breached the Agreement by failing to deliver the post-closing
schedules in a timely manner. On September 23, 1999, a jury
returned a verdict against Puritan-Bennett and in favor of New
Mexico Steel in the amount of $.4 million in compensatory and $5.0
million in punitive damages. With the advice of counsel, the
Company believes that the verdict is not supported by the law or
the facts of the case and is a product of passion and prejudice on
the part of the jury. Based upon all the facts available to
management, the Company believes that it is possible but not
probable that the jury verdict will be upheld on appeal. The
Company intends to vigorously challenge this verdict in post-trial
motions with the trial court, and on appeal if necessary.
The Company has recognized the costs and associated liabilities
only for those investigations, claims and legal proceedings for
which, in its view, it is probable that liabilities have been
incurred and the related amounts are estimable. Based upon
information currently available, management believes that existing
accrued liabilities 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 results of operations
or financial position.
In connection with laws and regulations pertaining to the
protection of the environment, the Company is a party to several
environmental investigations or remediations and, along with other
companies, has been named a "potentially responsible party" for
certain waste disposal sites. The Company accrues for losses
associated with environmental remediation obligations when such
losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations
generally are recognized no later than completion of the remedial
feasibility study. Such accruals are adjusted as further
information develops or circumstances change. Accruals for future
expenditures for environmental remediation are not discounted to
their present value. Recoveries, of which none exist at September
30, 1999 and June 30, 1999, of environmental remediation costs
from other parties are recognized as assets when their receipt is
deemed probable. The Company has recognized the costs
associated with the investigation and remediation of Superfund
sites, the litigation of potential environmental claims, and the
investigation and remedial activities at the Company's current and
former operating sites for matters that meet the policy set forth
above. Related accruals at September 30, 1999 and June 30, 1999
of $126.8 million and $128.8 million, respectively, are included
in current accrued liabilities and other noncurrent liabilities
and deferred credits.
See Part II, Item 1 "Legal Proceedings" for additional information
about legal proceedings involving the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. [1]
Mallinckrodt Inc. and its subsidiaries, collectively, are called the
"Company" or "Mallinckrodt." All references to years are to fiscal
years ended June 30 unless otherwise stated. Certain amounts in the
prior year were reclassified to conform to the current year
presentation. All earnings per share amounts are calculated on a
diluted basis unless otherwise stated.
RESULTS OF OPERATIONS
Mallinckrodt recorded earnings from continuing operations and net
earnings of $37.7 million, or 53 cents per share for the quarter ended
September 30, 1999. This is an increase of 19 percent and 23 percent,
respectively, from the $31.7 million or 43 cents per share from
earnings from continuing operations reported for the first quarter of
1999. Net earnings for the first quarter of 1999 included a gain of
$22.6 million, or 31 cents per share on the sale of a chemical
additives business, which related to a division reclassified to
discontinued operations in 1998.
Net sales for the quarter ended September 30, 1999 were $614.1
million, up 4 percent from the $591.9 million in the same period last
year. Sales to customers outside the United States were $196 million
or 32 percent of total sales for the first quarter of 2000. Operating
earnings for the quarter ended September 30, 1999 were $73.5 million,
which is a 10 percent improvement over the same period in 1999.
A comparison of sales and operating earnings follows:
(In millions)
Three Months Ended
September 30,
------------------------
1999 1998
--------- ---------
Net sales
Respiratory....................... $ 263.1 $ 256.2
Imaging........................... 182.2 183.6
Pharmaceuticals................... 168.8 152.1
-------- --------
$ 614.1 $ 591.9
======== ========
Operating earnings
Respiratory....................... $ 32.1 $ 22.4
Imaging........................... 23.0 30.7
Pharmaceuticals................... 24.2 20.5
-------- --------
$ 79.3 $ 73.6
Corporate expense................. (5.8) (7.0)
-------- --------
$ 73.5 $ 66.6
======== ========
The Respiratory segment reported sales for the quarter ended September
30, 1999 of $263.1 million or 3 percent greater than the sales
recorded for the same period last year. Excluding sales from
businesses divested, sales growth was 5 percent. Components of the 5
percent increase were 4 percent volume growth led by volume increase
of 13 percent in pulse oximetry, flat pricing and 1 percentage point
from the favorable impact of foreign currency changes. Respiratory
operating earnings were $32.1 million, compared with $22.4 million in
the same quarter last year. The 43 percent increase in earnings
reflects the strong performance of pulse oximetry and other higher
margin products and a relatively weak performance in the prior year
quarter.
- --------------------------
[1] CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995: Our discussion and analysis in this quarterly
report contain some forward-looking statements. Forward-looking
statements do not relate strictly to historical or current facts, but
rather give our current expectations or forecasts of future events.
Forward-looking statements may be identified by their use of words
such as "plans," "expects," "will," "anticipates," "believes," and
other words of similar meaning. Such statements may address, among
other things, the Company's strategy for growth, product development,
regulatory approvals, the outcome of contingencies such as legal
proceedings, market position, expenditures, and financial results.
Forward-looking statements are based on current expectations of future
events. Such statements involve risks and uncertainties and actual
results could differ materially from those discussed. Among the
factors that could cause actual results to differ materially from
those projected in any such forward-looking statements are as follows:
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; difficulties or delays in
addressing "Year 2000" problems (as discussed in Item 2, Management's
Discussion and Analysis of Financial Condition and Results of
Operations); and the risk factors reported from time to time in the
Company's SEC reports. The Company undertakes no obligation to update
any forward-looking statements as a result of future events or
developments.
<PAGE>
The Imaging segment had sales for the quarter ended September 30, 1999
of $182.2 million or 1 percent below sales in the prior year period of
$183.6 million. In spite of 6 percent volume growth in
radiopharmaceuticals, sales volume declined 1 percent from 1999 due to
lower x-ray contrast media sales and divestiture of a portion of the
diagnostic catheter business in August 1999. Pricing remained flat as
a result of higher pricing in radiopharmaceuticals offset by a
decrease in x-ray contrast media pricing. Operating earnings declined
to $23.0 million, compared with $30.7 million last year due primarily
to lower sales of x-ray contrast media partially offset by lower
operating expenses. Price declines in the x-ray contrast media
portion of the business continue and it is probable that this will be
a factor impacting subsequent quarters of this fiscal year.
The Pharmaceuticals segment's sales for the quarter ended September
30, 1999 were $168.8 million or 11 percent greater than in the same
period last year. The sales increase of $16.7 million was primarily
attributable to volume increases in all product lines, offset by 1
percent price decline. Operating earnings for the segment were $24.2
million or 18 percent greater than the $20.5 million recorded in the
comparable period last year. The operating earnings improvement was
primarily attributable to increased sales and to improved operating
rates at manufacturing facilities.
CORPORATE MATTERS
Corporate expense for the quarter ended September 30, 1999 was $5.8
million, or 17 percent below the level reported for the same period
last year primarily as the result of timing. Interest and other
nonoperating income, net was $1.2 million for the quarter ended
September 30, 1999 as compared with $.9 million for the same period
last year.
The Company's effective tax rate was 31.9 percent for the quarter
ended September 30, 1999. The effective tax rate for the same period
last year was 32.4 percent.
FINANCIAL CONDITION
The Company's financial resources are expected to continue to be
adequate to support existing businesses. Since June 30, 1999, cash
and cash equivalents decreased $6.4 million. Operations provided
$41.1 million of cash, while capital spending totaled $23.6 million.
The Company received $15.7 million in proceeds from asset disposals.
The Company's current ratio at September 30, 1999 was 1.0:1. Debt as
a percentage of invested capital was 52.0 percent at September 30,
1999.
At September 30, 1999, the Company had a $1.0 billion private
placement commercial paper program. The program is backed by a $1.0
billion revolving credit facility expiring September 12, 2002. There
were no borrowings outstanding under the revolving credit facility at
September 30, 1999. Commercial paper borrowings under this program
were $179.4 million as of September 30, 1999. Non-U.S. lines of
credit totaling $146.3 million were also available, and borrowings
under these lines amounted to $23.7 million at September 30, 1999.
The non-U.S. lines are cancelable at any time.
In May 1999, a $500 million shelf debt registration was declared
effective by the Securities and Exchange Commission and at September
30, 1999, the entire amount remained available.
The Company has $200 million aggregate principal amount of 5.99
percent notes, which mature in 2010, and 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. These notes have been
classified as short-term.
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 under these
authorizations have totaled 40.9 million shares, including 1.1 million
shares during the three months ended September 30, 1999.
Estimated capital spending for the year ending June 30, 2000 is
approximately $160 million.
Year 2000 Readiness Disclosure
- ------------------------------
The Year 2000 issue is the result of date-sensitive devices, systems
and computer programs that were deployed using two digits rather than
four to define the applicable year. Any such technologies may
recognize a year containing "00" as the year 1900 rather than the year
2000. If left unaddressed, this could result in a system failure or
miscalculations, under certain circumstances, causing disruptions of
operations including, among other things, a temporary inability to
process transactions or engage in similar normal business activities.
Mallinckrodt has developed and is implementing a comprehensive program
to address the Year 2000 issue. The program has four major focus
areas: information technology systems, non-information technology
systems, products, and key supplier and business partners. Overall,
the Company has completed its assessment in the above described areas,
and has virtually completed required modifications, replacements or
conversions.
Information technology systems are hardware and software which support
business applications. Year 2000 compliance for these systems
included modification and testing of existing systems and replacement
of certain systems with new technologies. We believe required
modifications, replacements and testing of critical systems are
completed.
Non-information technology systems (embedded systems) are used in
research and development, manufacturing processes and facility
management systems. We believe all remediation decisions, and
modifications and replacements deemed appropriate for critical items,
are completed.
Compliance status and applicable remediation steps for currently and
previously marketed products have been communicated via the Internet
using a dedicated web page. Modifications necessary to achieve
remediation for such products are available to customers in accordance
with the above communicated remediation steps.
The Company's key suppliers and business partners are also being
assessed for compliance using information requests, augmented with
more detailed reviews of certain of these key suppliers and business
partners. This effort is virtually completed, and there are no known
Year 2000 issues that would result in a material interruption in the
Company's conduct of normal business.
To further recognize potential adverse impact, the Company has
developed operating contingency plans to address unanticipated
interruptions that could occur in its critical processes, systems and
devices that have been assessed, remediated and considered Year 2000
ready by Mallinckrodt and its key suppliers and business partners.
The program to address Year 2000 has been underway since February
1997. Both internal and external resources are being used to assess
and modify or replace non-compliant technologies, and to appropriately
test Year 2000 modifications and replacements. The program is being
funded through operating cash flows. The pretax costs incurred for
this effort were approximately $10 million, $7 million and $1 million
in 1999, 1998 and 1997, respectively. In July through December 1999,
the Company anticipates an additional $2 million in pretax costs for
program management and to complete monitoring and evaluations of key
suppliers and business partners, program verification and contingency
planning.
The cost of the program and the date on which the Company believes it
will complete Year 2000 modifications are based on management's best
estimates. If the modifications and conversions are not made or are
not completed timely and operating contingency plans do not work as
anticipated, the result could be an interruption, or a failure, of
certain normal business activities or operations. Such failures could
materially impact and adversely affect the Company's results of
operations, liquidity and financial condition. In addition,
disruptions in the economy generally resulting from Year 2000 issues
could materially and adversely affect the Company.
The Company presently believes it has an effective plan to anticipate
and resolve any potential Year 2000 issues in a timely manner, and
that, with the completion of the program as scheduled, the possibility
of a material interruption of normal operations should be reduced.
European Monetary Union (EMU)
- -----------------------------
The euro was introduced on January 1, 1999, at which time the eleven
participating EMU member countries established fixed conversion rates
between their existing currencies (legacy currencies) and the euro.
The legacy currencies will continue to be valid as legal tender
through June 30, 2002; thereafter, the legacy currencies will be
canceled in the participating countries.
The Company's European sales offices and various manufacturing and
distribution facilities affected by the euro conversion have
established plans to address the systems issues raised by the euro
currency conversion and are cognizant of the potential business
implications of converting to a common currency. The Company is
unable to determine the ultimate financial impact of the conversion on
its operations, if any, given that the impact will be dependent upon
the competitive situations which exist in the various regional markets
in which the Company participates and the potential actions which may
or may not be taken by the Company's competitors and suppliers.
Mallinckrodt believes converting to the euro will have no material
impact on the Company's currency exchange cost and/or risk exposure,
continuity of contracts or taxation.
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
Registered and common law trademarks are indicated by an asterisk (*).
Environmental Matters
- ---------------------
The Company is actively involved in the investigation or remediation
of, or is addressing potential claims of, alleged or acknowledged
contamination at approximately 24 currently or previously owned or
operated sites and at approximately 16 off-site locations where its
waste was taken for treatment or disposal. These actions are in
various stages of development and generally include demands for
reimbursement of previously incurred costs, or costs for future
investigation and/or for remedial actions. In many instances, the
dollar amount of the claim is not specified. For some sites, other
potentially responsible parties may be jointly and severally
responsible, along with the Company, to pay for any past remediation
and other related expenses. For other sites, the Company may be
solely responsible for remediation and related costs. The Company
anticipates that a portion of these costs will be covered by insurance
or third party indemnities. A number of the currently pending matters
relate to historic and formerly owned operations of the Company.
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, engineering 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 costs at 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 recognized the costs and associated liabilities only
for those environmental matters for which, in its view, it is probable
that liabilities have been incurred and the related amounts are
estimable. Based upon information currently available, management
believes that existing accrued liabilities 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
results of operations or financial position.
During the Company's fiscal quarter ended September 30, 1999, there
were no material developments in the environmental proceedings
previously reported in the Company's Annual Report on Form 10-K for
the year ended June 30, 1999, nor did the Company become aware of any
new environmental proceedings requiring disclosure in this report.
General Litigation
- ------------------
The Company is a party to a number of other legal proceedings arising
in the ordinary course of business. The Company does not believe
these pending legal matters will have a material adverse effect on its
financial condition or the results of the Company's operations.
Previously Reported Matters
The following is a discussion of material developments in two matters
previously reported in the Company's Annual Report on Form 10-K for
the year ended June 30, 1999.
OPTISON(*) Patent Litigation -
Sonus Litigation - The court has moved the trial date for this
matter from February to April 2000 to give the parties additional
time to engage in settlement discussions. In addition, Sonus
Pharmaceuticals, Inc. (Sonus) has licensed its patent covering
ultrasound products to Nycomed Imaging AS, which has joined as a
plaintiff in the litigation. The Company and its licensor,
Molecular BioSystems, Inc., will continue to challenge the
validity of the Sonus patents in this litigation.
Augustine Medical, Inc. -
Europe - As previously reported, the District Court of The Hague,
the Netherlands held in February 1999 that the Company's blankets
do not infringe European patents owned by Augustine Medical, Inc.
(Augustine). Augustine appealed the court's ruling, but failed
to appear at the appellate hearing; accordingly, the appeal has
been dismissed.
United States - As previously reported, the Court of Appeals for
the Federal Circuit held in its June 8, 1999 ruling that the
Company's blankets do not infringe United States patents owned by
Augustine. The ruling of the Court of Appeals was issued as a
mandate to the United States District Court in Minneapolis. The
Company has filed a petition with the District Court to recover
its costs and attorneys' fees from Augustine.
New Litigation
New Mexico Steel v. Puritan-Bennett - The Company's subsidiary,
Puritan-Bennett Corporation (Puritan-Bennett), is a defendant in an
action that was filed on August 29, 1997 and is currently pending in
the U.S. District Court for the District of New Mexico, styled New
---
Mexico Steel Company Inc. v. Puritan-Bennett Corporation. This case
- --------------------------------------------------------
relates to a 1996 Asset Purchase Agreement (Agreement) whereby
Puritan-Bennett agreed to purchase certain assets of New Mexico Steel.
The purchase price of the assets was $1.2 million. Said purchase
price was to be adjusted upward or downward based upon post-closing
schedules of inventory, accounts receivable and office equipment to be
provided by Puritan-Bennett. Plaintiff alleges that Puritan-Bennett
breached the Agreement by failing to deliver the post-closing
schedules in a timely manner. On September 23, 1999, a jury returned
a verdict against Puritan-Bennett and in favor of New Mexico Steel in
the amount of $.4 million in compensatory and $5.0 million in punitive
damages. The Company believes that the verdict is not supported by
the law or the facts of the case and is a product of passion and
prejudice on the part of the jury. The Company intends to vigorously
challenge this verdict in post-trial motions with the trial court, and
on appeal if necessary.
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.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
- ------ -----------------------------------------------------------
10.22 Amendment Number One to the Mallinckrodt Inc. Equity
Incentive Plan (1) (incorporated herein by reference to
Exhibit A to Definitive Proxy Statement (Schedule 14A) for
the Company's 1999 Annual Meeting of Stockholders
filed with the Commission on September 8, 1999)
27 Financial data schedule for the quarter ended September 30,
1999 (filed with this electronic submission)
- ------------------------
(1) Management contract or compensatory plan required to be filed
pursuant to Item 601 of Regulation S-K.
(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 July 22, 1999 under Item 5 regarding Mallinckrodt and
Premier Purchasing Partnership signing new corporate agreement.
- - Report dated August 19, 1999 under Item 5 regarding Board of
Directors approval of amended Company bylaws.
* * * * * * * * * * * * * *
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: /s/ MICHAEL A. ROCCA By: /s/ DOUGLAS A. MCKINNEY
------------------------ -----------------------
Michael A. Rocca Douglas A. McKinney
Senior Vice President and Vice President and
Chief Financial Officer Controller
DATE: November 5, 1999
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