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, 1998
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.
71,341,966 shares excluding 15,774,323 treasury shares as of
October 31, 1998.
<PAGE>
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, 1998 of Mallinckrodt Inc. filed with the Securities and Exchange
Commission on November 10, 1998 (the Form 10-Q). Part I, Items 1 and
2 "Financial Information" and Part II, Item 6 "Exhibits and Reports
on Form 8-K" of the Form 10-Q are hereby amended and restated in
their entirety due to the change in the amount of the purchase price
of Nellcor Puritan Bennett Incorporated that was allocated to
purchased research and development and to provide additional
disclosures 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 Annual
Report on Form 10-K/A No. 1 for the year ended June 30, 1998, 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 and 3 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,
---------------------
1998 1997
-------- --------
Net sales $ 591.2 $ 454.6
Operating costs and expenses:
Cost of goods sold 318.3 275.8
Selling, administrative and
general expenses 172.4 119.0
Purchased research and development 306.3
Research and development expenses 33.9 27.7
Other operating income, net (1.5)
-------- --------
Total operating costs and expenses 524.6 727.3
-------- --------
Operating earnings (loss) 66.6 (272.7)
Interest and other nonoperating
income, net .9 9.2
Interest expense (20.6) (18.3)
-------- --------
Earnings (loss) from continuing
operations before income taxes 46.9 (281.8)
Income tax provision 15.2 9.1
-------- --------
Earnings (loss) from continuing operations 31.7 (290.9)
Discontinued operations 22.6
-------- --------
Earnings (loss) before cumulative effect
of accounting change 54.3 (290.9)
Cumulative effect of accounting change (8.4)
-------- --------
Net earnings (loss) 54.3 (299.3)
Preferred stock dividends (.1) (.1)
-------- --------
Available for common shareholders $ 54.2 $(299.4)
======== ========
Basic earnings per common share:
Earnings (loss) from continuing
operations $ .43 $ (4.02)
Discontinued operations .31
Cumulative effect of accounting change (.11)
-------- --------
Net earnings (loss) $ .74 $ (4.13)
======== ========
Diluted earnings per common share:
Earnings (loss) from continuing
operations $ .43 $ (4.02)
Discontinued operations .31
Cumulative effect of accounting change (.11)
-------- --------
Net earnings (loss) $ .74 $ (4.13)
======== ========
(See Notes to Condensed Consolidated Financial Statements on pages 4
through 7.)
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
September 30, June 30,
1998 1998
------------- ----------
Assets
Current assets:
Cash and cash equivalent $ 58.1 $ 55.5
Trade receivables, less allowances
of $18.3 at September 30 and $16.7
at June 30 452.1 486.3
Inventories 505.6 470.0
Deferred income taxes 108.9 95.2
Other current assets 69.3 61.5
Net current assets of discontinued
operations 4.8
--------- ---------
Total current assets 1,194.0 1,173.3
Investments and other noncurrent assets,
less allowances of $6.2 at September 30
and $5.8 at June 30 154.7 154.5
Property, plant and equipment, net 903.3 894.9
Goodwill, net 980.3 987.0
Technology, net 351.1 364.3
Other intangible assets, net 284.5 282.1
Net noncurrent assets of discontinued
operations 12.4
Deferred income taxes 4.8 4.6
--------- ---------
Total assets $3,872.7 $3,873.1
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 373.1 $ 311.4
Accounts payable 181.1 215.0
Accrued liabilities 468.9 532.0
Income taxes payable 114.5 122.3
Deferred income taxes 4.0 1.4
--------- ---------
Total current liabilities 1,141.6 1,182.1
Long-term debt, less current maturities 944.4 944.5
Deferred income taxes 401.8 396.2
Postretirement benefits 170.8 169.2
Other noncurrent liabilities
and deferred credits 183.2 175.2
--------- ---------
Total liabilities 2,841.8 2,867.2
--------- ---------
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 314.9 315.2
Reinvested earnings 1,082.0 1,039.7
Accumulated other comprehensive expense (53.7) (72.6)
Treasury stock, at cost (410.4) (374.5)
--------- ---------
Total shareholders' equity 1,030.9 1,005.9
--------- ---------
Total liabilities and shareholders' equity $3,872.7 $3,873.1
========= =========
(See Notes to Condensed Consolidated Financial Statements on pages 4
through 7.)
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Three Months Ended
September 30,
---------------------
1998 1997
-------- ---------
Cash Flows - Operating Activities
Net earnings (loss) $ 54.3 $ (299.3)
Adjustments to reconcile net earnings
(loss) to net cash provided (used)
by operating activities:
Depreciation 28.8 25.5
Amortization 20.9 12.6
Postretirement benefits 1.7 3.3
(Gains)/losses on asset disposals (37.4) .1
Deferred income taxes (7.4) (8.7)
Write-off of purchased research
and development 308.3
Sale of inventory stepped up to
fair value at acquisition 18.8
Write-off of pre-operating costs 12.5
-------- ----------
60.9 73.1
Changes in operating assets and
liabilities:
Trade receivables 41.5 33.8
Inventories (33.5) (17.4)
Other current assets (.8) 43.0
Accounts payable, accrued liabilities
and income taxes payable, net (112.1) (152.9)
Other noncurrent liabilities and
deferred credits 6.0 18.4
Other, net 6.7 2.0
-------- ----------
Net cash provided (used) by operating
activities (31.3) .0
-------- ----------
Cash Flows - Investing Activities
Capital expenditures (27.3) (30.3)
Acquisition spending (1,734.6)
-------- ----------
Proceeds from asset disposals 55.1 1.3
Net cash provided (used) by investing
activities 27.8 (1,763.6)
-------- ----------
Cash Flows - Financing Activities
Increase in short-term debt 60.5 1,091.8
Proceeds from long-term debt .2 .4
Payments on long-term debt (.4)
Issuance of Mallinckrodt common stock .3 10.0
Acquisition of treasury stock (42.5) (9.7)
Dividends paid (12.0) (12.1)
-------- ----------
Net cash provided by financing activities 6.1 1,080.4
-------- ----------
Increase (decrease) in cash and cash
equivalents 2.6 (683.2)
Cash and cash equivalents at beginning
of period 55.5 808.3
-------- ----------
Cash and cash equivalents at end of period $ 58.1 $ 125.1
======== ==========
(See Notes to Condensed Consolidated Financial Statements on pages 4
through 7.)
<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. The
aggregate purchase price of the Nellcor acquisition was
approximately $1.9 billion. The acquisition was accounted for
under the purchase method of accounting and, accordingly, the
results of operations of Nellcor have been included in the
Company's consolidated financial statements since September 1,
1997. The purchase price of the acquisition was allocated to the
assets acquired and liabilities assumed based upon generally
accepted accounting principles and estimated fair values at the
date of acquisition.
In connection with the Company's filing of a shelf registration
for debt securities in December 1997, Mallinckrodt was engaged in
discussions with the staff of the Securities and Exchange
Commission (SEC) regarding the purchase price allocation related
to the acquisition of Nellcor. On January 26, 1999, the Company
concluded these discussions with the SEC and, as a result, has
agreed to recalculate and restate the amount of purchase price
allocated to purchased research and development under a
methodology preferred by the SEC as articulated publicly in an
SEC letter to the American Institute of Certified Public
Accountants (AICPA) in September 1998. The amount of
purchased research and development charged to operations in the
first quarter of 1998 of $398.3 million has been reduced by $90
million to $308.3 million. Of this amount, $306.3 million
related to ongoing operations and $2.0 million related to
operations classified as discontinued operations. This one-time
noncash acquisition-related cost had no tax benefit. A
corresponding $90 million increase in goodwill is being amortized
on a straight-line basis over the previously established 30-year
amortization period beginning in September 1997. The effects of
this change on previously reported Condensed Consolidated
Statements of Operations and Condensed Consolidated Balance
Sheets are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------
(In millions, except per 1998 1997
share amounts -----------------------------------------
As As
Reported Restated Reported Restated
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Condensed Consolidated Statements
of Operations
Selling, administrative and
general expenses $ 171.7 $ 172.4 $ 118.8 $ 119.0
Purchased research and development 396.3 306.3
Total operating costs and expenses 523.9 524.6 817.1 727.3
Operating earnings (loss) 67.3 66.6 (362.5) (272.7)
Earnings (loss) from continuing
operations before income taxes 47.6 46.9 (371.6) (281.8)
Earnings (loss) from continuing
operations 32.4 31.7 (380.7) (290.9)
Earnings (loss) before cumulative
effect of accounting change 55.0 54.3 (380.7) (290.9)
Net earnings (loss) 55.0 54.3 (389.1) (299.3)
Available for common shareholders $ 54.9 $ 54.2 $ (389.2) $ (299.4)
Basic earnings per common share:
Earnings (loss) from continuing
operations $ .44 $ .43 $ (5.26) $ (4.02)
Net earnings (loss) $ .75 $ .74 $ (5.37) $ (4.13)
Diluted earnings per common share:
Earnings (loss) from continuing
operations $ .44 $ .43 $ (5.26) $ (4.02)
Net earnings (loss) $ .75 $ .74 $ (5.37) (4.13)
September 30, 1998 June 30, 1998
------------------- -------------------
As As
Reported Restated Reported Restated
-------- -------- -------- --------
Condensed Consolidated Balance
Sheets
Goodwill, net $ 893.5 $ 980.3 $ 899.5 $ 987.0
Total assets 3,785.9 3,872.7 3,785.6 3,873.1
Reinvested earnings 995.2 1,082.0 952.2 1,039.7
Total shareholders' equity 944.1 1,030.9 918.4 1,005.9
Total liabilities and
shareholders' equity 3,785.9 3,872.7 3,785.6 3,873.1
(/TABLE>
The sale of Nellcor inventories, which were stepped up to fair
value in connection with the allocation of purchase price,
resulted in charges of $18.8 million, $11.7 million net of taxes
for the quarter ended September 30, 1997. Of this pretax amount,
$18.6 million related to ongoing operations and $.2 million
related to operations classified as discontinued operations.
During 1998, in connection with management's plan to integrate
Mallinckrodt and Nellcor into one company, the Company recorded
additional purchase liabilities of $50.1 million, $30.8 million
net of related tax benefit, which were included in the
acquisition cost allocation and related goodwill. The principal
actions of the plan included Nellcor employee severance of $37.2
million, Nellcor employee relocation costs of $3.8 million and
the elimination of contractual obligations of Nellcor, which had
no future economic benefit, of $9.1 million. Approximately $32.1
million of cash expenditures have been incurred through
September 30, 1998 and liabilities of $18.0 million related to
the Nellcor integration plan remained in accrued liabilities at
September 30, 1998. The majority of the remaining cash
expenditures will occur in 1999 and, although none are expected,
reductions in the estimated liability for these integration
activities will be offset against the related goodwill.
During 1998, the Company recorded a pretax charge of $19.1
million associated with exiting certain activities related to
Mallinckrodt operations that were identified in the Nellcor
integration plan. The charge included $17.1 million related to
Mallinckrodt employee severance costs and facility exit costs of
$2.0 million. Approximately $6.0 million of cash expenditures
have been incurred through September 30, 1998. The majority of
the remaining cash expenditures will occur in 1999 and no
material adjustments to the original reserve are anticipated.
2. The Company sold certain chemical additive product lines in the
second quarter of 1998. In the fourth quarter of 1998, the
Company sold its catalyst business and Aero Systems division. 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, which was included in discontinued
operations for the quarter ended September 30, 1998. Earnings
from operations were zero for the one month of operations.
Included in prior year first quarter discontinued operations are
the earnings from operations of the catalysts and chemical
additives and Aero Systems divisions, which included $2.2 million
of after-tax earnings from operations and a $2.2 million after-
tax acquisition accounting charge.
3. The Company elected to early adopt the provisions of the American
Institute of Certified Public Accountants SOP 98-5, "Reporting on
the Costs of Start-Up Activities" (SOP 98-5), in its financial
statements for the year ended June 30, 1998. The effect of
adoption of SOP 98-5 was to record a charge of $8.4 million, net
of taxes, for the cumulative effect of an accounting change to
expense costs that had previously been capitalized prior to
July 1, 1997.
4. 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 models of its convective warming
blankets infringes certain claims of one or more of Augustine's
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
reasonably possible but not probable that the jury verdict and
the trial court injunction will be upheld on appeal. If damages
were assessed in the same manner as determined by the jury for
sales subsequent to September 30, 1997 plus interest on the
estimated total, the total liability would approximate $25.1
million at September 30, 1998. 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 and related
claims by Augustine against the Company.
5. 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 active investigation or
remediation of alleged or acknowledged contamination at 23
currently or previously owned or operated sites and at 15 off-
site locations where its waste was taken for treatment or
disposal. See Part II, Item 1 "Legal Proceedings" for additional
information about legal proceedings involving 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, 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 only for those matters that
are in its view probable and estimable. Based upon information
currently available, management believes that existing accruals
are sufficient to satisfy any known environmental liabilities,
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.
6. 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).
Three Months Ended
September 30,
----------------------
1998 1997
-------- ---------
Numerator:
Earnings (loss) from continuing
operations $ 31.7 $(290.9)
Preferred stock dividends (.1) (.1)
-------- ---------
Numerator for basic and diluted
earnings (loss) per share--income
(loss) available to common
shareholders $ 31.6 $ (291.0)
======== =========
Denominator:
Denominator for basic earnings (loss)
per share--weighted-average shares 72,917,133 72,475,530
Potential dilutive common shares--
employee stock option 86,766
---------- ----------
Denominator for diluted earnings
(loss) per share--adjusted
weighted-average shares 73,003,899 72,475,530
========== ==========
Basic earnings (loss) from continuing
operations per common share $ .43 $ (4.02)
======= =========
Diluted earnings (loss) from continuing
operations per common share $ .43 $ (4.02)
======= =========
The diluted share base for the three months ended September 30,
1997 excluded incremental shares of 681,423 related to employee
stock options. These shares were excluded due to their
antidilutive effect as a result of the Company's loss from
continuing operations during this period.
7. The components of inventory included the following as of
September 30, 1998:
(In millions)
Raw materials and supplies $ 206.6
Work in process 47.2
Finished goods 251.8
--------
$ 505.6
========
8. The Company has authorized and issued 100,000 shares, 98,330
outstanding at September 30, 1998, 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 1999 and 1998.
Shares included in treasury stock were:
September 30, June 30,
1998 1998
------------- ----------
Common stock 15,597,215 13,941,638
4 Percent cumulative preferred stock 1,670 1,670
9. Common shares reserved at September 30, 1998 consisted of the
following:
Exercise of common stock purchase rights 82,360,270
Exercise of stock options and granting
of stock awards 10,841,196
----------
93,201,466
==========
10. Supplemental cash flow information for the three months ended
September 30 included:
(In millions)
1998 1997
-------- --------
Interest paid $ 27.7 $ 12.7
Income taxes paid 43.3 4.8
Noncash investing and financing
activities:
Assumption of liabilities related
to an acquisition 488.5
Issuance of stock for investment
plan match 6.0 9.7
Restricted stock award 10.0
11. Effective July 1, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components.
Comprehensive income includes net income and other comprehensive
income/(expense). Other comprehensive income/(expense) includes
foreign currency translation adjustments and unrealized gains and
losses on investments which prior to adoption were reported
separately in shareholders' equity. Total comprehensive income
for the three months ended September 30 was as follows:
(In millions)
1998 1997
-------- --------
Net earnings (loss) $ 54.3 $(299.3)
Other comprehensive income/(expense):
Currency translation adjustment 21.2 (7.0)
Net unrealized gain (loss) on
investment securities (3.7) 3.4
Tax benefit related to items of other
comprehensive income 1.4
-------- --------
Other comprehensive income (expense),
net of tax 18.9 (3.6)
-------- --------
Total comprehensive income (loss) $ 73.2 $(302.9)
======== ========
As of September 30, 1998, the cumulative balances for currency
translation adjustment loss and the unrealized loss on investment
securities were $49.9 million and $3.8 million, respectively.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (1)
All references to years are to fiscal years ended June 30 unless
otherwise stated. Certain amounts in the prior year have been
reclassified to conform to the current year presentation. All
earnings per share amounts are calculated on a diluted basis unless
otherwise stated.
Overview
- --------
As disclosed in previous filings, in connection with the Company's
filing of a shelf registration for debt securities, Mallinckrodt was
engaged in discussions with the staff of the SEC regarding the
purchase price allocation related to the acquisition of Nellcor. The
Company has concluded these discussions with the SEC and, as a
result, has agreed to recalculate and restate the amount of purchase
price allocated to purchased research and development under a
methodology preferred by the SEC as articulated publicly in an SEC
letter to the AICPA in September 1998. The amount of purchased
research and development charged to operations in the first quarter
of 1998 of $398.3 million has been reduced by $90 million to $308.3
million. A corresponding $90 million increase in goodwill is being
amortized on a straight-line basis over the previously established
30-year amortization period beginning in September 1997. The effects
of this change on previously reported consolidated financial
statements are shown in the Company's Annual Report on Form 10-K/A
No. 1 for the year ended June 30, 1998. The effects of this change
on previously reported condensed consolidated financial statements
for the three months ended September 30, 1998 and 1997 are shown in
Note 1 of Notes to Condensed Consolidated Financial Statements.
Management's Discussion and Analysis of Financial Condition and
Results of Operations reflects these adjustments in all periods of
1999 and 1998 presented and discussed below.
Results of Operations
General
- -------
The Company recorded earnings from continuing operations of $31.7
million, or 43 cents per share for the quarter ended September 30,
1998. Earnings from continuing operations for the same quarter last
year, before including $317.8 million of noncash charges related to
the acquisition of Nellcor, were $26.9 million, or 37 cents per
share.
The acquisition of Nellcor was accounted for under the purchase
method of accounting and, accordingly, the results of operations of
Nellcor have been included in the Company's consolidated financial
statements since September 1, 1997. The purchase price of the
acquisition was allocated to the assets acquired and liabilities
assumed based upon generally accepted accounting principles and
estimated fair values at the date of acquisition.
Actual revenues of some significant acquired in-process projects have
experienced shortfalls when compared to revenue estimates developed
as of the acquisition date. These shortfalls are primarily
attributable to delays in receiving regulatory clearance to market
and/or problems with production ramp up activities which often occur
at the early stages of manufacturing a new product. The Company
believes that such revenue shortfalls experienced to date do not
indicate that these products will not meet customer needs or their
long-term revenue expectations. These delays/problems can have an
impact on sales for the first several quarters versus the plan
established at the date of acquisition because of the typically steep
increase in sales which occurs with the introduction of a new
product; however, such delays are usually inconsequential over the
life of the product. Thus, management believes the delays/problems
experienced to date of some significant products will not reduce the
expected long-term revenues of these products, but only the timing of
the receipt of these revenues.
- -----------------------------
(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>
Net earnings for the first quarter of 1999 were $54.3 million, or 74
cents per share as compared to a net loss of $299.3 million, or $4.13
loss per share for the same period last year. 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. The
net loss for the same quarter of 1998 included a charge of $8.4
million, or 11 cents per share related to the cumulative effect of an
accounting change discussed in Note 3 of the condensed consolidated
financial statements.
Net sales for the quarter were $591.2 million, up 30 percent from the
$454.6 million in the same period last year. Sales to customers
outside the United States were $181 million or 31 percent of total
sales for the first quarter of 1999.
A comparison of sales and operating earnings follows:
(In millions)
Three Months Ended
September 30,
---------------------
1998 1997
-------- --------
Net sales
Respiratory $ 256.2 $ 141.9
Imaging 182.9 177.3
Pharmaceuticals 152.1 135.4
-------- --------
$ 591.2 $ 454.6
======== ========
Operating earnings (loss)
Respiratory $ 22.4 $ 22.2
Imaging 30.7 23.1
Pharmaceuticals 20.5 12.4
-------- --------
73.6 57.7
Corporate expense (7.0) (5.5)
-------- --------
66.6 52.2
Acquisition charges (324.9)
-------- --------
$ 66.6 $(272.7)
======== ========
Operating earnings for the quarter ended September 30, 1998 were
$66.6 million, which is a 28 percent improvement over the same period
of fiscal 1998 before acquisition-related charges. In the first
quarter of last year, the Company recorded an operating loss of
$272.7 million, which included noncash charges of $306.3 million for
the write-off of purchased research and development and $18.6 million
related to the sale of Nellcor inventories which were stepped up to
fair value in connection with the Nellcor acquisition.
The Respiratory Group, of which Nellcor is now a part, had sales of
$256.2 million or 81 percent greater than the sales recorded for the
same period last year. The prior year results included only one
month of Nellcor sales and operating results. The Group's sales
increase of $114.3 million was attributable to volume growth of 85
percent, of which 72 percent was due to the inclusion of only one
month of Nellcor revenue in 1998, partially offset by price declines
primarily involving anesthesia and respiratory devices. Operating
earnings for the Group for the quarter were $22.4 million or 1
percent above the prior year. In spite of the benefits of the
increased sales, the earnings comparison with prior year was
negatively impacted by two months of additional expenses, which
included additional amortization of intangibles and goodwill of $8.4
million.
The Imaging Group had sales of $182.9 million or 3 percent above the
prior year period of $177.3 million. The sales improvement was
attributable to a $7.8 million increase in nuclear medicine product
volume which offset the $2.2 million decline in the other product
lines comprising the Group. Operating earnings for the Group were
$30.7 million or 33 percent above the $23.1 million recorded for the
same period last year. The operating earnings improvement was
attributable to volume growth, lower rebates, expense control and
increased manufacturing efficiencies. Although price declines in the
x-ray contrast media portion of the business were not a major factor
in the year to year comparison of results for the first quarter, it
is probable that this will be a factor impacting subsequent quarters
of this fiscal year. The demand for price discounts is expected to
increase and reduce profitability in 1999, but at a lower rate of
decline than was experienced in 1998 and 1997.
The Pharmaceuticals Group sales for the quarter ended September 30,
1998 were $152.1 million or 12 percent greater than in the same
period last year. The sales increase of $16.7 million was primarily
attributable to volume increases in narcotics and drug chemicals of
$15 million and $4 million, respectively, offset by volume declines
in acetaminophen and lab and microelectronics. Price increases
generated 3 percent of the year over year sales increase. Operating
earnings for the Group were $20.5 million or 65 percent greater than
the $12.4 million recorded in the comparable period last year. The
operating earnings improvement was primarily attributable to
increased sales of higher margin bulk and dosage narcotics and to
improved operating rates at manufacturing facilities.
Corporate Matters
Corporate expenses were $7.0 million, or 27 percent above the level
reported for the same period last year. Interest and other
nonoperating income, net was $.9 million for the quarter as compared
with $9.2 million for the same period last year. In 1998, the
Company generated interest income on cash proceeds from 1997
divestitures invested in interest bearing securities. These cash
equivalents were utilized to acquire Nellcor at the end of August
1997.
The Company's effective tax rate was 32.4 percent for the quarter
ended September 30, 1998. The tax rate for the same period last
year, after excluding the one-time noncash write-off of purchased
research and development of $306.3 million which had no tax benefit,
was 37.1 percent. The improvement in 1999 was primarily attributable
to changes in earnings mix between higher tax rate and lower tax rate
entities associated with the acquisition of Nellcor.
Financial Condition
The Company's financial resources are expected to continue to be
adequate to support existing businesses. Since June 30, 1998, cash
and cash equivalents increased $2.6 million. Operations utilized
$31.3 million of cash, while capital spending totaled $27.3 million.
The Company received $55.1 million in proceeds from asset disposals.
The Company's current ratio at September 30, 1998 was 1.0:1. Debt as
a percentage of invested capital was 56.1 percent.
In December 1997, the Company filed a $500 million shelf debt
registration statement which has not, as yet, been declared
effective.
At September 30, 1998, the Company has 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. The
revolving credit facility was reduced from $1.6 billion to $1.0
billion in September 1998. There was no borrowing outstanding under
the revolving credit facility at September 30, 1998. Commercial
paper borrowings under this program were $345.0 million as of
September 30, 1998. Non-U.S. lines of credit totaling $127.8 million
were also available, and borrowings under these lines amounted to
$19.2 million at September 30, 1998. 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 under these
authorizations have totaled 38.7 million shares, including 1.9
million shares during the three months ended September 30, 1998.
Estimated capital spending for the year ending June 30, 1999 is
approximately $140 million.
Year 2000 Update
- ----------------
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. 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 its assessment of its information systems
which support business applications and is in the late stages of
modifying or replacing those portions of the software that are
required. The assessment of products sold to customers has also been
completed and necessary remediation is being accomplished.
Assessment and remediation of research and development, manufacturing
processes and facility management systems are underway. The Company
is also assessing the readiness of its key suppliers and business
partners to be Year 2000 compliant. Information requests have been
distributed and replies are being evaluated. If the risk is deemed
material, the Company is prepared to perform on-site visits to those
businesses to verify the adequacy of the information received. All
of these modification, replacement or conversion efforts should be
substantially complete during the first quarter of calendar 1999,
which is prior to any anticipated significant impact on
Mallinckrodt's operations.
Based upon the accomplishments to date, no modification or conversion
contingency plans are expected to be needed and therefore none have
been developed. Because of substantial progress to date and plans
that contemplate being substantially complete in the first quarter of
calendar 1999, we believe adequate time will be available to insure
modification alternatives could be developed, assessed and
implemented prior to a Year 2000 issue having a material negative
impact on the operations of the Company. To further recognize
potential adverse impact, the Company is developing operating
contingency plans to address unanticipated interruptions that could
occur in processes, systems and devices that have been assessed,
remediated and considered Year 2000 ready by Mallinckrodt and its key
suppliers and business partners. Such operating contingency plans
are expected to be substantially complete before June 30, 1999.
Both internal and external resources are being used to reprogram or
replace non-compliant technologies, and to appropriately test Year
2000 modifications. Such modifications are being funded through
operating cash flows. The project to address Year 2000 has been
underway since February 1997. The pretax costs incurred for this
effort were approximately $7 million and $1 million in 1998 and 1997,
respectively. The Company anticipates expenses of approximately $13
million will be incurred in 1999 to substantially complete the
effort.
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.
If the modifications and conversions are not made or are not
completed timely and operating contingency plans developed 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.
Readers are cautioned that forward looking statements contained in
this Year 2000 Update should be read in conjunction with the
Company's disclosures under the heading "CAUTIONARY STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995" on page 7.
European Monetary Union (EMU)
- -----------------------------
The euro is scheduled to be introduced on January 1, 1999, at which
time the eleven participating EMU member countries will establish
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 and euro bills and coins will be used for
cash transactions 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
- ------- --------------------------------------------------------
10.29 Executive Incentive Compensation Plan for Fiscal 1999
(incorporated herein by reference to Exhibit 10.29 to
September 30, 1998 Form 10-Q)
27 Financial data schedule for the quarter ended September 30,
1998 (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
report on Form 8-K was filed.
- - Report dated July 6, 1998 under Item 5 regarding the closure of
Nellcor Puritan Bennett Incorporated facilities in Lenexa, Kansas.
* * * * * * * * * * * * * *
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 Controller
Chief Financial Officer
Date: February 16, 1999
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the consolidated balance sheets and consolidated statements
of operations of the Company's Form 10-Q/A No. 1, and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 58
<SECURITIES> 0
<RECEIVABLES> 470
<ALLOWANCES> 18
<INVENTORY> 506
<CURRENT-ASSETS> 1194
<PP&E> 1450
<DEPRECIATION> 547
<TOTAL-ASSETS> 3873
<CURRENT-LIABILITIES> 1142
<BONDS> 944
0
11
<COMMON> 87
<OTHER-SE> 933
<TOTAL-LIABILITY-AND-EQUITY> 3873
<SALES> 591
<TOTAL-REVENUES> 591
<CGS> 318
<TOTAL-COSTS> 525
<OTHER-EXPENSES> 0
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</TABLE>
