UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-Q
X
--- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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: 68,566,071 shares as of January 31, 2000.
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)
Quarter Ended Six Months Ended
December 31, December 31,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales $ 681.8 $ 637.9 $1,295.9 $1,229.8
Operating costs and expenses:
Cost of goods sold 385.5 347.7 722.6 666.0
Selling, general and
administrative expenses 189.2 180.8 359.6 353.9
Research and development expenses 32.0 37.4 65.1 71.3
--------- --------- --------- ---------
Total operating costs and expenses 606.7 565.9 1,147.3 1,091.2
--------- --------- --------- ---------
Operating earnings 75.1 72.0 148.6 138.6
Nonoperating income, net 15.1 2.5 16.3 3.4
Interest expense (19.8) (22.5) (39.1) (43.1)
--------- --------- --------- ---------
Earnings from continuing operations
before income taxes 70.4 52.0 125.8 98.9
Income tax provision 23.6 16.9 41.3 32.1
--------- --------- --------- ---------
Earnings from continuing operations 46.8 35.1 84.5 66.8
Discontinued operations 22.6
--------- --------- --------- ---------
Net earnings 46.8 35.1 84.5 89.4
Preferred stock dividends (.1) (.1) (.2) (.2)
--------- --------- --------- ---------
Available for common shareholders $ 46.7 $ 35.0 $ 84.3 $ 89.2
========= ========= ========= =========
Basic earnings per common share:
Earnings from continuing
operations $ .67 $ .49 $ 1.21 $ .93
Discontinued operations .31
--------- --------- --------- ---------
Net earnings $ .67 $ .49 $ 1.21 $ 1.24
========= ========= ========= =========
Diluted earnings per common share:
Earnings from continuing
operations $ .67 $ .49 $ 1.20 $ .92
Discontinued operations .31
--------- --------- --------- ---------
Net earnings $ .67 $ .49 $ 1.20 $ 1.23
========= ========= ========= =========
Dividends declared and paid per
common share $ .165 $ .165 $ .33 $ .33
========= ========= ========= =========
(See Notes to Condensed Consolidated Financial Statements on pages 4 through 7.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
December 31, June 30,
1999 1999
------------- ----------
Assets
Current assets:
Cash and cash equivalents $ 24.7 $ 32.7
Trade receivables, less allowances
of $20.0 at December 31 and $17.9
at June 30 473.9 490.9
Inventories 520.8 530.3
Deferred income taxes 76.3 54.7
Other current assets 63.5 61.3
--------- ---------
Total current assets 1,159.2 1,169.9
Investments and other noncurrent assets 82.2 67.2
Property, plant and equipment, net 843.1 870.7
Goodwill, net 899.7 942.3
Technology, net 304.4 336.4
Other intangible assets, net 243.9 266.6
Deferred income taxes 4.3 4.3
--------- ---------
Total assets $3,536.8 $3,657.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 287.9 $ 383.8
Accounts payable 196.5 221.2
Accrued liabilities 427.5 459.5
Income taxes payable 102.4 77.3
Deferred income taxes 1.0 1.2
--------- ---------
Total current liabilities 1,015.3 1,143.0
Long-term debt, less current maturities 742.5 742.5
Deferred income taxes 358.1 363.0
Postretirement benefits 167.3 166.5
Other noncurrent liabilities and
deferred credits 161.2 182.0
--------- ---------
Total liabilities 2,444.4 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 314.9 314.7
Reinvested earnings 1,249.8 1,188.4
Accumulated other comprehensive loss (74.6) (105.1)
Treasury stock, at cost (495.8) (435.7)
--------- ---------
Total shareholders' equity 1,092.4 1,060.4
--------- ---------
Total liabilities and shareholders' equity $3,536.8 $3,657.4
========= =========
(See Notes to Condensed Consolidated Financial Statements on pages 4
through 7.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Six Months Ended
December 31,
---------------------
1999 1998
--------- ---------
CASH FLOWS - OPERATING ACTIVITIES
Net earnings $ 84.5 $ 89.4
Adjustments to reconcile net earnings
to net cash provided (used)
by operating activities:
Depreciation 63.0 58.9
Amortization 42.5 42.2
Postretirement benefits .7 3.6
Gains on asset disposals (29.8) (40.1)
Deferred income taxes (29.1) (3.1)
Write-down of investment in equity
security 10.5
-------- --------
142.3 150.9
Changes in operating assets and
liabilities:
Trade receivables 18.4 13.3
Inventories 7.2 (49.3)
Other current assets (2.3) 2.6
Accounts payable, accrued liabilities
and income taxes payable, net (39.3) (162.6)
Other noncurrent liabilities and
deferred credits 2.1 4.5
Other, net (14.6) (.9)
-------- --------
Net cash provided (used) by operating
activities 113.8 (41.5)
-------- --------
CASH FLOWS - INVESTING ACTIVITIES
Capital expenditures (51.5) (56.2)
Proceeds from asset disposals 139.4 70.7
Acquisition spending (1.0)
Proceeds from redemption and sale of
investments 3.7
Purchase of investments and intangible
assets (19.2) (4.7)
-------- --------
Net cash provided by investing activities 67.7 13.5
-------- --------
CASH FLOWS - FINANCING ACTIVITIES
Increase (decrease) in notes payable (99.8) 107.5
Payments on long-term debt (.3) (7.8)
Issuance of common stock 3.0 .6
Acquisition of treasury stock (69.3) (46.8)
Dividends paid (23.1) (23.8)
-------- --------
Net cash provided (used) by financing
activities (189.5) 29.7
-------- --------
Increase (decrease) in cash and
cash equivalents (8.0) 1.7
Cash and cash equivalents at beginning
of period 32.7 55.5
-------- --------
Cash and cash equivalents at end of
period $ 24.7 $ 57.2
======== ========
(See Notes to Condensed Consolidated Financial Statements on pages 4
through 7.)
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. On December 16, 1999, the Company sold its blood analysis product
line, which was part of the Respiratory segment. The transaction
resulted in a $26.9 million pretax gain, $16.6 million net of
tax. The pretax gain is included in nonoperating income, net for
the quarter and six months ended December 31, 1999.
2. During the quarter ended December 31, 1999, the Company recorded
a pretax charge of $10.5 million, $6.6 million net of tax,
associated with the write-down of an investment in an equity
security due to a decline in fair value considered to be other
than temporary. The pretax charge is included in nonoperating
income, net.
3. Included in operating earnings for the quarter and six months
ended December 31, 1999 is a pretax charge of $8.2 million
primarily associated with the write-off of inventory as a result
of product line rationalizations within the Respiratory segment.
4. On July 31, 1998, the Company completed the sale of the remaining
chemical additives business of the catalyst and chemical
additives division, which was reclassified to discontinued
operations in June 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 six months ended
December 31, 1998. Earnings from operations were zero for the
one month of operations in 1999.
5. The following table sets forth the computation of basic and
diluted earnings from continuing operations per common share (in
millions, except shares and per share amounts).
Quarter Ended Six Months Ended
December 31, December 31,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
Numerator:
Earnings from
continuing operations $ 46.8 $ 35.1 $ 84.5 $ 66.8
Preferred stock dividends (.1) (.1) (.2) (.2)
------- ------- ------- -------
Numerator for basic and
diluted earnings per
share--income available
to common shareholders $ 46.7 $ 35.0 $ 84.3 $ 66.6
======= ======= ======= =======
Denominator:
Denominator for
basic earnings per
share--weighted-average
shares 69,474,986 71,349,208 69,954,876 72,133,170
Potential dilutive
common shares--employee
stock options 374,181 229,031 409,623 157,899
---------- ---------- ---------- ----------
Denominator for diluted
earnings per share--
adjusted weighted-average
shares 69,849,167 71,578,239 70,364,499 72,291,069
========== ========== ========== ==========
Basic earnings from
continuing operations
per common share $ .67 $ .49 $ 1.21 $ .93
====== ====== ====== ======
Diluted earnings from
continuing operations
per common share $ .67 $ .49 $ 1.20 $ .92
====== ====== ====== ======
6. Supplemental cash flow information for the six months ended
December 31 included:
(In millions)
1999 1998
------- ------
Interest paid $ 38.7 $ 42.8
Income taxes paid 43.1 106.0
Noncash investing and financing activities:
Assumption of liabilities related to an
acquisition .3 (1.2)
Issuance of stock for 401(k) employee
matching contribution 6.3 6.0
Fair value loss adjustment to securities (1.9) (5.4)
7. The components of inventory included the following as of
December 31, 1999:
(In millions)
Raw materials and supplies $ 204.8
Work in process 65.5
Finished goods 250.5
--------
$ 520.8
========
8. The Company has authorized and issued 100,000 shares, 98,330
outstanding at December 31, 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:
December 31, June 30,
1999 1999
------------ ------------
Common stock 18,201,444 16,422,084
4 Percent cumulative preferred
stock 1,670 1,670
9. Total comprehensive income for the three months and six months
ended December 31 was as follows:
(In millions)
Quarter Ended Six Months Ended
December 31, December 31,
------------------- -------------------
1999 1998 1999 1998
--------- -------- --------- --------
Net earnings $ 46.8 $ 35.1 $ 84.5 $ 89.4
Other comprehensive income
(expense):
Foreign currency translation
adjustment (21.9) (8.5) (10.7) 12.7
Foreign currency translation
adjustment included in net
earnings during the period 35.8 35.8
Unrealized loss on investment
securities arising during
the period (1.0) (1.7) (1.9) (5.4)
Loss on investment securities
included in net earnings
during the period 10.5 10.5
Tax benefit (provision)
related to items of other
comprehensive income (3.5) .6 (3.2) 2.0
------- ------- -------- -------
Other comprehensive income
(expense), net of tax 19.9 (9.6) 30.5 9.3
------- ------- -------- -------
Total comprehensive income $ 66.7 $ 25.5 $ 115.0 $ 98.7
======= ======= ======== =======
During the three-month and six-month periods ended December 31,
1999, a foreign currency translation adjustment was included in
net earnings in conjunction with the sale of the blood analysis
product line (see Note 1), and a loss on equity investment
security was included in net earnings in conjunction with the
write-down of an investment security available for sale due to a
decline in fair value no longer considered temporary (see
Note 2).
The foreign currency translation adjustments relate to indefinite
investments in non-U.S. subsidiaries and, accordingly, are not
recorded net of tax. As of December 31, 1999, the cumulative
balances for foreign currency translation adjustment loss and the
net unrealized gain on investment securities were $74.7 million
and $.1 million, respectively. Investments as of December 31,
1999 and June 30, 1999 included a gross unrealized gain of $.1
million and a gross unrealized loss of $8.6 million,
respectively.
10. 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)
Quarter Ended Six Months Ended
December 31, December 31,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales
Respiratory $ 311.2 $ 290.4 $ 574.3 $ 546.6
Imaging 194.5 196.3 376.7 379.9
Pharmaceuticals 176.1 151.2 344.9 303.3
-------- -------- --------- ---------
$ 681.8 $ 637.9 $1,295.9 $1,229.8
======== ======== ========= =========
Operating earnings
Respiratory $ 36.1 $ 31.6 $ 68.2 $ 54.0
Imaging 23.4 28.8 46.4 59.5
Pharmaceuticals 22.3 17.1 46.5 37.6
-------- -------- --------- ---------
$ 81.8 $ 77.5 $ 161.1 $ 151.1
======== ======== ========= =========
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):
Quarter Ended Six Months Ended
December 31, December 31,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Total operating earnings
for reportable segments $ 81.8 $ 77.5 $ 161.1 $ 151.1
Corporate expense (6.7) (5.5) (12.5) (12.5)
-------- -------- -------- --------
Consolidated operating
earnings 75.1 72.0 148.6 138.6
Nonoperating income, net 15.1 2.5 16.3 3.4
Interest expense (19.8) (22.5) (39.1) (43.1)
-------- -------- -------- --------
Earnings from continuing
operations before
income taxes $ 70.4 $ 52.0 $ 125.8 $ 98.9
======== ======== ======== ========
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. Normally, these seasonal factors tend to
favorably impact net sales and operating earnings in the third
and fourth quarters; however, an early cold and influenza season
in the current year favorably impacted Respiratory segment second
quarter operating earnings.
11. 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. On January 4,
2000, the trial court judge reduced the punitive damages to $2.5
million. 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 and to seek a further reduction
of the trial court's judgement on appeal.
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 December 31, 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 December 31, 1999 and June 30, 1999 of $125.1 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
The Company recorded earnings from continuing operations and net
earnings of $46.8 million, or 67 cents per share for the quarter ended
December 31, 1999, representing increases of 33 percent and 37
percent, respectively, from the $35.1 million, or 49 cents per share
for the same period last year. Results for the current year period
included a gain on the sale of the blood analysis product line of the
Respiratory segment, and a charge associated with the write-down of an
investment in an equity security due to a decline in fair value
considered to be other than temporary. See Notes 1 and 2 of Notes to
Condensed Consolidated Financial Statements. Excluding these
transactions, which are included in nonoperating income, net, earnings
from continuing operations would have been $36.8 million.
Net sales for the quarter ended December 31, 1999 were $681.8 million,
or a 7 percent increase over the same quarter of last year. The
Company estimates that sales for the quarter benefitted from
accelerated purchases of approximately $10 million due to Year 2000
concerns by certain customers. This action may have an offsetting
impact on the Company's third quarter results of operations. The
Company's management also believes hospital ventilator orders were
delayed by certain customers during the quarter due to Year 2000
concerns, but this impact cannot be quantified. Sales to customers
outside the United States were $233 million, or 34 percent of sales
for the second quarter of 2000.
For the six months ended December 31, 1999, the Company recorded
earnings from continuing operations and net earnings of $84.5 million,
or $1.20 per share. Earnings from continuing operations for the same
period last year were $66.8 million, or 92 cents per share. Net
earnings for the six-month period of last year were $89.4 million, or
$1.23 per share and included a gain of $22.6 million, or 31 cents per
share on the sale of a chemical additives business in July 1998 which
related to a division reclassified to discontinued operations in 1998.
Net sales for the first half of 2000 were $1.3 billion, which
represents a 5 percent increase over the same period in 1999. Sales
to customers outside the United States were $429 million, or 33
percent of sales for the first half of 2000.
- -------------------------------------
[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.
A comparison of sales and operating earnings follows:
(In millions)
Quarter Ended Six Months Ended
December 31, December 31,
--------------------- ---------------------
1999 1998 1999 1998
--------- -------- --------- ---------
Net sales
Respiratory $ 311.2 $ 290.4 $ 574.3 $ 546.6
Imaging 194.5 196.3 376.7 379.9
Pharmaceuticals 176.1 151.2 344.9 303.3
-------- -------- --------- ---------
$ 681.8 $ 637.9 $1,295.9 $1,229.8
======== ======== ========= =========
Operating earnings
Respiratory $ 36.1 $ 31.6 $ 68.2 $ 54.0
Imaging 23.4 28.8 46.4 59.5
Pharmaceuticals 22.3 17.1 46.5 37.6
-------- -------- --------- ---------
$ 81.8 $ 77.5 $ 161.1 $ 151.1
Corporate expense (6.7) (5.5) (12.5) (12.5)
-------- -------- --------- ---------
$ 75.1 $ 72.0 $ 148.6 $ 138.6
======== ======== ========= =========
The Respiratory segment reported sales for the quarter ended
December 31, 1999 of $311.2 million or 7 percent greater than the
sales recorded for the same period last year. Excluding sales from
businesses divested, sales growth was 9 percent over the prior year
quarter. Components of the 9 percent sales increase were 12 percent
volume growth partially offset by a 1 percent price decline and 2
percent foreign currency impact as a result of the strength of the
U.S. dollar. The volume growth was led by pulse oximetry with a 22
percent increase, anesthesiology and respiratory disposables 12
percent and oxygen therapy 8 percent. Ventilator sales declined 5
percent as a result of reduced volume. Respiratory segment operating
earnings for the quarter ended December 31, 1999 were $36.1 million.
Excluding an $8.2 million second quarter charge that was primarily
associated with the write-off of inventory as a result of product line
rationalizations, Respiratory segment operating earnings were $44.3
million or 40 percent higher than the prior year results for the same
three-month period of $31.6 million. This improvement was primarily
attributable to the strong volume growth of pulse oximetry and other
higher margin products of this segment.
In the quarter ending March 31, 2000, management will finalize a
detailed plan to consolidate certain manufacturing operations, which
are associated with product line rationalizations within the
Respiratory segment, and will notify affected employees. These
actions will result in a third quarter charge, currently estimated at
$15 million, to operating earnings.
For the first six months of 2000, Respiratory segment sales were
$574.3 million or 5 percent greater than the same period last year.
Excluding sales from businesses divested, sales growth was 7 percent
over the first six months of the prior year. Components of the 7
percent sales increase were 8 percent volume growth offset by a 1
percent price decline. Pulse oximetry product sales grew almost $26
million and anesthesiology and respiratory disposables sales grew $10
million, which were partially offset by lower ventilator volume.
Operating earnings for the Respiratory segment were $68.2 million or
26 percent higher than the same period last year. The improvement was
primarily attributable to the strong volume growth of pulse oximetry
and other higher margin products of this segment.
The Imaging segment had sales for the quarter ended December 31, 1999
of $194.5 million or 1 percent below sales in the same three-month
period last year. Prices declined 1 percent overall. Pricing in
x-ray contrast media declined 4 percent while radiopharmaceutical
prices increased 5 percent. Volume growth was 1 percent overall.
Volume growth of 3 percent in both x-ray contrast media and
radiopharmaceuticals was partially offset by the impact of divested
businesses. Foreign currency changes reduced sales by 1 percent.
Operating earnings for the quarter ended December 31, 1999 declined 19
percent to $23.4 million compared to $28.8 million in the prior year
period primarily due to the continued impact of net price declines.
For the first half of 2000, Imaging segment sales were $376.7 million
or 1 percent below the same prior year period. The operating earnings
of this segment during the first six months were $46.4 million or 22
percent below prior year. The factors impacting the second quarter
results were the same for the six-month period. Price declines within
the x-ray contrast media business are expected to continue to be a
factor in future quarters.
The Pharmaceuticals segment's sales for the quarter ended December 31,
1999 were $176.1 million or 16 percent greater than in the same period
last year. The sales increase of $24.9 million was attributable to
volume increases in bulk and dosage narcotics. This increase was
primarily the result of increased demand and manufacturing capacity of
bulk narcotics, and the impact of new product introductions and
increased market share of dosage products. Operating earnings for the
quarter ended December 31, 1999 for this segment were $22.3 million,
which was 30 percent greater than the $17.1 million recorded in the
comparable period last year, primarily attributable to the increased
sales.
For the six months ended December 31, 1999, Pharmaceuticals segment
sales were $344.9 million or 14 percent greater than for the same
prior year period. The sales increase of $41.6 million was
attributable to volume increases in all product lines, but over 80
percent of the increase was attributable to bulk and dosage narcotics
and was the result of the same factors as discussed for the second
quarter. Operating earnings during the first six months of 2000 were
$46.5 million, or 24 percent higher than the same period last year
primarily due to the increased sales.
CORPORATE MATTERS
Corporate expense was up 22 percent for the second quarter but it was
unchanged for the first half of the year compared to the respective
prior year periods. The fluctuations by quarter were primarily the
result of timing of certain expenses.
Nonoperating income, net was $15.1 million and $16.3 million for the
quarter and six months ended December 31, 1999, respectively. During
the quarter, the Company recorded a pretax gain on the divestiture of
the blood analysis product line of $26.9 million and a pretax charge
of $10.5 million related to the write-down of an investment in an
equity security classified as available for sale due to a decline in
fair value considered other than temporary. The investment is
included in the balance sheet caption investments and other noncurrent
assets. See Notes 1 and 2 of Notes to Condensed Consolidated
Financial Statements for additional information regarding these
transactions.
The Company's effective tax rates were 33.5 percent and 32.8 percent
for the quarter and six months ended December 31, 1999, respectively.
Excluding the impact of the divestiture of the blood analysis product
line and write-down of the equity investment discussed in the
preceding paragraph, the effective tax rate was 31.9 percent for both
periods. For the same two periods of the prior year, the effective
tax rate was 32.5 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 $8.0 million. Operations provided
$113.8 million of cash, while capital spending totaled $51.5 million.
The Company received $139.4 million in proceeds from asset disposals.
Payments on debt were $100.1 million. The Company's current ratio at
December 31, 1999 was 1.1:1. Debt as a percentage of invested capital
was 48.5 percent at December 31, 1999.
At December 31, 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 December
31, 1999. Commercial paper borrowings under this program were $54.8
million as of December 31, 1999. Non-U.S. lines of credit totaling
$144.7 million were also available, and borrowings under these lines
amounted to $24.0 million at December 31, 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 December
31, 1999, the entire amount remained available.
The Company had $200 million aggregate principal amount of 5.99
percent notes, which mature in 2010, and were 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. On January 14, 2000, the notes were
redeemed at the request of the holders and refinanced with commercial
paper.
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 41.9 million shares, including 2.1 million
shares during the six months ended December 31, 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 developed and implemented 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.
The Company completed modifications, replacements or conversions where
deemed necessary and appropriate. In addition, the Company 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 Company has experienced no significant problems associated with
the Year 2000 issues.
The program to address Year 2000 has been underway since February
1997. Both internal and external resources were used to assess and
modify or replace non-compliant technologies, and to appropriately
test Year 2000 modifications and replacements. The program is funded
through operating cash flows. Based upon management's best estimates,
the pretax costs incurred for this effort were approximately $10
million, $7 million and $1 million in 1999, 1998 and 1997,
respectively. In 2000, 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. Most of these costs
were incurred during the first six months of 2000.
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 March 1, 2002; thereafter, the legacy currencies will be
canceled. Euro bills and coins will be used for cash transactions in
the participating countries effective January 1, 2002, allowing for a
two-month transition period to euro cash.
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. The Company is cognizant of the potential
business implications of converting to a common currency; however, it
is unable to determine, at this time, 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.
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 quarter ended December 31, 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, as amended by the Company's quarterly report on Form 10-Q for
the quarter ended September 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 one matter
previously reported in the Company's report on Form 10-Q for the
quarter ended September 30, 1999.
New Mexico Steel v. Puritan-Bennett - On January 4, 2000, the trial
court judge ordered a remittitur of the punitive damages award from
$5.0 million to $2.5 million. The Company intends to vigorously
challenge the verdict in this case on appeal. See Note 11 of Notes to
Condensed Consolidated Financial Statements for additional
information.
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.
The following matters were voted upon at the Annual Meeting of
Shareholders held on October 20, 1999, and received the votes set
forth below:
1. All of the following nominees were elected to serve as directors
for 3-year terms and received the number of votes set
opposite their names:
Votes For Votes Withheld
------------ ---------------
Raymond F. Bentele 62,028,515 879,072
Ronald G. Evens 62,034,616 872,971
Peter B. Hamilton 62,041,918 865,669
2. A proposal to ratify the appointment of independent public
accountants received 62,592,912 votes FOR, 171,659 votes AGAINST,
with 143,016 abstentions.
3. A proposal to amend the Company's 1999 Equity Incentive Plan to
increase the number of shares reserved for issuance by five
million received 50,709,457 votes FOR, 6,987,233 votes AGAINST,
759,393 abstentions, and 4,451,504 broker non-votes.
4. A proposal to adopt the Mallinckrodt Inc. Employee Stock Purchase
Plan received 53,830,367 votes FOR, 4,281,259 votes AGAINST,
344,457 abstentions, and 4,451,504 broker non-votes.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
- ------- ---------------------------------------------------------
10.23 Mallinckrodt Inc. Income Deferral Plan effective January 1,
2000 (1) (filed with this electronic submission)
27 Financial data schedule for the quarter ended December 31,
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 December 17, 1999 under Item 5 regarding EQT
acquisition of HemoCue from Mallinckrodt Inc.
* * * * * * * * * * * * * *
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 10, 2000