UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
---
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
X 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.
(*) Indicates registered trademark
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
The accompanying interim condensed consolidated financial statements
of Mallinckrodt Inc. (the Company or Mallinckrodt) do not include all
disclosures normally provided in annual financial statements. These
financial statements, which should be read in conjunction with the
consolidated financial statements contained in Mallinckrodt's 1998
Annual Report to Shareholders, are unaudited but include all
adjustments which Mallinckrodt's management considers necessary for a
fair presentation. These adjustments consist of normal recurring
accruals except as discussed in Notes 1, 2 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 171.7 118.8
Purchased research and development 396.3
Research and development expenses 33.9 27.7
Other operating income, net (1.5)
--------- ---------
Total operating costs and expenses 523.9 817.1
--------- ---------
Operating earnings (loss) 67.3 (362.5)
Interest and other nonoperating
income, net .9 9.2
Interest expense (20.6) (18.3)
--------- ---------
Earnings (loss) from continuing
operations before income taxes 47.6 (371.6)
Income tax provision 15.2 9.1
--------- ---------
Earnings (loss) from continuing
operations 32.4 (380.7)
Discontinued operations 22.6
--------- ---------
Earnings (loss) before cumulative
effect of accounting change 55.0 (380.7)
Cumulative effect of accounting change (8.4)
--------- ---------
Net earnings (loss) 55.0 (389.1)
Preferred stock dividends (.1) (.1)
--------- ---------
Available for common shareholders $ 54.9 $(389.2)
========= =========
Basic earnings per common share:
Earnings (loss) from continuing
operations $ .44 $ (5.26)
Discontinued operations .31
Cumulative effect of accounting
change (.11)
--------- ---------
Net earnings (loss) $ .75 $ (5.37)
========= =========
Diluted earnings per common share:
Earnings (loss) from continuing
operations $ .44 $ (5.26)
Discontinued operations .31
Cumulative effect of accounting
change (.11)
--------- ---------
Net earnings (loss) $ .75 $ (5.37)
========= =========
(See Notes to Condensed Consolidated Financial Statements on pages 4
through 7.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
September 30, June 30,
1998 1998
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 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 893.5 899.5
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 $3,785.9 $3,785.6
========= =========
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 995.2 952.2
Accumulated other comprehensive expense (53.7) (72.6)
Treasury stock, at cost (410.4) (374.5)
--------- ---------
Total shareholders' equity 944.1 918.4
--------- ---------
Total liabilities and shareholders'
equity $3,785.9 $3,785.6
========= =========
(See Notes to Condensed Consolidated Financial Statements on pages 4
through 7.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Three Months Ended
September 30,
------------------------
1998 1997
--------- ---------
CASH FLOWS - OPERATING ACTIVITIES
Net earnings (loss) $ 55.0 $ (389.1)
Adjustments to reconcile net earnings
(loss) to net cash provided (used)
by operating activities:
Depreciation 28.8 25.5
Amortization 20.2 12.4
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 398.3
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.)
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 estimated fair
values at the date of acquisition.
Included in earnings for the quarter ended September 30, 1997 are
one-time noncash acquisition-related costs of $398.3 million for
the write-off of purchased research and development, an
identifiable intangible asset of the Nellcor acquisition, which
had no tax benefit. Of this amount, $396.3 million related to
ongoing operations and $2.0 million related to operations
classified as discontinued operations.
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.
In connection with the Company's filing of a shelf registration
statement for debt securities, Mallinckrodt is engaged in
discussions with the staff of the Securities and Exchange
Commission (SEC) regarding the purchase price allocation related
to its acquisition of Nellcor. The Company and its auditors,
Ernst & Young LLP, believe that the allocation and related
amortization charges are in accordance with generally accepted
accounting principles. Ernst & Young LLP has expressed their
opinion that the Company's 1998 annual consolidated financial
statements are fairly presented, in all material respects, in
conformity with generally accepted accounting principles.
Nevertheless, if there are any significant changes as a result of
these discussions with the SEC to the amounts allocated to
purchased research and development or other intangible assets or
changes in the lives over which such amounts are amortized, these
changes could have a material impact on the related noncash
charges reflected in the 1998 and 1999 results of operations and
could materially affect future results of operations as a result
of increased amortization expense.
During 1998, in connection with management's plan to integrate
Mallinckrodt and Nellcor into one successful 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 $ 32.4 $(380.7)
Preferred stock dividends (.1) (.1)
--------- ---------
Numerator for basic and diluted
earnings (loss) per share--
income (loss) available to common
shareholders $ 32.3 $(380.8)
========= =========
Denominator:
Denominator for basic earnings
(loss) per share--
weighted-average shares 72,917,133 72,475,530
Potential dilutive common
shares--employee stock options 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 $ .44 $ (5.26)
====== ========
Diluted earnings (loss) from
continuing operations per
common share $ .44 $ (5.26)
====== ========
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) $55.0 $(389.1)
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) $73.9 $(392.7)
========= =========
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.
RESULTS OF OPERATIONS
General
- -------
The Company recorded earnings from continuing operations of $32.4
million, or 44 cents per share for the quarter ended
September 30, 1998. Earnings from continuing operations for the same
quarter last year, before including $407.8 million of noncash charges
related to the acquisition of Nellcor, were $27.1 million, or 37
cents per share.
- --------------------
[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.
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.
In connection with the Company's filing of a shelf registration
statement for debt securities, Mallinckrodt is engaged in discussions
with the staff of the Securities and Exchange Commission (SEC)
regarding the purchase price allocation related to its acquisition of
Nellcor. The Company and its auditors, Ernst & Young LLP, believe
that the allocation and related amortization charges are in
accordance with generally accepted accounting principles. Ernst &
Young LLP has expressed their opinion that the Company's 1998 annual
consolidated financial statements are fairly presented, in all
material respects, in conformity with generally accepted accounting
principles. Nevertheless, if there are any significant changes as a
result of these discussions with the SEC to the amounts allocated to
purchased research and development or other intangible assets or
changes in the lives over which such amounts are amortized, these
changes could have a material impact on the related noncash charges
reflected in the 1998 and 1999 results of operations and could
materially affect future results of operations as a result of
increased amortization expense.
Net earnings for the first quarter of 1999 were $55.0 million, or 75
cents per share as compared to a net loss of $389.1 million, or $5.37
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 $ 23.1 $ 22.4
Imaging 30.7 23.1
Pharmaceuticals 20.5 12.4
--------- ---------
74.3 57.9
Corporate expense (7.0) (5.5)
--------- ---------
67.3 52.4
Acquisition charges (414.9)
--------- ---------
$ 67.3 $(362.5)
========= =========
Operating earnings for the quarter ended September 30, 1998 were
$67.3 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
$362.5 million, which included noncash charges of $396.3 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 primarily attributable to volume
growth (85 percent) due to the inclusion of only one month of Nellcor
revenue in 1998, which was offset by price declines primarily
involving anesthesia and respiratory devices. Operating earnings for
the Group for the quarter were $23.1 million or 3 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 $7.9 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 31.9 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 $396.3 million which had no tax benefit,
was 36.8 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 58.3 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company has determined that its market risk exposures, which
arise primarily from exposures to fluctuations in interest rates and
foreign currency rates, are not material to its future earnings, fair
value and cash flows.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the
ordinary course of its business activities. In addition, in
connection with laws and regulations pertaining to the protection of
the environment, the Company is a party to several environmental
remediation investigations and clean-ups and, along with other
companies, has been named a "potentially responsible party" for
certain waste disposal sites. Each of these matters is subject to
various uncertainties, and it is possible that some of these matters
will be decided unfavorably against the Company.
Environmental Matters
- ---------------------
The Company is actively involved in the investigation or remediation
of alleged contamination of 23 currently or previously owned or
operated sites and at 15 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.
Previously Reported Matters
- ---------------------------
The following is a brief discussion of material developments in
environmental proceedings previously reported in the Company's annual
report on Form 10-K for its fiscal year ended June 30, 1998.
Orrington, ME - The Company has completed additional supplemental
work which was required before submitting the final Site
Investigation Plan to the EPA and the State of Maine. The Company
anticipates it will submit the supplemental Site Investigation Plan
in December 1998.
St. Louis, MO/CT Decommissioning - The Company is developing the
Phase II Decommissioning and Decontamination Plan (Phase II Plan) to
submit to the Nuclear Regulatory Commission. This plan is due in
December 1998. The Company, however, intends to request an extension
of time for submittal of the Phase II Plan.
Raleigh, NC - The Company has worked with federal and state
agencies to complete the Resource Conservation Recovery Act Facility
Investigation (RFI) and identified certain Solid Waste Management
Units (SWMUs). Final approval of the RFI was granted and field work
has been completed. The Company is preparing a report to submit to
the North Carolina Department of Environment, Health and Natural
Resources.
Springville, UT - The parties at this site have hired an allocation
consultant to assist in identifying historic practices in order to
develop a final allocation. Meetings with the allocation consultant
are scheduled to be held in November 1998.
In October 1996, a resident with property bordering the Springville
site filed suit against Ensign Bickford Industries (EBI) in the U.S.
District Court for the District of Utah (Don Henrichsen, et al v. The
----------------------------
Ensign-Bickford Company, et al) alleging nuisance and trespass for
- ------------------------------
contamination that allegedly migrated onto the resident's property.
On January 31, 1997, the Company was added as a defendant.
Depositions are being completed and expert reports have been
generated. Plaintiffs have made settlement overtures, but the
Company has rejected such proposals.
The Company and EBI have entered into a confidential settlement of
the Kent Gordon Stephens, et al v. Trojan Corporation, et al case.
--------------------------------------------------------
Additional Environmental Matters
- --------------------------------
Animal Health Business Properties - The Company sold its animal
health business in June 1997 to Schering-Plough Corporation (S-P) and
provided an environmental indemnity to S-P. This indemnity covered
both U.S. facilities and international facilities. The indemnity
lasts for a term of fifteen years and is limited to claims arising
from activities and uses of the property prior to closing. The
Company is working with S-P and the Indiana Department of
Environmental Management (IDEM) to resolve certain issues regarding
the Resource Conservation and Recovery Act requirements at the Terre
Haute, Indiana facility. The facility had begun the RCRA Corrective
Action process, but decided to allow the RCRA Part B permit to
expire. However, there were continuing negotiations with the IDEM
and U.S. Environmental Protection Agency Region V to discuss
voluntary remediation activities to obtain a No Further Action
letter. The Company and S-P have worked together and submitted
reports to IDEM to resolve these issues. The Company and S-P will
evaluate IDEM's response and determine the appropriate course of
action for this facility.
Under the terms of the indemnity, S-P had the option to conduct
baseline environmental assessments at all of the properties
transferred. S-P has completed initial baseline assessments and has
made certain claims against the Company under the indemnity. Several
of the properties located outside of the United States are in
countries that have no specific environmental laws; therefore, the
Company and S-P must determine the appropriate activities. The
Company is working closely with S-P to discuss and resolve these
claims. The Company has accruals to address potential indemnity
claims. The Company intends to vigorously defend its position in
connection with the environmental matters in connection with the
formerly owned animal health business.
Erie, PA (Calsicat) - The Company sold its facility located in Erie,
Pennsylvania to Engelhard Corporation (Engelhard) in May 1998. This
facility manufactures a variety of specialty catalysts. As part of
the transaction, the Company provided an environmental indemnity to
Engelhard. This indemnity distinguishes between on-site and off-site
liabilities. On-site liabilities are limited to a term of five
years. The Company has an obligation to jointly manage any on-site
liabilities covered by the indemnity which require remediation. Off-
site liabilities for activities arising from pre-closing activities
are indemnified without a time limit. The Company and Engelhard are
working together to address an ongoing groundwater collection and
soil remediation project at the site. This project is being managed
under the oversight of the Pennsylvania Department of Environmental
Protection. The Company and Engelhard are evaluating including these
remediation activities under Pennsylvania's voluntary remediation
program. The Company has accruals to address the ongoing remediation
projects and potential environmental claims under the indemnity.
Allentown, PA (Trimet) - The Company sold its operations in
Allentown, Pennsylvania to Geo Specialty Chemicals, Inc. (Geo) in
July 1998. This facility currently manufactures formaldehyde and a
limited number of specialty chemicals. The facility was historically
operated as an explosives manufacturing plant. The Company provided
an environmental indemnity to Geo for certain environmental
activities which may be required by governmental agencies and a more
limited indemnity for potential environmental claims arising from the
actions of Geo.
In addition to the indemnity, the Company has retained responsibility
for completion of two ongoing remediation projects on-site including
demolition of certain buildings and closure of a wastewater lagoon,
as well as other environmental issues. The Company has established a
reserve to address the ongoing remediation projects, potential
environmental claims under the indemnity, and other environmental
issues.
St. Louis, MO/RCRA Corrective Action - The Company's St. Louis
plant has a Resource Conservation Recovery Act (RCRA) Part B permit
which requires the facility to undergo corrective action. The
Company worked with the state agency to complete the RCRA Facility
Assessment and identified certain Solid Waste Management Units
(SWMUs) and Areas of Concern (AOCs). The Company received its permit
and appealed certain provisions. The Company has negotiated a
resolution of its appeal. The Missouri Department of Natural
Resources has conditionally approved the RCRA Facility Investigation
Final Work Plan submitted by the Company, which describes additional
investigation of certain SWMUs and AOCs. The Company will be
commencing field work in accordance with the Work Plan.
Other Litigation
- ----------------
The following is a brief discussion of material developments in other
pending legal matters previously reported in the Company's annual
report on Form 10-K for its fiscal year ended June 30, 1998.
OPTISON(*) Patent Litigation - Discovery in the Mallinckrodt/MBI
action has been stayed until the court rules on the Company and MBI's
motion for summary judgement of invalidity of Nycomed's patent. The
motion for summary judgement will be filed shortly.
A motion to stay discovery in the Sonus action is pending before the
court in the state of Washington. The motion was filed by Sonus.
Sonus is asking the court to stay discovery until reexamination
proceedings in the Patent Office are concluded.
Augustine Medical, Inc. - A hearing before the Court of Appeals in
this previously reported proceeding has been set for December 9,
1998. A decision by the Court of Appeals is expected in early
calendar year 1999.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
- ------- --------------------------------------------------------
10.29 Executive Incentive Compensation Plan for Fiscal 1999
(filed with this electronic submission) (1)
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: MICHAEL A. ROCCA By: DOUGLAS A. MCKINNEY
------------------------ ---------------------
Michael A. Rocca Douglas A. McKinney
Senior Vice President and Vice President and
Chief Financial Officer Controller
DATE: November 9, 1998