Mallinckrodt Plc Reports Transition Period Results And Announces 2017 Guidance

The following excerpt is from the company's SEC filing.

-- Net sales of $829.9 million, up 2.3%, 2.6% on a constant-currency basis; Specialty Brands segment net sales increased 11.0%, 11.6% on a constant-currency basis, contributing 72.7% of company total, principally driven by volume growth across the portfolio --

-- GAAP

diluted loss per share from continuing operations of $1.67, reflecting impact of specific items occurring in this period - Specialty Generics segment goodwill impairment, FTC settlement and certain pension charges --

-- Adjusted diluted earnings per share of $1.91 --

-- H.P. Acthar

Gel (repository corticotropin injection) net sales growth of 13.5%, reflecting continued strong, volume-based performance balanced across payer mix --

-- 2017 guidance for adjusted diluted earnings per share is $7.40 to $8.00 --

STAINES-UPON-THAMES, United Kingdom - Feb. 7, 2017 -

Mallinckrodt plc

(NYSE: MNK), a leading global specialty pharmaceutical company, today reported results for the transition period from Oct. 1, 2016 to Dec. 30, 2016. The last quarter of calendar year 2016 was the planned transition period as the company aligns to a calendar-based financial year. The company will continue its “4/5/4” reporting convention with the first fiscal year ending Dec. 29, 2017 (referred to as “2017”). Unless otherwise noted, all comparisons of the transition period ended Dec. 30, 2016 are to the comparable period in fiscal 2016 ended Dec. 25, 2015.

Net sales were $829.9 million in the transition period, up 2.3%, or 2.6% on a constant-currency basis. GAAP gross profit was $445.8 million with gross profit as a percentage of net sales of 53.7%, compared with 55.6%. Adjusted gross profit was $623.9 million, compared with $638.7 million. Adjusted gross profit as a percentage of net sales was 75.2% versus 78.7%.

“Mallinckrodt’s transition period results were solid, driven by predominantly volume-based growth in our diversified Specialty Brands segment, which continued to contribute greater than 70% of our total net sales. By focusing on execution, we are making good progress in building a leading specialty pharmaceutical company, creating near- and long-term value for patients with high unmet medical needs,” said

Mark Trudeau, President and Chief Executive Officer

. “Our

Acquire to Invest

strategy is evident in our focus on portfolio transformation and in developing a robust, organic Specialty Brands pipeline, including investigational products like StrataGraft

skin substitute and Terlipressin - potentially transformative therapies that, if approved, may deliver significant, even life-changing benefits for patients.”

“We have made significant progress over the past few months in strengthening our specialty pharmaceutical focus with the completed sale of our Nuclear Imaging business and our definitive agreement to divest the Intrathecal Therapy business. We believe these actions will provide additional capital for investment in continued growth and are confident this strategic transition will best position Mallinckrodt for the future,” Trudeau said.

(1) Generally accepted accounting principles in the United States

(2) The reported constant currency growth percentage is identical for Acthar, OFIRMEV and INOMAX.

GAAP selling, general and administrative (SG&A) expenses were $368.3 million, compared with $223.3 million, representing 44.4% and 27.5% of net sales, respectively. SG&A in the transition period was impacted primarily by the settlement of the legacy Questcor Pharmaceuticals, Inc. matter brought by the U.S. Federal Trade Commission (FTC) and five states, and expenses associated with the termination of the company’s defined benefit pension plans. Adjusted SG&A expenses were $217.2 million or 26.2% of net sales, compared with $208.9 million or 25.8%. Research and development (R&D) expense in the transition period increased 7.8%, with R&D as a percentage of net sales at 8.0% in the transition period, compared with 7.6%. Due to increased competitive entrants, declining volumes and channel consolidation, the company recorded a goodwill impairment charge in the quarter of $207.0 million associated with its Specialty Generics segment.

Income tax benefit was $121.7 million versus $37.3 million, resulting in GAAP effective rates of 40.8% and negative 56.1%, respectively. The adjusted effective tax rate was 15.7% in the transition period compared with 16.1%. The variance between the GAAP and non-GAAP effective tax rate relates to the tax effect on pre-tax non-GAAP adjustments and deferred tax benefits recognized upon pay down of intercompany installment notes created by internal sales of acquired intangible assets.

GAAP diluted per share results from continuing operations were a loss of $1.67 in the transition period compared with earnings per share of $0.89. The loss reflects the impact of a goodwill impairment charge in the Specialty Generics segment, the recently announced FTC settlement and expenses associated with termination of the company’s defined benefit plans. Adjusted diluted earnings per share were $1.91 versus $1.97.

BUSINESS SEGMENT RESULTS

Specialty Brands Segment

Net sales for the Specialty Brands segment were $603.1 million in the transition period, compared with $543.2 million, an increase of 11.0%, or 11.6% on a constant-currency basis.

H.P. Acthar Gel net sales were $325.4 million in the transition period, a 13.5%

increase over $286.7 million. Mallinckrodt’s second largest product, INOMAX

(nitric oxide) gas, for inhalation, generated net sales of $118.3 million, up 6.8%

over $110.8 million. OFIRMEV

(acetaminophen) injection net sales were $72.5 million compared with $66.9 million, an increase of 8.4%

Net sales of the Therakos

immunology platform were $47.4 million compared with $50.4 million, a decrease of 6.0%, with growth of 0.1% on a constant-currency basis. The company is encouraged by progress towards resolution of the third-party manufacturer production issue and expects resolution by the second quarter of 2017.

Specialty Generics Segment

Net sales in the transition period decreased 17.4% to $212.9 million, compared with $257.6 million, driven principally by net sales declines in various product categories due to continued competition and channel consolidation negatively impacting both price and volume. On a constant-currency basis, segment net sales declined 17.5%.

LIQUIDITY

Mallinckrodt generated $195.6 million in operating cash flow and $130.4 million in free cash flow in the transition period. During the transition period, operating cash flow and free cash flow were unfavorably impacted by tax payments to the U.S. Internal Revenue Service (IRS).

During the period, the company repurchased 2.6 million ordinary shares for $158.8 million under its share repurchase program, bringing total shares repurchased since January 2015 under the company’s authorized programs to 13.1 million, or approximately 11.3% of diluted shares outstanding, since inception.

Mallinckrodt’s cash balance at the end of the transition period was $342.0 million, allowing the company to repay its revolving credit facility subsequent to the period close.

With its strong cash position, proven cash flow generation ability and proceeds from the sale of the Nuclear Imaging business, Mallinckrodt remains focused on capital allocation through business development and returning cash to shareholders.

2017 MALLINCKRODT FINANCIAL GUIDANCE

Metric

(excluding foreign currency impact)

2017 Guidance

Total Mallinckrodt net sales

Decrease 2% to 5%

Increase 4% to 7%

Specialty Generics segment net sales

Decrease 21% to 25%

Net interest expense

$360 million to $380 million

Adjusted effective tax rate

15% to 17%

Adjusted diluted EPS

The company’s guidance reflects the comparison of a 53-week prior year to a 52-week 2017. The additional week will impact comparisons to prior year results in the quarter ending Sept. 2017 and on a full-year basis.

CONFERENCE CALL AND WEBCAST

Mallinckrodt will hold a conference call for investors on Tuesday, Feb. 7, 2017, beginning at 8:30 a.m. U.S. Eastern Time. This call can be accessed in three ways:

At the Mallinckrodt website:

http://www.mallinckrodt.com/investors

By telephone: For both listen-only participants and those who wish to take part in the question-and-answer portion of the call, the telephone dial-in number in the U.S. is (877) 359-9508. For participants outside the U.S., the dial-in number is (224) 357-2393. Callers will need to provide the Conference ID of 42905158.

Through an audio replay: A replay of the call will be available beginning at 11:30 a.m. Eastern Time on Tuesday, Feb. 7, 2017, and ending at 11:59 p.m. Eastern Time on Tuesday, Feb. 21, 2017. Dial-in numbers for U.S.-based participants are (855) 859-2056 or (800) 585-8367. Participants outside the U.S. should use the replay dial-in number of (404) 537-3406. All callers will be required to provide the Conference ID of 42905158.

ABOUT MALLINCKRODT

Mallinckrodt is a global business that develops, manufactures, markets and distributes specialty pharmaceutical products and therapies. Areas of focus include autoimmune and rare diseases in specialty areas like neurology, rheumatology, nephrology, pulmonology and ophthalmology; immunotherapy and neonatal respiratory critical care therapies; and analgesics and hemostasis products. The company's core strengths include the acquisition and management of highly regulated raw materials and specialized chemistry, formulation and manufacturing capabilities. The company's Specialty Brands segment includes branded medicines and its Specialty Generics segment includes specialty generic drugs, active pharmaceutical ingredients and external manufacturing. To learn more about Mallinckrodt, visit

Mallinckrodt uses its website as a channel of distribution of important company information, such as press releases, investor presentations and other financial information. It also uses its website to expedite public access to time-critical information regarding the company in advance of or in lieu of distributing a press release or a filing with the U.S. Securities and Exchange Commission (SEC) disclosing the same information. Therefore, investors should look to the Investor Relations page of the website for important and time-critical information. Visitors to the website can also register to receive automatic e-mail and other notifications alerting them when new information is made available on the Investor Relations page of the website.

NON-GAAP FINANCIAL MEASURES

This press release contains financial measures, including adjusted net income, adjusted diluted earnings per share, adjusted gross profit, adjusted SG&A, net sales growth on a constant-currency basis, adjusted effective tax rate, and free cash flow, which are considered "non-GAAP" financial measures under applicable SEC rules and regulations.

Adjusted net income, adjusted gross profit and adjusted SG&A represent amounts prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) and adjusted for certain items that management believes are not reflective of the operational performance of the business. The adjustments for these items are on a pre-tax basis for adjusted gross profit and adjusted SG&A and on an after-tax basis for adjusted net income. Adjustments to GAAP amounts include, as applicable to each measure, restructuring and related charges, net; amortization and impairment charges; discontinued operations; acquisition-related expenses; changes in fair value of contingent consideration obligations; inventory step-up expenses; significant legal and environmental charges; pension settlement charges; recurrent cash tax payments to the IRS associated with internal installment sales transactions; and other items identified by the company. Adjusted diluted earnings per share represent adjusted net income divided by the number of diluted shares.

The adjusted effective tax rate is calculated as the income tax effects on continuing and discontinued operations plus the income tax impact included in Mallinckrodt’s reconciliation of net income, divided by income from continuing and discontinued operations plus the pre-tax, non-income, tax-related adjustments included in its reconciliation of adjusted net income (excluding dilutive share impact). The income tax impact item included in its reconciliation of adjusted net income primarily represents the tax impact of adjustments between net income and adjusted net income as well as deferred tax benefits recognized upon pay down of intercompany installment notes created by internal sales of acquired intangible assets.

Net sales growth on a constant-currency basis measures the change in net sales between current- and prior-year periods using a constant currency, the exchange rate in effect during the applicable prior-year period.

Free cash flow for the transition quarter represents net cash provided by operating activities of $195.6 million less capital expenditures of $65.2 million, each as prepared in accordance with GAAP.

The company has provided these adjusted financial measures because they are used by management, along with financial measures in accordance with GAAP, to evaluate the company's operating performance. In addition, the company believes that they will be used by certain investors to measure Mallinckrodt's operating results. Management believes that presenting these adjusted measures provides useful information about the company's performance across reporting periods on a consistent basis by excluding items that the company does not believe are indicative of its core operating performance.

These adjusted measures should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP. The company's definition of these adjusted measures may differ from similarly titled measures used by others.

Because adjusted financial measures exclude the effect of items that will increase or decrease the company's reported results of operations, management strongly encourages investors to review the company's consolidated financial statements and publicly filed reports in their entirety. A reconciliation of certain of these historical adjusted financial measures to the most directly comparable GAAP financial measures is included in the tables accompanying this release.

Guidance on the company's 2017 diluted earnings per share and effective tax rate has been provided only on a non-GAAP basis. This is due to the inherent difficulty of forecasting the timing or amount of items that would be included in the most directly comparable forward-looking GAAP financial measures. Because reconciliation is not available without unreasonable effort, it is not included in this release.

Further information regarding non-GAAP financial measures can be found on the Investor Relations page of the company’s website.

CAUTIONARY STATEMENTS RELATED TO FORWARD-LOOKING STATEMENTS

Statements in this document that are not strictly historical, including statements regarding future financial condition and operating results, economic, business, competitive and/or regulatory factors affecting Mallinckrodt's businesses and any other statements regarding events or developments that we believe or anticipate will or may occur in the future, may be "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve a number of risks and uncertainties.

There are a number of important factors that could cause actual events to differ materially from those suggested or indicated by such forward-looking statements and you should not place undue reliance on any such forward-looking statements. These factors include risks and uncertainties related to, among other things: general economic conditions and conditions affecting the industries in which Mallinckrodt operates; the commercial success of Mallinckrodt's products; Mallinckrodt's ability to realize anticipated growth, synergies and cost savings from acquisitions; conditions that could necessitate an evaluation of Mallinckrodt's goodwill and/or intangible assets for possible impairment; changes in laws and regulations; Mallinckrodt's ability to successfully integrate acquisitions of operations, technology, products and businesses generally and to realize anticipated growth, synergies and cost savings; Mallinckrodt's ability to successfully develop or commercialize new products; Mallinckrodt's ability to protect intellectual property rights; Mallinckrodt's ability to receive procurement and production quotas granted by the U.S. Drug Enforcement Administration; customer concentration; Mallinckrodt's reliance on certain individual products that are material to its financial performance; cost containment efforts of customers, purchasing groups, third-party payers and governmental organizations; the reimbursement practices of a small number of public or private insurers; pricing pressure on certain of Mallinckrodt’s products due to legal changes or changes in insurers’ reimbursement practices resulting from recent increased public scrutiny of healthcare and pharmaceutical costs; limited clinical trial data for H.P. Acthar Gel; complex reporting and payment obligations under healthcare rebate programs; Mallinckrodt's ability to navigate price fluctuations; future changes to U.S. and foreign tax laws; Mallinckrodt's ability to achieve expected benefits from restructuring activities; complex manufacturing processes; competition; product liability losses and other litigation liability; ongoing governmental investigations; material health, safety and environmental liabilities; retention of key personnel; conducting business internationally; the effectiveness of information technology infrastructure; and cybersecurity and data leakage risks.

These and other factors are identified and described in more detail in the "Risk Factors" sections of Mallinckrodt's Annual Report on Form 10-K for the fiscal year ended September 30, 2016. The forward-looking statements made herein speak only as of the date hereof and Mallinckrodt does not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise, except as required by law.

CONTACTS

Coleman N. Lannum, CFA

Senior Vice President, Investor Strategy and IRO

314-654-6649

cole.lannum@mallinckrodt.com

Daniel J. Speciale, CPA

Director, Investor Relations

314-654-3638

daniel.speciale@mallinckrodt.com

Rhonda Sciarra

Senior Communications Manager

908-238-6765

rhonda.sciarra@mallinckrodt.com

Meredith Fischer

Chief Public Affairs Officer

314-654-3318

meredith.fischer@mallinckrodt.com

MALLINCKRODT PLC

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited, in millions, except per share data)

Three Months Ended

December 30,

Percent of

December 25,

Cost of sales

Gross profit

Selling, general and administrative expenses

Research and development expenses

Restructuring charges, net

Non-restructuring impairments

Operating (loss) income

(206.8

Interest expense

Interest income

Other (loss) income, net

(Loss) income from continuing operations before income taxes

(298.5

(121.7

(176.8

Income from discontinued operations, net of income taxes

Net (loss) income

(153.2

Basic earnings per share:

Diluted earnings per share:

Weighted-average number of shares outstanding:

NON-GAAP MEASURES

(unaudited, in millions except per share data)

December 30, 2016

December 25, 2015

net (loss) income

Net income

Adjustments:

Intangible asset amortization

Restructuring and related charges, net

Inventory step-up expense

(107.3

Change in contingent consideration fair value

Acquisition related expenses

Non-restructuring impairment charges

Significant legal and environmental changes

(102.0

Pension settlement charge

Income taxes

(159.6

As adjusted

Percent of net sales

Includes pre-tax accelerated depreciation.

Includes tax effects of above adjustments as well as the elimination of deferred tax benefits recognized upon pay down of intercompany installment notes created by internal sales of acquired intangible assets.

In periods where losses are incurred, potential ordinary shares outstanding are excluded from the calculation of diluted earnings per share, prepared in accordance with GAAP, as they would be anti-dilutive. These potentially dilutive shares are included in the calculation of adjusted diluted earnings per share when dilutive. As a result, the adjusted diluted earnings per share utilized a weighted average share count of 106.4 shares.

SEGMENT NET SALES AND CONSTANT-CURRENCY GROWTH

(unaudited, in millions)

Currency impact

Constant-currency growth

Represents net sales from an ongoing, post-divestiture supply agreement with the acquirer of the CMDS business. Amounts for periods prior to the divestiture represent the reclassification of intercompany sales to third-party sales to conform with the presentation of the ongoing supply agreement.

SELECT PRODUCT LINE NET SALES

December 30,

December 25,

Inomax

Ofirmev

Therakos immunotherapy

Hemostasis products

Specialty Brands Total

Hydrocodone (API) and hydrocodone-containing tablets

Oxycodone (API) and oxycodone-containing tablets

Methylphenidate ER

Other controlled substances

Other products

Specialty Generics Total

CONDENSED CONSOLIDATED BALANCE SHEETS

Assets

Current Assets:

Cash and cash equivalents

Accounts receivable, net

Inventories

Prepaid expenses and other current assets

Current assets held for sale

Total current assets

1,566.5

1,506.6

Property, plant and equipment, net

Goodwill

3,498.1

3,705.3

Intangible assets, net

9,000.5

9,182.3

Other assets

Total Assets

15,206.3

15,498.7

Liabilities and Shareholders' Equity

Current Liabilities:

Current maturities of long-term debt

Accounts payable

Accrued payroll and payroll-related costs

Accrued interest

Accrued and other current liabilities

Current liabilities held for sale

Total current liabilities

1,307.2

1,234.7

Long-term debt

5,880.8

5,788.7

Pension and postretirement benefits

Environmental liabilities

Deferred income taxes

2,398.1

2,581.4

Other income tax liabilities

Other liabilities

Total Liabilities

10,222.0

10,228.0

Shareholders' Equity:

Preferred shares

Ordinary shares

Ordinary shares held in treasury at cost

(919.8

(762.6

Additional paid-in capital

5,424.0

5,412.7

Retained earnings

Accumulated other comprehensive income

Total Shareholders' Equity

4,984.3

5,270.7

Total Liabilities and Shareholders' Equity

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash Flows From Operating Activities:

Adjustments to reconcile net cash provided by operating activities:

Depreciation and amortization

Share-based compensation

(204.3

(108.9

Non-cash impairment charges

Gain on disposal of discontinued operations

Other non-cash items

Changes in assets and liabilities, net of the effects of acquisitions:

Net cash (used in) provided by operating activities

Cash Flows From Investing Activities:

Capital expenditures

Acquisitions and intangibles, net of cash acquired

Proceeds from disposal of discontinued operations, net of cash

Restricted cash

Net cash (used in) provided by investing activities

Cash Flows From Financing Activities:

Issuance of external debt

Repayment of external debt and capital leases

(129.6

Debt financing costs

Proceeds from exercise of share options

Repurchase of shares

(158.8

(275.4

Net cash (used in) provided by financing activities

(369.5

Effect of currency rate changes on cash

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

The above information was disclosed in a filing to the SEC. To see the filing, click here.

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