SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-13252
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McKESSON CORPORATION
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(Exact name of Registrant as specified in its charter)
DELAWARE 94-3207296
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Post Street, San Francisco, California 94104
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(Address of principal executive offices) (Zip Code)
(415) 983-8300
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(Registrant's telephone number, including area code)
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
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at September 30, 1995
- ---------------------------- ---------------------------------
Common stock, $.01 par value 44,321,681 shares
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
==============================
Item Page
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1. Financial Statements
Consolidated Balance Sheets
September 30, 1995 and March 31, 1995 3 - 4
Condensed Statements of Consolidated Income
Three and six months ended
September 30, 1995 and 1994 5
Statements of Consolidated Cash Flows
Six months ended September 30, 1995 and 1994 6 - 7
Financial Notes 8
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Review 9 - 11
PART II. OTHER INFORMATION
===========================
6. Exhibits and Reports on Form 8-K 12
Exhibit Index 14
PART I. FINANCIAL INFORMATION
==============================
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, March 31,
1995 1995
---------- ----------
(in millions)
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 370.8 $ 385.4
Marketable securities
available for sale 394.8 307.3
Receivables 809.5 778.6
Inventories 1,108.2 1,160.2
Prepaid expenses 86.0 67.9
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Total 2,769.3 2,699.4
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Property, Plant and Equipment
Land 38.9 41.0
Buildings, machinery and equipment 735.9 722.1
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Total 774.8 763.1
Accumulated depreciation (402.2) (396.8)
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Net 372.6 366.3
Goodwill and other intangibles 211.3 214.3
Other assets 223.7 199.2
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Total Assets $3,576.9 $3,479.2
======= =======
(Continued)
- 3 -
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, March 31,
1995 1995
---------- ----------
(in millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Drafts payable $ 174.3 $ 175.7
Accounts payable - trade 1,240.1 1,120.8
Short-term borrowings 87.5 21.7
Current portion of long-term debt 21.4 17.8
Salaries and wages 30.9 40.6
Taxes 91.4 144.0
Interest and dividends 21.3 20.9
Other 132.9 196.7
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Total 1,799.8 1,738.2
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Postretirement Obligations and
Other Noncurrent Liabilities 209.7 208.8
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Long-Term Debt 456.0 458.8
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Minority Interest in Subsidiary 59.5 59.9
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Stockholders' Equity
Common stock 0.4 0.4
Other capital 326.5 315.7
Retained earnings 919.4 875.9
Accumulated translation adjustment (44.0) (51.6)
ESOP notes and guarantee (124.2) (126.4)
Treasury shares, at cost (26.2) (0.5)
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Net 1,051.9 1,013.5
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Total Liabilities and
Stockholders' Equity $3,576.9 $3,479.2
======= =======
See Financial Notes.
(Concluded)
- 4 -
McKESSON CORPORATION and SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
Three Months Ended Six Months Ended
September 30 September 30
--------------- ---------------
1995 1994 1995 1994
------ ------ ------ ------
(in millions-except per share amounts)
REVENUES $3,348.4 $3,255.8 $6,684.4 $6,491.0
COSTS AND EXPENSES
Cost of sales 3,063.2 2,986.0 6,116.9 5,946.7
Selling, dist. and admin. 218.7 228.0 430.8 442.3
Interest 12.0 11.2 24.4 22.3
------- ------- ------- -------
Total 3,293.9 3,225.2 6,572.1 6,411.3
------- ------- ------- -------
INCOME BEFORE TAXES ON INCOME 54.5 30.6 112.3 79.7
TAXES ON INCOME (21.5) (11.6) (44.9) (31.5)
------- ------- ------- -------
INCOME BEFORE MINORITY INTEREST 33.0 19.0 67.4 48.2
Minority interest in net
income of subsidiary (1.3) (1.9) (2.9) (4.7)
------- ------- ------- -------
INCOME AFTER TAXES
Continuing operations 31.7 17.1 64.5 43.5
Discontinued operations - 8.4 - 18.0
------- ------- ------- -------
NET INCOME $ 31.7 $ 25.5 $ 64.5 $ 61.5
======= ======= ======= =======
EARNINGS PER COMMON SHARE
Fully diluted earnings
Continuing operations $ .68 $ .36 $ 1.38 $ .93
Discontinued operations - .18 - .40
------- ------- ------- -------
Total $ .68 $ .54 $ 1.38 $ 1.33
======= ======= ======= =======
Primary earnings
Continuing operations $ .68 $ .36 $ 1.38 $ .96
Discontinued operations - .20 - .43
------- ------- ------- -------
Total $ .68 $ .56 $ 1.38 $ 1.39
======= ======= ======= =======
Dividends $ .25 $ .42 $ .50 $ .84
======= ======= ======= =======
SHARES ON WHICH EARNINGS PER
COMMON SHARE WERE BASED
Fully diluted 46.7 45.0 46.8 45.0
Primary 46.7 42.0 46.7 41.7
See Financial Notes. - 5 -
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Six Months Ended
September 30
-----------------------
1995 1994
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(in millions)
Operating Activities
Income after taxes from cont. op. $ 64.5 $ 43.5
Adjustments to reconcile to net cash
provided by operating activities
Depreciation 29.7 29.5
Amortization 4.7 5.8
Provision for bad debts 4.2 20.9
Deferred taxes on income (5.2) (1.1)
Gain on sale of subsidiary (11.2) -
Other (1.3) 1.2
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Total 85.4 99.8
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Effects of changes in
Receivables (37.7) (76.4)
Inventories 49.3 (72.0)
Accounts and drafts payable 104.3 147.5
Taxes (56.3) (12.6)
Other (102.6) (38.5)
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Total (43.0) (52.0)
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Net cash provided by
continuing operations 42.4 47.8
Discontinued operations 3.3 (5.6)
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Net cash provided by
operating activities 45.7 42.2
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Investing Activities
Purchases of marketable securities (130.3) -
Maturities of marketable securities 49.9 -
Property acquisitions (39.7) (40.4)
Properties sold 5.8 5.0
Acquisitions of businesses, less cash and
short-term investments acquired (11.3) -
Proceeds from sale of subsidiary 36.1 -
Investing activities - discontinued operations - (9.1)
Other 3.1 (1.5)
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Net cash used by investing activities (86.4) (46.0)
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(Continued)
- 6 -
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Six Months Ended
September 30
-----------------------
1995 1994
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(in millions)
Financing Activities
Proceeds from issuance of debt $ 72.3 $ 48.0
Repayment of debt (4.7) (27.9)
Capital stock transactions
Treasury stock acquired (25.7) -
Issuances 3.8 4.6
ESOP notes and guarantee 2.2 5.2
Dividends paid (21.8) (41.7)
Financing activities
- discontinued operations - 1.0
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Net cash provided (used)
by financing activities 26.1 (10.8)
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Net Decrease in Cash
and Cash Equivalents (14.6) (14.6)
Cash and Cash Equivalents
at beginning of period 385.4 89.0
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Cash and Cash Equivalents
at end of period $ 370.8 $ 74.4
======= =======
See Financial Notes.
(Concluded)
- 7 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
1. Interim Financial Statements
----------------------------
In the opinion of the Company, these unaudited
consolidated financial statements include all adjustments
necessary to a fair presentation of its financial position as
of September 30, 1995 and the results of its operations and
its cash flows for the six months ended September 30, 1995 and
1994. Such adjustments were of a normal recurring nature.
The results of operations for the six months ended
September 30, 1995 and 1994 are not necessarily indicative of
the results for the full years.
It is suggested that these interim financial statements
be read in conjunction with the annual audited financial
statements, accounting policies and financial notes thereto
included in the Appendix to the Company's 1995 Proxy Statement
which has previously been filed with the Commission.
2. Discontinued Operations
-----------------------
Earnings from discontinued operations in the prior year
three and six month periods consist of the operations of PCS
Health Systems, Inc. ("PCS") which were divested in November
1994.
- 8 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Segment Results
- ---------------
The operating profits of the Company by business segment are as follows:
Three Months Ended Six Months Ended
September 30 September 30
------------------------- -------------------------
% %
1995 1994 Chg. 1995 1994 Chg.
------ ------ ---- ------ ------ ----
($ in millions)
REVENUES
Health Care Serv. <F1> $3,228.9 $3,143.9 2.7 $6,438.3 $6,259.5 2.9
Water Products 74.1 69.4 6.8 138.1 130.6 5.7
Armor All 39.8 41.1 (3.2) 90.0 97.7 (7.9)
Corporate 5.6 1.4 18.0 3.2
------- ------- ------- -------
Total $3,348.4 $3,255.8 2.8 $6,684.4 $6,491.0 3.0
======= ======= ======= =======
OPERATING PROFIT
Health Care Services $ 48.9 $ 33.0<F2> 48.2 $ 103.1 $ 81.5<F2> 26.5
Water Products 13.6 10.9 24.8 22.5 18.9 19.0
Armor All 4.2 7.3 (42.5) 9.9 18.1 (45.3)
------- ------- ------- -------
Total 66.7 51.2 30.3 135.5 118.5 14.3
Interest - net<F3> (2.6) (10.5) (5.9) (20.8)
Corporate and other (9.6) (10.1)<F4> (17.3) (18.0)<F4>
------- ------- ------- -------
Income before taxes $ 54.5 $ 30.6 78.1 $ 112.3 $ 79.7 40.9
======= ======= ======= =======
<FN>
<F1> Health Care Services Revenues include:
Sales to customers'
warehouses $762.6 $712.9 7.0 $1,513.6 $1,440.5 5.1
International
revenues 387.1 343.0 12.9 770.2 677.7 13.6
<F2> Includes $11.5 million charge in FY95 due to a credit loss arising from a
problem receivable in the U.S. pharmaceutical and health care products
distribution business.
<F3> Interest is shown net of corporate interest income.
<F4> Includes special expense item of $0.8 million in FY95 resulting from a
contribution of Armor All stock to the McKesson Foundation.
</FN>
- 9 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
OVERVIEW OF RESULTS
- -------------------
Net income from continuing operations for the second quarter
increased to $31.7 million, $.68 per fully-diluted share, from
$17.1 million, $.36 per share in the prior year (which included a
charge of $6.6 million primarily related to a credit loss). For
the six month period, net income from continuing operations
increased to $64.5 million, $1.38 per share, from $43.5 million,
$.93 per share for the comparable period in the prior year. The
prior year's three and six month net income included $8.4 million
and $18.0 million, respectively, from the operations of PCS which
was divested in November of 1994 (the "PCS Transaction") and has
been accounted for as a discontinued operation.
Health Care Services
The Health Care Services segment includes the operations of
the Company's U.S. pharmaceutical and health care products
distribution businesses and its international pharmaceutical
operations (Canada, Mexico, and Central America). This segment
accounted for 96% of consolidated revenues and 73% of operating
profit for the second quarter, and 96% and 76%, respectively, for
the six month period ended September 30, 1995.
Segment revenues increased by 3% for both the three and six
month periods, from the comparable periods in the prior year.
Revenue growth continues to reflect the loss of a high-volume
customer at the beginning of the current fiscal year, offset by
growth from the independent retail drug store segment, especially
the Company's Valu-Rite(R) network of independent pharmacies.
Operating profit for the quarter increased by 10% from the
prior year (excluding the $11.5 million pretax credit loss in the
prior year's quarter) and by 11% for the six month period. These
increases reflect, in part, additional operating expense
efficiencies and improved international results. Second quarter
results include start-up, research and development costs related to
the Company's new Health Systems division and to new,
technology-based initiatives to improve the Company's
competitiveness in the retail and institutional market segments.
In addition, in the second quarter expenses were incurred to
further streamline operating and administrative functions. Such
costs were offset by a pretax gain of $11.2 million from the sale
of a Central American pharmaceutical manufacturing subsidiary in
the second quarter.
- 10 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Water Products
Revenues in the Water Products segment increased by 7% for the
three months (6% for the six months) compared with the prior year.
Operating profits increased 25% to $13.6 million from $10.9 million
for the second quarter, compared with the same quarter in the prior
year. For the six month period, operating profit increased by 19%
to $22.5 million from $18.9 million. This improvement reflects
lower operating costs, due in part to the segment's ongoing
programs to improve customer service which have reduced customer
turnover expenses.
Armor All
Armor All Products Corp., which is 55% owned by the Company,
experienced decreases in revenue of 3% and 8% for the three and six
month periods, respectively, compared with the prior year. These
decreases resulted from retailers reducing inventory levels in
response to slower consumer purchases of automotive appearance
products. Operating profits declined by 42% in the quarter and 45%
in the six month period due to declining revenues, higher
ingredient costs and additional expenses associated with the
introduction of new products.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash, equivalents and marketable securities increased $72.9
million during the first half to $765.6 million.
Net interest expense decreased during the six month period as
compared with the prior year primarily due to earnings on the
investment of the proceeds received from the PCS Transaction in the
third quarter of fiscal 1995. Until redeployed, the proceeds are
being invested in U.S. Treasury securities with maturities ranging
up to two years.
The Company's debt-to-capital ratio increased from 33% at
March 31, 1995 to 35% at September 30, 1995 largely as a result of
short-term borrowings by its health care products distribution
operations in Canada.
During the first six months of fiscal 1996, the Company
repurchased 578,685 shares of its common stock for $25.7 million
under a previously announced 3.5 million share repurchase program.
This program was designed to maintain fully diluted shares at the
level prior to the PCS transaction.
- 11 -
PART II. OTHER INFORMATION
===========================
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
11 Computation of Earnings per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the
quarter ended September 30, 1995.
- 12 -
SIGNATURE
S I G N A T U R E
-----------------
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.
McKESSON CORPORATION
(Registrant)
Dated: November 13, 1995 By /s/ Kevin B. Ferrell
-------------------------------
Kevin B. Ferrell
Vice President and
Chief Financial Officer
By /s/ Richard H. Hawkins
-------------------------------
Richard H. Hawkins
Vice President and Controller
- 13 -
EXHIBIT INDEX
Exhibit
Number
- ------
Description
-----------
11 Computation of Earnings per Common Share
27 Financial Data Schedule
- 14 -
Exhibit 11
McKESSON CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(unaudited)
(in millions except per share amounts)
Three Months Six Months
Ended Ended
September 30 September 30
------------ -------------
1995 1994 1995 1994
---- ---- ---- ----
FULLY DILUTED EARNINGS PER SHARE
Income after taxes from
continuing operations $31.7 $17.1 $64.5 $43.5
Contribution adjustment
- Series B ESOP convertible
preferred stock(1) - (1.0) - (1.9)
---- ---- ---- ----
31.7 16.1 64.5 41.6
Discontinued operations - 8.4 - 18.0
---- ---- ---- ----
Total $31.7 $24.5 $64.5 $59.6
==== ==== ==== ====
Fully diluted shares
Common shares outstanding(2) 46.7 42.0 46.8 41.7
Convertible securities
- dilutive - 3.0 - 3.3
---- ---- ---- ----
Total 46.7 45.0 46.8 45.0
==== ==== ==== ====
Fully diluted earnings per share
Continuing operations $ .68 $ .36 $1.38 $ .93
Discontinued operations - .18 - .40
---- ---- ---- ----
Total $ .68 $ .54 $1.38 $1.33
==== ==== ==== ====
PRIMARY EARNINGS PER SHARE
Income after taxes from
continuing operations $31.7 $17.1 $64.5 $43.5
Dividend requirements
- preferred stocks(1) - (1.7) - (3.5)
---- ---- ---- ----
31.7 15.4 64.5 40.0
Discontinued operations - 8.4 - 18.0
---- ---- ---- ----
Total $31.7 $23.8 $64.5 $58.0
==== ==== ==== ====
Primary shares
Common shares outstanding(2) 46.7 42.0 46.7 41.7
==== ==== ==== ====
Primary earnings per share
Continuing operations $ .68 $ .36 $1.38 $ .96
Discontinued operations - .20 - .43
---- ---- ---- ----
Total $ .68 $ .56 $1.38 $1.39
==== ==== ==== ====
(1) Net of certain tax benefits.
(2) Common shares outstanding have been computed by adding the
monthly averages (beginning of the month plus end of the month
divided by 2), dividing the aggregate by 3 or 6, as
appropriate, and adjusting this total for dilutive stock
options using the treasury stock method based on the greater
of the common share price at the end of the period or the
average common share price during the period (fully diluted)
and on the average common share price during the period
(primary).