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 December 31, 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
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(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 December 31, 1995
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Common stock, $.01 par value 44,649,904 shares
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
==============================
Item Page
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1. Financial Statements
Consolidated Balance Sheets
December 31, 1995 and March 31, 1995 3 - 4
Statements of Consolidated Income
Three and Nine month periods
ended December 31, 1995 and 1994 5 - 6
Statements of Consolidated Cash Flows
Nine months ended
December 31, 1995 and 1994 7 - 8
Financial Notes 9
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Review 10 - 12
PART II. OTHER INFORMATION
===========================
6. Exhibits and Reports on Form 8-K 13
Exhibit Index 15
PART I. FINANCIAL INFORMATION
==============================
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, March 31,
1995 1995
-------- --------
(in millions)
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 181.6 $ 385.4
Marketable securities available for sale 345.4 307.3
Receivables 875.7 778.6
Inventories 1,346.7 1,160.2
Prepaid expenses 90.2 67.9
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Total 2,839.6 2,699.4
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Property, Plant and Equipment
Land 39.0 41.0
Buildings, machinery and equipment 748.2 722.1
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Total 787.2 763.1
Accumulated depreciation (413.1) (396.8)
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Net 374.1 366.3
Goodwill and other intangibles 226.4 214.3
Other assets 234.3 199.2
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Total Assets $3,674.4 $3,479.2
======= =======
(Continued)
- 3 -
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, March 31,
1995 1995
-------- --------
(in millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Drafts payable $ 174.2 $ 175.7
Accounts payable - trade 1,280.1 1,120.8
Short-term borrowings 101.5 21.7
Current portion of long-term debt 21.3 17.8
Salaries and wages 34.6 40.6
Taxes 122.2 144.0
Interest and dividends 21.1 20.9
Other 130.2 196.7
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Total 1,885.2 1,738.2
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Postretirement Obligations and
Other Noncurrent Liabilities 201.9 208.8
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Long-Term Debt 455.8 458.8
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Minority Interest in Subsidiary 58.9 59.9
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Stockholders' Equity
Common stock 0.4 0.4
Other capital 339.3 315.7
Retained earnings 941.5 875.9
Accumulated translation adjustment (50.1) (51.6)
ESOP notes and guarantee (122.5) (126.4)
Treasury shares, at cost (36.0) (0.5)
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Net 1,072.6 1,013.5
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Total Liabilities and
Stockholders' Equity $3,674.4 $3,479.2
======= =======
See Financial Notes.
(Concluded)
- 4 -
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
---------------- ----------------
1995 1994 1995 1994
------ ------ ------ ------
(in millions - except per share amounts)
REVENUES $3,549.7 $3,350.0 $10,234.1 $9,841.0
COSTS AND EXPENSES
Cost of sales (Note 3) 3,272.0 3,113.7 9,388.9 9,060.4
Selling, distribution and
administration (Note 3) 211.1 452.5 641.9 897.1
Interest 11.8 11.3 36.2 33.6
------- ------- -------- -------
Total 3,494.9 3,577.5 10,067.0 9,991.1
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GAIN ON SALE AND DONATION
OF SUBSIDIARY STOCK - 3.1 - 5.4
------- ------- -------- -------
INCOME (LOSS) BEFORE
TAXES ON INCOME 54.8 (224.4) 167.1 (144.7)
TAXES ON INCOME (Note 3) (21.1) (50.0) (66.0) (81.5)
------- ------- -------- -------
INCOME (LOSS) BEFORE
MINORITY INTEREST 33.7 (274.4) 101.1 (226.2)
Minority interest in net
income of subsidiary (0.8) (1.9) (3.7) (6.6)
------- ------- -------- -------
INCOME (LOSS) AFTER TAXES
Continuing operations 32.9 (276.3) 97.4 (232.8)
Discontinued operations - 3.0 - 21.0
Discontinued operations
- gain on sale of PCS - 576.7 - 576.7
------- ------- -------- -------
NET INCOME $ 32.9 $ 303.4 $ 97.4 $ 364.9
======= ======= ======== =======
(Continued)
- 5 -
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
---------------- ----------------
1995 1994 1995 1994
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(in millions - except per share amounts)
EARNINGS (LOSS) PER COMMON SHARE
Fully diluted earnings
Continuing operations $ 0.70 $(6.06) $ 2.08 $(5.20)
Discontinued operations - 0.07 - 0.47
Discontinued operations
- gain on sale of PCS - 12.64 - 12.78
----- ----- ----- -----
Total $ 0.70 $ 6.65 $ 2.08 $ 8.05
===== ===== ===== =====
Primary earnings
Continuing operations $ 0.70 $(6.24) $ 2.08 $(5.55)
Discontinued operations - 0.07 - 0.50
Discontinued operations
- gain on sale of PCS - 13.03 - 13.54
----- ----- ----- -----
Total $ 0.70 $ 6.86 $ 2.08 $ 8.49
===== ===== ===== =====
Dividends $ 0.25 $ 0.25 $ 0.75 $ 1.09
===== ===== ===== =====
SHARES ON WHICH EARNINGS (LOSS)
PER COMMON SHARE WERE BASED
Fully diluted 46.6 45.6 46.8 45.1
Primary 46.6 44.2 46.7 42.6
See Financial Notes.
(Concluded)
- 6 -
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Nine Months Ended
December 31
-------------------
1995 1994
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(in millions)
Operating Activities
Income (loss) after taxes from
continuing operations $ 97.4 $ (232.8)
Adjustments to reconcile to net cash
provided by operating activities
Depreciation 45.1 44.4
Amortization 7.0 8.7
Provision for bad debts 10.1 44.2
Deferred taxes on income (4.8) (83.1)
Gain on sale of subsidiary (11.2) -
Other non-cash charges (3.4) 222.2
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Total 140.2 3.6
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Effects of changes in
Receivables (110.0) (128.2)
Inventories (191.6) (260.0)
Accounts and drafts payable 146.8 186.6
Taxes (25.6) 100.4
Other (110.7) 41.9
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Total (291.1) (59.3)
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Net cash used by continuing operations (150.9) (55.7)
Discontinued operations 2.6 85.4
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Net cash (used) provided by
operating activities (148.3) 29.7
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Investing Activities
Purchases of marketable securities (130.3) (496.0)
Maturities of marketable securities 99.6 -
Property acquisitions (54.4) (55.0)
Properties sold 6.2 5.9
Acquisitions of businesses, less cash and
short-term investments acquired (30.7) (0.7)
Proceeds from sale of subsidiary 36.1 568.5
Investing activities - discontinued operations - (12.3)
Other (10.2) 11.6
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Net cash (used) provided by
investing activities (83.7) 22.0
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(Continued)
- 7 -
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Nine Months Ended
December 31
-------------------
1995 1994
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(in millions)
Financing Activities
Proceeds from issuance of debt $ 89.7 $ 76.5
Repayment of debt (6.5) (34.2)
Capital stock transactions
Treasury stock acquired (35.1) (3.1)
Issuances 9.2 7.8
ESOP notes and guarantee 3.9 11.0
Dividends paid (33.0) (58.4)
Financing activities
- discontinued operations - 3.9
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Net cash provided by
financing activities 28.2 3.5
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Net (Decrease) Increase in Cash
and Cash Equivalents (203.8) 55.2
Cash and Cash Equivalents
at beginning of period 385.4 89.0
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Cash and Cash Equivalents
at end of period $ 181.6 $ 144.2
======= =======
See Financial Notes.
(Concluded)
- 8 -
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 December 31, 1995 and
the results of its operations and its cash flows for the nine
months ended December 31, 1995 and 1994. Such adjustments were of
a normal recurring nature other than those discussed in Note 3
herein.
The results of operations for the nine months ended December
31, 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 Securities and Exchange Commission.
2. Discontinued Operations
- ---------------------------
Earnings from discontinued operations in the prior year three
and nine month periods consist of the operations of PCS Health
Systems, Inc. ("PCS") which were divested in November 1994 (the
"PCS Transaction") resulting in a gain on the sale of $576.7
million.
3. Continuing Operations
- -------------------------
The loss from continuing operations in the quarter ended
December 31, 1994, includes $61.9 million ($46.8 million
after-tax) of one-time compensation costs related to the PCS
Transaction, $107.0 million of income tax expense related to
transfer of assets and liabilities in connection with the PCS
Transaction, $208.9 million ($149.6 million after-tax) of charges
for restructuring, asset impairment and other operating items and
$1.2 million of expense ($0.6 million income after-tax) related to
contributions to the McKesson Foundation. An additional charge of
$11.5 million ($7.0 million after-tax) due to a credit loss
arising from a problem receivable and $0.8 million of
contributions to the McKesson Foundation ($0.4 million income
after-tax) are included in continuing operations in the nine
months ended December 31, 1994.
- 9 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Segment Results
- ---------------
The operations of the Company's Service Merchandising
Business previously included in the Health Care Services segment
have been reclassified as a separate segment to better reflect
healthcare related activities. Prior periods have been
reclassified accordingly. The operating profits of the Company's
continuing operations by business segment were impacted in the
quarter and nine month periods ended December 31, 1994 by the
previously discussed charges for restructuring, asset impairment
and other operating items, compensation costs associated with the
PCS Transaction and contributions to the McKesson Foundation.
Such charges are discussed in Note 3 to the Consolidated Interim
Financial Statements and affect all segments except for Armor All.
The revenues and operating profits of the Company by business
segment are as follows:
Three Months Ended December 31
--------------------------------
1995 1994 %Chg.
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(in millions)
REVENUES
Health Care Services(1) $3,299.4 $3,085.7 6.9
Service Merchandising 143.1 163.2 (12.3)
Water Products 59.7 57.5 3.8
Armor All 34.6 39.2 (11.7)
Corporate 12.9 4.4
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Total $3,549.7 $3,350.0 6.0
======= =======
OPERATING PROFIT
Health Care Services $ 50.1 $ (48.3)(2)
Service Merchandising 6.1 (75.1)(2)
Water Products 8.5 (12.4)(2)
Armor All 2.7 6.4 (57.8)
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Total 67.4 (129.4)
Interest - net(3) (4.3) (7.6)
Corporate and other (8.3) (87.4)(2)
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Income (loss) before taxes $ 54.8 $ (224.4)
======= =======
(1) Health Care Services Revenues include:
Sales to customers'
warehouses $790.4 $708.1 11.6
International revenues 398.4 379.9 4.9
(2) See Note 3 to the Consolidated Interim Financial Statements
for a discussion of charges effecting segment operating
profit for the periods ended December 31, 1994.
(3) Interest expense is shown net of corporate interest income.
Nine Months Ended December 31
--------------------------------
1995 1994 %Chg.
------ ------ -----
(in millions)
REVENUES
Health Care Services(1) $ 9,447.5 $9,017.3 4.8
Service Merchandising 433.3 491.1 (11.8)
Water Products 197.8 188.1 5.2
Armor All 124.6 136.9 (9.0)
Corporate 30.9 7.6
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Total $10,234.1 $9,841.0 4.0
======== =======
OPERATING PROFIT
Health Care Services $ 144.1 $ 22.1(2)
Service Merchandising 15.2 (64.0)(2)
Water Products 31.0 6.5(2)
Armor All 12.6 24.5 (48.6)
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Total 202.9 (10.9)
Interest - net(3) (10.2) (28.4)
Corporate and other (25.6) (105.4)(2)
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Income (loss) before taxes $ 167.1 $ (144.7)
======== =======
(1) Health Care Services Revenues include:
Sales to customers'
warehouses $2,304.0 $2,148.6 7.2
International revenues 1,168.6 1,057.6 10.5
(2) See Note 3 to the Consolidated Interim Financial Statements
for a discussion of charges effecting segment operating
profit for the periods ended December 31, 1994.
(3) Interest expense is shown net of corporate interest income.
- 10 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Overview of Results
- -------------------
Net income from continuing operations for the third quarter
increased to $32.9 million, $.70 per fully-diluted share, from a
loss of $276.3 million, $(6.06) per share in the prior year (which
included $302.8 million of charges as discussed in Note 3 to the
Consolidated Interim Financial Statements). For the nine month
period, net income from continuing operations increased to $97.4
million, $2.08 per share, from a loss of $232.8 million, $(5.20)
per share for the comparable period in the prior year (which
included $309.4 million of charges as discussed in Note 3 to the
Consolidated Interim Financial Statements). The prior year's
three and nine month net income amounts included $3.0 million and
$21.0 million, respectively, from the operations of PCS which were
divested in November of 1994 and have been accounted for as a
discontinued operation. The PCS Transaction resulted in a gain of
$576.7 million in the quarter ended December 31, 1994.
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 92.9% of consolidated revenues and 74.3% of
operating profit for the third quarter, and 92.3% and 71.0%,
respectively, for the nine month period ended December 31, 1995.
Segment revenues increased by 6.9% and 4.8% for the three and
nine month periods, respectively, from the comparable periods in
the prior year. The level of 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 institutional and
independent retail drug store segments, especially the Company's
Valu-Rite(R) network of independent pharmacies.
Operating profit for the quarter increased by 8.7% from the
prior year and by 12.6% for the nine month period (excluding $94.4
million and $105.9 million of charges for restructuring, asset
impairment and other items in the three month and nine month
periods ended December 31, 1994, respectively). The segment
continues to experience intense pricing competition which is
expected to persist. The results for both the three and nine
month periods include start-up and 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.
Results for the nine month period include a pre-tax gain of $11.2
million from the sale of the Central American pharmaceutical
subsidiary.
SERVICE MERCHANDISING
Revenues in the Service Merchandising segment decreased by
12.3% and 11.8% for the three and nine month periods,
respectively, from the comparable periods in the prior year. The
decrease in revenues is a result of ongoing competitive pressures
and the loss of a major customer. Operating profit for the
quarter decreased by 15.3% from the prior year and by 16.9% for
the nine month period (excluding $82.3 million of charges for
restructuring, asset impairment and other special items in the
prior year's periods). These decreases also reflect ongoing
competitive pressure in the segment's business.
- 11 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
WATER PRODUCTS
Revenues in the Water Products segment increased by 3.8% for
the three months and 5.2% for the nine months as compared with the
prior year. Operating profit for the quarter increased by 73.5%
from the prior year quarter and by 30.3% for the nine month period
(excluding charges for restructuring, asset impairment and other
items of $17.3 million in the prior year's periods). This
improvement reflects sales growth in the direct delivery business
and lower overall operating costs, due in part to the segment's
ongoing programs to improve customer service which have reduced
customer turnover expenses and increased productivity.
ARMOR ALL
Armor All Products Corp., which is 55% owned by the Company,
experienced decreases in revenue of 11.7% and 9.0% for the three
and nine month periods, respectively, compared with the prior
year. These decreases resulted from retailers in North America
reducing inventory levels in response to slower consumer purchases
of automotive appearance products, partly offset by increases in
the international and home care divisions. Operating profit
declined by 57.8% in the quarter and 48.6% in the nine month
period due to the decline in revenues and because fixed marketing
and advertising expenses are spread over the lower revenue base.
CORPORATE
Prior year quarter and nine month results included $61.9
million of compensation costs related to the PCS Transaction,
$14.9 million of charges for restructuring, asset impairment and
other operating items and $1.2 million of contributions to the
McKesson Foundation. An additional $0.8 million of contributions
to the McKesson Foundation is included in the prior year's nine
month results.
Liquidity and Capital Resources
- -------------------------------
Cash, equivalents and marketable securities decreased $165.7
million during the nine months to $527.0 million primarily due to
a seasonal increase in inventories and payments of other current
liabilities related to the PCS Transaction.
Net interest expense decreased during the nine 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 December 31, 1995 largely as a result of
short-term borrowings by its health care products distribution
operations in Canada.
During the first nine months of fiscal 1996, the Company
repurchased 779,925 shares of its common stock for $35.1 million
under a previously announced 3.5 million share repurchase program.
- 12 -
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 December 31, 1995.
- 13 -
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: February 13, 1996 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
- 15 -
EXHIBIT INDEX
=============
Exhibit
Number Description
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11 Computation of Earnings per Common Share
27 Financial Data Schedule
- 16 -