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 June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number 1-13252
McKESSON CORPORATION
- -----------------------------------------------------------------
(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
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(415) 983-8300
- -----------------------------------------------------------------
(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
----- -----
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 June 30, 1996
- ---------------------------- ----------------------------
Common stock, $.01 par value 42,820,705 shares
2
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
==============================
Item Page
- ---- ----
1. Financial Statements
Consolidated Balance Sheets
June 30, 1996 and March 31, 1996 3 - 4
Condensed Statements of Consolidated Income
Quarter ended June 30, 1996 and 1995 5
Statements of Consolidated Cash Flows
Quarter ended June 30, 1996 and 1995 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
===========================
4. Submission of Matters to a Vote of
Security Holders 12
6. Exhibits and Reports on Form 8-K 12
Exhibit Index 14
3
PART I. FINANCIAL INFORMATION
==============================
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, March 31,
1996 1996
-------- ---------
(in millions)
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 163.1 $ 281.8
Marketable securities available for sale 139.3 195.4
Receivables 866.8 781.4
Inventories 1,327.7 1,379.1
Prepaid expenses 36.4 27.3
------- -------
Total 2,533.3 2,665.0
------- -------
Property, Plant and Equipment
Land 39.0 39.0
Buildings, machinery and equipment 776.4 760.6
------- -------
Total 815.4 799.6
Accumulated depreciation (432.3) (419.8)
------- -------
Net 383.1 379.8
Goodwill and other intangibles 282.5 223.4
Other assets 249.0 235.7
------- -------
Total Assets $3,447.9 $3,503.9
======= =======
(Continued)
4
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, March 31,
1996 1996
-------- ---------
(in millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Drafts payable $ 158.9 $ 200.4
Accounts payable - trade 1,157.7 1,188.6
Short-term borrowings 85.8 6.6
Current portion of long-term debt 27.9 28.3
Salaries and wages 28.1 30.3
Taxes 106.8 97.0
Interest and dividends 22.2 20.6
Other 149.3 150.8
------- -------
Total 1,736.7 1,722.6
------- -------
Postretirement Obligations and
Other Noncurrent Liabilities 216.2 217.0
------- -------
Long-Term Debt 444.8 442.5
------- -------
Minority Interest in Subsidiary 57.8 57.2
------- -------
Stockholders' Equity
Common stock 0.4 0.4
Other capital 295.3 295.8
Retained earnings 989.1 968.9
Accumulated translation adjustment (50.0) (49.7)
ESOP notes and guarantee (120.7) (122.5)
Treasury shares, at cost (121.7) (28.3)
------- -------
Net 992.4 1,064.6
------- -------
Total Liabilities and
Stockholders' Equity $3,447.9 $3,503.9
======= =======
See Financial Notes.
(Concluded)
5
McKESSON CORPORATION and SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
Quarter Ended June 30
---------------------
1996 1995
-------- --------
(in millions - except
per share amounts)
REVENUES $3,501.5 $3,336.0
COSTS AND EXPENSES
Cost of sales 3,210.3 3,053.7
Selling, distribution and administration 227.0 212.1
Interest 11.6 12.4
------- -------
Total 3,448.9 3,278.2
------- -------
INCOME BEFORE TAXES ON INCOME 52.6 57.8
TAXES ON INCOME (20.5) (23.4)
------- -------
INCOME BEFORE MINORITY INTEREST 32.1 34.4
Minority interest in net
income of subsidiary (2.0) (1.6)
------- -------
NET INCOME $ 30.1 $ 32.8
======= =======
EARNINGS PER COMMON SHARE
Fully diluted $ .66 $ .70
Primary $ .66 $ .70
DIVIDENDS PER COMMON SHARE $ .25 $ .25
SHARES ON WHICH EARNINGS PER
COMMON SHARE WERE BASED
Fully diluted 45.5 46.9
Primary 45.5 46.8
See Financial Notes.
6
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Quarter Ended June 30
---------------------
1996 1995
-------- --------
(in millions)
Operating Activities
Net income $ 30.1 $ 32.8
Adjustments to reconcile to net cash
used by operating activities
Depreciation 16.4 14.4
Amortization 2.9 2.3
Provision for bad debts 2.0 1.0
Deferred taxes on income 1.0 0.2
Other 1.2 (7.8)
------- -------
Total 53.6 42.9
------- -------
Effects of changes in
Receivables (85.4) (14.4)
Inventories 52.3 79.7
Accounts and drafts payable (72.6) (50.9)
Taxes 17.0 (46.0)
Other (20.7) (35.0)
------- -------
Total (109.4) (66.6)
------- -------
Net cash used by operating activities (55.8) (23.7)
------- -------
Investing Activities
Purchases of marketable securities (0.2) (131.8)
Maturities of marketable securities 58.3 35.0
Property acquisitions (20.1) (16.0)
Properties sold 0.2 3.6
Acquisitions of businesses, less cash and
short-term investments acquired (61.4) (11.2)
Other (15.2) 1.6
------- -------
Net cash used by investing activities (38.4) (118.8)
------- -------
(Continued)
7
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Quarter Ended June 30
---------------------
1996 1995
-------- --------
(in millions)
Financing Activities
Proceeds from issuance of debt $ 84.4 $ 61.1
Repayment of debt (3.4) (3.3)
Capital stock transactions
Treasury stock acquired (101.9) (4.7)
Issuances 5.3 1.5
ESOP notes and guarantee 1.8 1.6
Dividends paid (10.7) (10.2)
------- -------
Net cash (used) provided
by financing activities (24.5) 46.0
------- -------
Net Decrease in Cash
and Cash Equivalents (118.7) (96.5)
Cash and Cash Equivalents
at beginning of period 281.8 385.4
------- -------
Cash and Cash Equivalents
at end of period $ 163.1 $ 288.9
======= =======
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 for a fair
presentation of its financial position as of June 30, 1996 and the
results of its operations and its cash flows for the three months
ended June 30, 1996 and 1995. Such adjustments were of a normal
recurring nature.
The results of operations for the three months ended June 30,
1996 and 1995 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 1996 Proxy Statement which has previously
been filed with the Commission.
2. Acquisitions
------------
In April 1996, the Company acquired Automated Healthcare, Inc.
("AHI") for $61.4 million in cash and the assumption of $3.2
million of employee stock incentives. AHI designs, manufactures
and installs automated pharmaceutical dispensing equipment for use
by health care institutions. The goodwill related to the
acquisition will be amortized on a straight-line basis over a 20
year period.
9
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Segment Results
- ---------------
The operating profits of the Company by business segment are
as follows:
Quarter Ended June 30
-------------------------
%
1996 1995 Chg.
------ ------ ----
(in millions)
REVENUES
Health Care Services
Direct Delivery
US $2,219.9 $1,928.5 15.1
International 376.8 383.1 (1.6)
------- -------
Total Direct Delivery 2,596.7 2,311.6 12.3
Sales to Customers' Warehouses 656.1 751.0 (12.6)
------- -------
Total Health Care Services 3,252.8 3,062.6 6.2
Service Merchandising 119.1 146.8 (18.9)
Water Products 70.4 64.0 10.0
Armor All 55.3 50.2 10.2
Corporate 3.9 12.4
------- -------
Total $3,501.5 $3,336.0 5.0
======= =======
OPERATING PROFIT
Health Care Services $ 51.5 $ 48.9 5.3
Service Merchandising 1.9 5.3 (64.2)
Water Products 9.6 8.9 7.9
Armor All 7.1 5.7 24.6
------- -------
Total 70.1 68.8 1.9
Interest - net(1) (8.4) (3.3)
Corporate and other (9.1) (7.7)
------- -------
Income before taxes $ 52.6 $ 57.8 (9.0)
======= =======
(1) Interest is shown net of corporate interest income.
10
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Overview of Results
- -------------------
Net income for the first quarter decreased to $30.1 million,
$.66 per fully-diluted share, from $32.8 million, $.70 per share in
the prior year. Earnings growth in the Health Care Services
segment including costs associated with strategic initiatives was
more than offset by lower earnings from the Service Merchandising
segment and higher net interest expense.
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 and Mexico). This segment accounted for 93% of
consolidated revenues and 73% of operating profit for the first
quarter.
Segment revenues increased by 6% for the three months compared
with the prior year. Revenue growth of 15% in the U.S. Health Care
direct delivery businesses was partially offset by declines in U.S.
sales to customer warehouses and sales at Medis, the Company's
Canadian unit.
Operating profit for the quarter increased by 5% from the
prior year due to direct delivery sales growth in every customer
segment (independents, chain stores and hospitals) and to cost
reduction efforts. First quarter results include $ 4.2 million of
costs associated with a series of strategic initiatives designed to
improve the Company's competitiveness in the retail and
institutional market segments.
SERVICE MERCHANDISING
Revenues in the Service Merchandising segment declined 19% for
the three months compared with the prior year. Strong competitive
pressures and customer consolidations resulted in the loss of
several large customers in fiscal 1996. Operating profit decreased
64% to $1.9 million due primarily to the impact of fixed expenses
over a lower revenue base. These trends are expected to continue
and to adversely affect the Company's earnings for the rest of the
fiscal year.
11
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
WATER PRODUCTS
Revenues in the Water Products segment increased by 10% for
the three months compared with the prior year. Operating profit
increased 8% to $9.6 million from $8.9 million for the first
quarter, compared with the same quarter in the prior year. This
improvement reflects growth in the direct delivery and packaged
water businesses, and the favorable impact of 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 an increase in revenue of 10% for the three months
compared with the prior year. The increase was primarily
attributable to sales growth of Armor All Protectant(R) and to
sales of two new products introduced in December, 1995. Operating
profit increased by 25% due to an increased proportion of higher
margin automotive products in the sales mix.
Liquidity and Capital Resources
- -------------------------------
Cash, equivalents and marketable securities decreased $174.8
million during the first quarter to $302.4 million primarily due to
stock repurchase activity and the cost of the acquisition referred
to in Financial Note 2.
During the first three months of fiscal 1997, the Company
repurchased 2.2 million shares of its common stock for $102 million
under a share repurchase program initiated in June 1995 and
expanded in May 1996. As of June 30, 1996, 3.4 million shares
remain to be repurchased under the program.
The Company's debt-to-capital ratio increased from 31% at
March 31, 1996 to 36% at June 30, 1996 as debt increased from
short-term borrowings by its health care products distribution
operations in Canada and equity was reduced by the share
repurchases.
12
PART II. OTHER INFORMATION
===========================
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
The Company's Annual Meeting of stockholders was held on
July 31, 1996. The only matter voted upon at the meeting was the
election of three directors. In an uncontested election, the Board
of Directors' nominees for director as listed in the proxy
statement were each elected to serve for a three year term expiring
at the Annual Meeting in 1999. The vote was as follows:
Votes For Votes Withheld
---------- --------------
Carl E. Reichardt 39,067,430 545,654
Alan Seelenfreund 39,150,553 462,531
Jane E. Shaw 39,237,898 375,186
The terms of office of the following named directors continued
after the annual meeting:
Mary G. F. Bitterman Tully M. Friedman John M. Pietruski
Mark A. Pulido Robert H. Waterman, Jr.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
3 Restated By-Laws of the Company, as amended effective
July 31, 1996
10.1 Form of Employment Agreement effective as of January 31,
1996 by and between the Company and a corporate Vice
President and President of its Health Systems unit
10.2 McKesson Corporation Severance Policy for Executive
Employees, amended and restated as of May 31, 1996
27 Financial Data Schedule
(b) Reports on Form 8-K
1. Form 8-K dated April 8, 1996
Item 5. Other Events
----------------------
The Registrant announced that David E. McDowell was resigning
as President and Chief Operating Officer of the company,
effective upon commencement of employment of his successor.
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
---------------------------------------------------
2. Form 8-K dated April 29, 1996
Item 5. Other Events
----------------------
The Registrant announced that Mark A. Pulido had been elected
President and Chief Operating Officer and a Director of the
Registrant, effective May 20, 1996.
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
---------------------------------------------------
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: August 14, 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
14
EXHIBIT INDEX
Exhibit
Number Description
- ------- -------------------------------------------------
3 Restated By-Laws of the Company, as amended
effective July 31, 1996
10.1 Form of Employment Agreement effective as of
January 31, 1996 by and between the Company and a
corporate Vice President and President of its
Health Systems unit
10.2 McKesson Corporation Severance Policy for Executive
Employees, amended and restated as of May 31, 1996
27 Financial Data Schedule