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, 1997
[ ] 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
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
----- -----
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, 1997
- ---------------------------- --------------------------------
Common stock, $.01 par value 92,573,800 shares
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
==============================
Item Page
- ---- ----
1. Financial Statements
Consolidated Balance Sheets
December 31, 1997 and March 31, 1997 3 - 4
Statements of Consolidated Income
Three and nine month periods ended
December 31, 1997 and 1996 5 - 6
Statements of Consolidated Cash Flows
Nine month periods ended
December 31, 1997 and 1996 7 - 8
Financial Notes 9 - 14
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Review 15 - 18
PART II. OTHER INFORMATION
===========================
4. Submission of Matters to a Vote
of Security Holders 19
6. Exhibits and Reports on Form 8-K 19
Exhibit Index 21
PART I. FINANCIAL INFORMATION
==============================
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, March 31,
1997 1997
------ ------
(in millions)
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 71.0 $ 124.8
Marketable securities available
for sale (Note 6) 98.0 105.0
Receivables 1,520.5 1,224.5
Inventories 2,358.1 2,259.5
Prepaid expenses 60.7 47.3
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Total 4,108.3 3,761.1
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Property, Plant and Equipment
Land 37.4 38.0
Buildings, machinery and equipment 791.3 741.3
------- -------
Total 828.7 779.3
Accumulated depreciation (432.2) (405.7)
------- -------
Net 396.5 373.6
Goodwill and Other Intangibles 756.5 736.2
Other Assets 322.9 301.9
------- -------
Total Assets $5,584.2 $5,172.8
======= =======
(Continued)
- 3 -
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, March 31,
1997 1997
------ ------
(in millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Drafts payable $ 238.2 $ 210.7
Accounts payable - trade 1,816.5 1,854.7
Short-term borrowings 350.5 100.0
Current portion of long-term debt 59.2 60.3
Salaries and wages 41.9 52.9
Taxes 121.2 80.0
Interest and dividends 34.4 21.3
Other 200.7 257.3
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Total 2,862.6 2,637.2
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Postretirement Obligations and
Other Noncurrent Liabilities 243.2 255.1
------- -------
Long-Term Debt (Note 6) 918.1 824.9
------- -------
McKesson-obligated mandatorily redeemable
convertible preferred securities of
subsidiary grantor trust whose sole
assets are junior subordinated debentures
of McKesson (Note 7) 195.1 194.8
------- -------
Stockholders' Equity
Common stock (400.0 shares authorized,
92.8 issued as of December 31 and 46.4
issued as of March 31, 1997; par value
of $0.01) (Note 8) 0.9 0.4
Additional paid-in capital 417.9 408.2
Other capital (35.4) (19.2)
Retained earnings 1,148.5 1,062.6
Accumulated translation adjustment (45.6) (44.6)
ESOP notes and guarantee (115.6) (118.3)
Treasury shares, at cost (5.5) (28.3)
------- -------
Net 1,365.2 1,260.8
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Total Liabilities and
Stockholders' Equity
------- -------
$5,584.2 $5,172.8
======= =======
See Financial Notes.
(Concluded)
- 4 -
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
---------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
(in millions - except per share amounts)
REVENUES (Note 4) $4,670.8 $3,486.6 $13,481.3 $8,888.1
------- ------- -------- -------
COSTS AND EXPENSES
Cost of sales 4,293.8 3,242.8 12,371.8 8,181.4
Selling, distribution
and administration
(Note 3) 281.6 291.4 836.5 647.9
Purchased in-process
technology (Note 2) - - - 48.2
Interest 26.7 12.7 74.8 33.8
------- ------- -------- -------
Total 4,602.1 3,546.9 13,283.1 8,911.3
------- ------- -------- -------
INCOME (LOSS) BEFORE INCOME
TAX EXPENSE AND DIVIDENDS
ON CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY
TRUST 68.7 (60.3) 198.2 (23.2)
INCOME TAX (EXPENSE)
BENEFIT (25.1) 24.2 (74.3) (8.5)
DIVIDENDS ON CONVERTIBLE
PREFERRED SECURITIES OF
SUBSIDIARY TRUST, NET OF
TAX BENEFIT (1.6) - (4.7) -
------- ------- ------- -------
INCOME (LOSS) AFTER TAXES
Continuing operations 42.0 (36.1) 119.2 (31.7)
Discontinued operations - 2.1 - 7.7
Discontinued operations
-- gain on sale of
Armor All stock - 120.2 - 120.2
------- ------- ------- -------
NET INCOME $ 42.0 $ 86.2 $ 119.2 $ 96.2
======= ======= ======= =======
(Continued)
- 5 -
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
---------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
(in millions - except per share amounts)
EARNINGS PER COMMON SHARE (Notes 8 and 9)
Diluted
Continuing operations $ 0.43 $ (0.43) $ 1.23 $ (0.37)
Discontinued operations - 0.02 - 0.09
Discontinued operations
-- gain on sale of
Armor All stock - 1.44 - 1.41
------ ------ ------ ------
Total $ 0.43 $ 1.03 $ 1.23 $ 1.13
====== ====== ====== ======
Basic
Continuing operations $ 0.45 $ (0.43) $ 1.30 $ (0.37)
Discontinued operations - 0.02 - 0.09
Discontinued operations
-- gain on sale of
Armor All stock - 1.44 - 1.41
------ ------ ------ ------
Total $ 0.45 $ 1.03 $ 1.30 $ 1.13
====== ====== ====== ======
Dividends $ 0.125 $ 0.125 $ 0.375 $ 0.375
====== ====== ====== ======
SHARES ON WHICH EARNINGS
PER COMMON SHARE WERE
BASED (Notes 8 and 9)
Diluted 101.8 83.7 101.1 85.0
Basic 91.6 83.7 91.3 85.0
See Financial Notes.
(Concluded)
- 6 -
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Nine Months Ended
December 31
------------------
1997 1997
------ ------
(in millions)
Operating Activities
Income (loss) from continuing operations $ 119.2 $ (31.7)
Adjustments to reconcile to net cash
used by operating activities
Depreciation 52.3 47.6
Amortization 11.8 5.4
Provision for bad debts 5.8 21.0
Deferred taxes on income 8.4 2.2
Gain on disposal of assets (0.9) -
Other non-cash items (Notes 2 and 3) 0.1 124.6
------- -------
Total 196.7 169.1
------- -------
Effects of changes in
Receivables (269.1) (329.2)
Inventories (99.4) (417.3)
Accounts and drafts payable (5.2) 456.8
Taxes 58.6 (7.4)
Other (99.4) (34.3)
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Total (414.5) (331.4)
------- -------
Net cash used by continuing operations (217.8) (162.3)
------- -------
Discontinued operations (2.1) 27.1
------- -------
Net cash used by operating activities (219.9) (135.2)
------- -------
Investing Activities
Purchases of marketable securities (1.3) (6.2)
Maturities of marketable securities 11.5 197.4
Property acquisitions (82.5) (56.4)
Properties sold 8.0 1.5
Acquisitions of businesses,
less cash and short-term
investments acquired (50.8) (580.0)
Proceeds from sale of subsidiary - 221.9
Investing activities of
discontinued operations - (4.2)
Other (42.0) (38.6)
------- -------
Net cash used by investing activities (157.1) (264.6)
------- -------
(Continued)
- 7 -
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Nine Months Ended
December 31
------------------
1997 1997
------ ------
(in millions)
Financing Activities
Proceeds from issuance of debt $ 397.4 $ 870.5
Repayment of debt (37.9) (294.7)
Dividends paid on preferred securities
of subsidiary trust (7.8) -
Capital stock transactions
Stock repurchases - (155.7)
Issuances 3.5 13.2
ESOP notes and guarantee 2.6 4.2
Dividends paid (34.6) (31.8)
Financing activities of
discontinued operations - 0.1
------- -------
Net cash provided by
financing activities 323.2 405.8
------- -------
Net Increase (Decrease) in Cash
and Cash Equivalents (53.8) 6.0
Cash and Cash Equivalents at
beginning of period 124.8 260.8
------- -------
Cash and Cash Equivalents at
end of period $ 71.0 $ 266.8
======= =======
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 December 31, 1997
and the results of its operations and its cash flows for the nine
months ended December 31, 1997 and 1996. Except for certain
items described in Notes 2 and 3, relating to the prior year,
such adjustments were of a normal recurring nature.
The results of operations for the nine months ended December
31, 1997 and 1996 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
Company's 1997 Annual Report to Stockholders which has previously
been filed with the Securities and Exchange Commission.
2. Fiscal 1997 Acquisitions
- ----------------------------
In April 1996, the Company acquired McKesson Automated
Healthcare, Inc. ("AHI"), a provider of automated pharmaceutical
dispensing equipment for use by health care institutions. In the
first quarter of fiscal 1997, a $48.2 million charge was recorded
to write off the portion of the purchase price of AHI allocated
to technology for which technological feasibility had not been
established as of the acquisition date and for which there were
no alternate uses.
In November 1996, the Company acquired FoxMeyer
Corporation's healthcare distribution business ("FoxMeyer"),
pursuant to an expedited auction process.
In February 1997, the Company acquired General Medical Inc.
("General Medical"), a multi-market distributor of
medical-surgical supplies to acute-care, physician-care, and
extended-care markets.
The acquisitions were accounted for under the purchase
method. The revenues and operating results of AHI, FoxMeyer and
General Medical are included in the consolidated financial
statements from their respective dates of acquisition.
- 9 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
3. Fiscal 1997 Restructuring, Asset Impairment and Other Charges
- -----------------------------------------------------------------
The acquisition of the assets and operations of FoxMeyer
(see Note 2) in the third quarter of fiscal 1997 resulted in a
significant increase in sales volume, a substantial change in
customer mix and overlapping, duplicate and "similar purpose"
assets. Management reassessed its operations, its distribution
center network and its business strategies, including program
offerings and developed a plan to optimize the network
configuration from the combined distribution centers of the
Company and those acquired in the transaction, which has resulted
in the consolidation and closure of certain distribution centers,
workforce reductions and disposal of excess, duplicate assets.
Management also reassessed strategies and program offerings for
expanding certain customer segments in light of the larger and
more diverse customer base, and identified certain programs and
investments which will no longer be pursued as originally
contemplated. Other duplicate common purpose assets including
administrative facilities, software and other equipment were
reviewed to identify the optimum mix for the combined companies.
This resulted in the impairment in the value of certain assets
which will not ultimately be retained or utilized as originally
intended. The foregoing was reflected in the valuation of the
FoxMeyer assets acquired and liabilities assumed and in charges
taken in the quarter ended December 31, 1996 discussed below with
respect to the affected assets of the Company.
The charges resulting from the impairment of assets of the
Company as a result of the integration and rationalization of the
Company's distribution operations, systems, strategies, and
program offerings and administrative functions and for certain
operating items were recorded in selling, distribution, and
administration expenses and are summarized below (in millions):
Development costs and investments associated
with program offerings which will no longer
be pursued as originally contemplated $28.0
Computer software which will no longer be
utilized or for which the development program
has ceased 29.3
Cost of facilities closures - primarily write-
down of assets which will no longer be utilized
and will be disposed of 10.1
Receivable reserves 15.1
Other operating items 16.3
-----
$ 98.8
=====
Included in the charge for facilities closures was $7.2
million associated with the Company's Canadian operation, which
restructured its distribution operations and network following a
significant change in its customer mix.
Other operating items included a provision by the Water
Products business of $7.0 million for the impairment of assets in
its vended water business, which was subsequently sold. Other
operating items of the U.S. Health Care business consisted of
$2.8 million of incremental costs incurred during a strike at a
distribution center, $1.5 million for the termination of a
marketing program and certain distributor relationships, and $5.0
million of other charges.
- 10 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
4. Sales to Customers' Warehouses
- ----------------------------------
For large volume sales of pharmaceuticals to major
self-warehousing drugstore chains, the Company acts as an
intermediary in the order and subsequent delivery of products
directly from the manufacturer to the customers' warehouses.
These sales to customers' warehouses were $0.7 billion in each of
the three month periods ended December 31, 1997 and 1996 ($2.0
billion and $2.1 billion for the nine months ended December 31,
1997 and 1996, respectively). Gross margin from such sales has
been classified in revenues in the accompanying financial
statements. The Company intends to restate revenue and cost of
sales for such sales in its Annual Report for the fiscal year
ending March 31, 1998.
5. Discontinued Operations
- ---------------------------
Earnings from discontinued operations for the three and nine
month periods ended December 31, 1996, consist of the Company's
interest in the operations of Armor All Products Corporation
("Armor All") and Millbrook Distribution Services, Inc. ("Service
Merchandising") which were sold in December 1996 and March 1997,
respectively. On December 31, 1996, the Company sold its 55%
equity interest in Armor All to The Clorox Company for $221.9
million and recognized an after-tax gain of $120.2 million.
6. Marketable Securities
- -------------------------
The December 31, 1997 marketable securities balance includes
a restricted balance of $76.7 million held in trust as exchange
property for the Company's $134.5 million, 4.5% exchangeable
subordinated debentures which remain outstanding.
- 11 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
7. Convertible Preferred Securities
- ------------------------------------
In February 1997, a wholly owned subsidiary trust of the
Company issued 4 million shares of preferred securities to the
public and 123,720 common securities to the Company, which are
convertible at the holder's option into shares of McKesson common
stock. The proceeds of such issuances were invested by the trust
in $206,186,000 aggregate principal amount of the Company's 5%
Convertible Junior Subordinated Debentures due 2027 (the
"Debentures"). The Debentures represent the sole assets of the
trust. The Debentures mature on June 1, 2027, bear interest at
the rate of 5%, payable quarterly, and are redeemable by the
Company beginning in March 2000 at 103.5% of the principal amount
thereof.
Holders of the preferred securities are entitled to
cumulative cash distributions at an annual rate of 5% of the
liquidation amount of $50 per preferred security. Each preferred
security is convertible at the rate of 1.3418 shares of McKesson
common stock, subject to adjustment in certain circumstances.
The preferred securities will be redeemed upon repayment of the
Debentures and are callable by the Company at 103.5% of the
liquidation amount beginning in March 2000.
The Debentures and related trust investment in the
Debentures have been eliminated, and the preferred securities
reflected as outstanding, in the accompanying consolidated
financial statements.
8. Stock Split
- ---------------
On October 29, 1997, the Company's board of directors
declared a two-for-one split of the Company's common stock. The
split was effective January 2, 1998 for shareholders of record on
December 1, 1997. Shares used in the computation of earnings per
share (see Note 9) have been restated to give effect to the stock
split.
- 12 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
9. Earnings Per Share
- ----------------------
The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share," in the third
quarter of the current fiscal year. All per share amounts have
been restated in accordance with the provisions of SFAS No. 128.
The following is a reconciliation of the numerators and
denominators of the basic and diluted per-share computations for
income from continuing operations:
Three Months Ended Nine Months Ended
December 31, 1997 December 31, 1997
--------------------- ---------------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
(in millions except per share amounts)
Basic EPS
Income from continuing operations $ 42.0 91.6 $ 0.45 $119.2 91.3 $ 1.30
===== =====
Effect of Dilutive Securities
Options to purchase common stock 4.3 3.9
Convertible preferred securities 1.6 5.4 4.7 5.4
Restricted stock issuance 0.5 0.5
----- ----- ----- -----
Diluted EPS
Income available to common stock-
holders plus assumed conversions $ 43.6 101.8 $ 0.43 $123.9 101.1 $ 1.23
===== ===== ===== ===== ===== =====
Three Months Ended Nine Months Ended
December 31, 1996 December 31, 1996
--------------------- ---------------------
Per Per
Loss Shares Share Loss Shares Share
------ ------ ----- ------ ------ -----
Basic and Diluted EPS (F1)
Loss from continuing operations $(36.1) 83.7 $(0.43) $(31.7) 85.0 $(0.37)
===== ===== ===== ===== ===== =====
(F1) For the quarter and nine month periods of fiscal 1997, 3.2
million shares arising from the assumed exercise of stock
options under the treasury stock method and 0.2 million
shares assumed issued under the restricted stock plans were
excluded from the computations of diluted EPS because they
were anti-dilutive due to the loss from continuing
operations.
- 13 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
10. New Accounting Pronouncements
- ----------------------------------
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130 "Reporting Comprehensive Income," which
requires that an enterprise report, by major components and as a
single total, the change in its net assets during the period from
nonowner sources; and SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information," which establishes annual
and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services,
geographic areas, and major customers. Adoption of these
statements will not impact the Company's consolidated financial
position, results of operations or cash flows, and any effect
will be limited to the form and content of its disclosures. Both
statements are effective for the Company's fiscal year 1999, with
earlier application permitted.
11. Proposed AmeriSource Acquisition
- -------------------------------------
On September 23, 1997, the Company and AmeriSource Health
Corporation ("AmeriSource") announced the execution of a
definitive merger agreement, as amended (the "Merger Agreement")
providing for the Company to acquire AmeriSource. AmeriSource is
the third-largest prime vendor to the institutional/managed care
market and the fourth-largest distributor of pharmaceuticals and
related health care products and value-added services in the
United States. Under the terms of the Merger Agreement,
stockholders of AmeriSource will receive a fixed exchange ratio
of 1.42 shares of McKesson common stock for each share of
AmeriSource common stock. The Company will issue up to 36.4
million new shares of common stock in the merger and will assume
the long-term debt of AmeriSource, which was approximately $781.0
million at December 31, 1997. The merger of the two companies
has been structured as a tax-free transaction and will be
accounted for as a pooling of interests. The combined company
will operate under the McKesson name and will be headquartered in
San Francisco.
On October 23, 1997, the Company and AmeriSource received a
request for additional information and documentary material from
the Federal Trade Commission ("FTC") in connection with the
Merger which the Company and AmeriSource have provided. This
"second request" extends the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 during which
the FTC is permitted to review the proposed transaction. The
Merger, and the transactions contemplated thereby, have been
approved by the stockholders of both companies. Subject to
regulatory approval, the transaction is expected to be completed
in early 1998. However, there can be no assurance that the
Merger will be completed, or that it will be completed as
contemplated or what the results of the Merger might be.
- 14 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Segment Results
- ---------------
The revenues and operating profits of the Company by
business segment are as follows:
Three Months Ended Nine Months Ended
December 31 December 31
----------------------- -----------------------
% %
1997 1996 Chg. 1997 1996 Chg.
------ ------ ---- ------ ------ ----
($ in millions)
REVENUES
Health Care Services
U.S. Health Care
Pharmaceutical Distribution
& Services $3,702.1 $3,015.7 22.8 $10,683.0 $7,507.6 42.3
Medical/Surgical Distribution
& Services 461.7 - 1,366.9 -
------- ------- -------- -------
Total U.S. Health Care 4,163.8 3,015.7 38.1 12,049.9 7,507.6 60.5
International 439.5 406.9 8.0 1,204.2 1,158.7 3.9
------- ------- -------- -------
Total Health Care Services 4,603.3 3,422.6 34.5 13,254.1 8,666.3 52.9
------- ------- -------- -------
Water Products 64.8 62.0 4.5 217.5 210.0 3.6
Corporate 2.7 2.0 9.7 11.8
------- ------- -------- -------
Total $4,670.8 $3,486.6 34.0 $13,481.3 $8,888.1 51.7
======= ======= ======== =======
OPERATING PROFIT (LOSS)
Health Care Services $ 97.0 $ (37.9) (F1) $ 264.4 $ 10.7 (F1)
Water Products 10.0 1.7 (F2) 37.8 25.7 (F2)
------- ------- -------- -------
Total 107.0 (36.2) 302.2 36.4
Interest - net (F3) (25.0) (11.9) (70.3) (27.1)
Corporate and other (13.3) (12.2) (33.7) (32.5)
------- ------- -------- -------
Income (loss) before taxes $ 68.7 $ (60.3) $ 198.2 $ (23.2)
======= ======= ======== =======
(F1) Includes $91.8 million in charges for restructuring, asset
impairment and other operating items in the quarter and nine
month periods and $48.2 million for the write-off of
in-process technology related to the acquisition of McKesson
Automated Healthcare, Inc. in the nine month period.
(F2) Includes a write-down of $7 million for the assets of the
Aqua-Vend unit.
(F3) Interest expense is shown net of corporate interest income.
- 15 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Overview of Results
- -------------------
Net income for the third quarter was $42.0 million, $0.43
per diluted share, compared to $86.2 million, $1.03 per diluted
share in the prior year. The prior year's results included
several nonrecurring items: $98.8 million in pre-tax charges
($61.3 million, after-tax) for restructuring, asset impairment
and other operating items; $120.2 million after-tax gain from the
sale of the Company's remaining interest in its former
subsidiary, Armor All, and $2.1 million after-tax income from the
discontinued Armor All and Service Merchandising segments.
For the nine month period net income increased to $119.2
million, $1.23 per diluted share, compared to $96.2 million,
$1.13 per diluted share in the prior year. The prior year
results included the items noted above and a charge of $48.2
million for the write-off of in-process technology related to the
acquisition of McKesson Automated Healthcare, Inc. in the first
quarter.
The effective income tax rate applicable to continuing
operations for the nine months ended December 31, 1997 was lower
than the effective tax rate for the comparable period ended
December 31, 1996 primarily due to the write-off in the prior
year's first quarter of in-process technology, which had no
associated tax benefit. The Company's tax rate decreased to
36.5% in the current fiscal quarter and 37.5% for the current
year-to-date period, resulting from the effect of the
re-financing during the quarter of Canadian debt in a more
tax-efficient manner.
HEALTH CARE SERVICES
The Health Care Services segment includes the operations of
the Company's U.S. pharmaceutical and health care products
distribution and services businesses, its medical/surgical
distribution and services businesses and its international
pharmaceutical operations (Canada and Mexico). This segment
accounted for 99% and 98% of consolidated revenues for the three
and the nine month periods ended December 31, 1997, respectively.
Segment revenues increased by 34% and 53% for the three and
nine month periods, respectively, from the comparable periods in
the prior year, reflecting revenue from the fiscal 1997
acquisitions, an internal growth rate of 14% and 16% in the U.S.
Health Care pharmaceutical distribution and services business in
the quarter and nine month periods, respectively, and a moderate
increase in international revenues.
- 16 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Operating profit increased by 80% and 75% for the third
quarter and the nine month periods, respectively, excluding the
effect of the $91.8 million and $140.0 million of nonrecurring
charges recorded in the three and nine month periods of the prior
year, respectively. The increases in operating profit reflect
the increased operating margins in the U. S. Health Care
pharmaceutical distribution and services business, the favorable
impact of acquisitions and the increased profit from its Canadian
business. The improved operating margins are due primarily to
the elimination of fixed costs through the rapid integration of
the FoxMeyer business and increased efficiency on an expanding
base of business. International operating profits increased for
both the third quarter and the nine month periods as a result of
the impact of new business in the Canadian operations.
WATER PRODUCTS
Segment revenues increased by 5% and 4% for the third
quarter and the nine month periods, respectively, from the
comparable periods in the prior year. Prior year revenues
include sales of $3.5 million for the third quarter and $12.7
million for the nine months associated with the Aqua-Vend
business that was sold in March 1997. The 11% and 10% increase
in revenues from comparable operations for the third quarter and
the nine month periods, respectively, was driven by continuing
strong grocery sales growth following a series of new product
introductions and the effect of direct delivery geographic
expansion. Before the nonrecurring charge in the prior year's
third quarter, operating profit increased by 15% and 16% in the
third quarter and nine month periods, respectively.
INTEREST, NET
Interest expense, net of interest income, increased to $25.0
million in the third quarter and $70.3 million for the nine month
period, compared to $11.9 million and $27.1 million,
respectively, in the prior year. The increase was primarily a
result of the debt issued to finance the acquisitions completed
in the second half of fiscal 1997.
Liquidity and Capital Resources
- -------------------------------
Cash and marketable securities available for sale were
$169.0 million at December 31, 1997 and $229.8 million at March
31, 1997. The December 31, 1997 marketable securities balance
included $76.7 million from the sale of the Armor All shares
which is currently restricted and held in trust as exchange
property in connection with the Company's outstanding
exchangeable debentures. Cash and marketable securities
available for sale decreased by $60.8 million and total debt
increased by $342.6 million during the nine months ended December
31, 1997, due primarily to increased working capital
requirements. Working capital has increased due to the growth in
sales over fourth quarter fiscal 1997 levels and seasonal
fluctuations. In addition $50.8 million in cash was used to
acquire the net assets of several small companies in the
Company's core Health Care Services segment in the nine months
ended December 31, 1997.
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McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Stockholders' equity was $1,365.2 million at December 31,
1997, and the net debt-to-capital ratio was 43% compared with 34%
on March 31, 1997. The net debt-to-capital ratio for both
periods was computed by reducing the outstanding debt amount by
the cash and marketable securities at the end of the period. The
higher ratio at December 31, 1997 reflects seasonal fluctuations
in working capital.
Common shares outstanding increased to 92.6 million at
December 31, 1997 from 84.2 million at December 31, 1996, due
primarily to the issuance of common shares in connection with the
acquisition of General Medical in February 1997 and shares issued
under employee benefit plans.
Other
- -----
The Company relies heavily on computer technologies to
operate its business. The Company has conducted an assessment of
its computer systems and has begun to make the changes necessary
to make its computer systems Year 2000 compliant. The Company
believes that with these modifications to or replacements of its
existing computer-based systems, it will be Year 2000 compliant
by March 31, 1999, although the Company cannot provide any
assurance in this regard. The Company's systems rely in part on
computer based systems of other companies. As part of the
Company's assessment, an overview of certain other companies'
Year 2000 compliant strategies is being performed. Nevertheless,
if any such company failed to become Year 2000 compliant, the
Company could be adversely affected. Although the amount
expensed by the Company for its Year 2000 project has not been
and the Company does not anticipate that such cost will be
significant to its results of operations in any year, these costs
are difficult to estimate accurately and the projected cost could
change due to unanticipated technological difficulties, project
vendor delays and project vendor cost overruns.
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PART II. OTHER INFORMATION
===========================
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
A special meeting of the Company's stockholders was held on
February 9, 1998, to consider and vote upon a proposal to approve
the issuance of shares of the Company's common stock, par value
$0.01 per share, in connection with the merger of AmeriSource
with and into the Company in accordance with the Agreement and
Plan of Merger dated as of September 22, 1997, as amended, by and
among the Company, Patriot Acquisition Corp., a newly formed,
wholly-owned subsidiary of the Company, and AmeriSource. The
proposal was approved by the following vote (on a pre-split
basis) of the Company's stockholders:
Votes For Votes Against Votes Withheld
------------- --------------- ----------------
39,087,633 121,367 128,306
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
(10) McKesson Corporation 1994 Stock Option and
Restricted Stock Plan, as amended through January
28, 1998
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed the following reports on Form 8-K
during the three months ended December 31, 1997:
1. Form 8-K
Date of Report: October 29, 1997
Date Filed: November 3, 1997
Item 5. Other Events
---------------------
The Registrant reported its Board of Directors
declared a two-for-one split of the Company's
common stock to be effected in the form of a stock
dividend distributable January 2, 1998 to
stockholders of record on December 1, 1997.
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SIGNATURE
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 11, 1998 By /s/ Richard H. Hawkins
-----------------------------
Richard H. Hawkins
Vice President and
Chief Financial Officer
By /s/ Heidi E. Yodowitz
-----------------------------
Heidi E. Yodowitz
Controller
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EXHIBIT INDEX
Exhibit
Number Description
- ------- -------------------------------------------------
(10) McKesson Corporation 1994 Stock Option and
Restricted Stock Plan, as amended through January
28, 1998
(27) Financial Data Schedule
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