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, 1993
[ ] 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 1-9626
McKESSON CORPORATION
- -----------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3040479
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. 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, 1993
- -------------------------- --------------------------------
Common stock, $2 par value 40,416,376 shares
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
==============================
Pages
-----
Consolidated Balance Sheets
December 31, 1993 and March 31, 1993 3 - 4
Statements of Consolidated Income
Nine months ended December 31, 1993 and 1992 5 - 6
Statements of Consolidated Cash Flows
Nine months ended December 31, 1993 and 1992 7 - 8
Financial Notes 9 - 10
Financial Review 11 - 14
PART II. OTHER INFORMATION
===========================
Item
- ----
1. Legal Proceedings 15
6. Exhibits and Reports on Form 8-K 15
Index to Exhibits 17
- 2 -
PART I. FINANCIAL INFORMATION
==============================
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, March 31,
1993 1993
-------- --------
(in millions)
ASSETS
- ------
Current Assets
Cash and short-term investments $ 13.5 $ 120.1
Receivables 952.0 842.2
Inventories 1,182.6 885.9
Prepaid expenses 58.3 50.0
------- -------
Total 2,206.4 1,898.2
------- -------
Property, Plant and Equipment
Land 69.4 69.1
Buildings, machinery and equipment 844.4 803.6
------- -------
Total 913.8 872.7
Accumulated depreciation (433.3) (412.6)
------- -------
Net 480.5 460.1
Goodwill and other intangibles 344.8 316.9
Other assets 171.7 124.9
------- -------
Total $3,203.4 $2,800.1
======= =======
(Continued)
- 3 -
PART I. FINANCIAL INFORMATION
==============================
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, March 31,
1993 1993
-------- --------
(in millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Drafts payable $ 454.4 $ 217.9
Accounts payable - trade 1,041.5 1,043.1
Short-term borrowings 251.5 61.2
Current portion of long-term debt 28.0 27.1
Salaries and wages 44.5 45.6
Taxes 29.1 38.8
Interest and dividends 25.5 28.8
Other 122.4 152.4
------- -------
Total 1,996.9 1,614.9
------- -------
Postretirement Obligations and
Other Noncurrent Liabilities 221.2 199.6
------- -------
Long-Term Debt 284.3 346.5
------- -------
Minority Interest in Subsidiary 49.6 19.7
------- -------
Stockholders' Equity
Preferred stocks 125.6 126.5
Common stock 89.5 89.2
Other capital 173.4 172.4
Retained earnings 589.4 546.8
Accumulated translation adjustment (20.1) (17.0)
ESOP notes and guarantee (167.5) (177.1)
Treasury shares, at cost (138.9) (121.4)
------- -------
Net 651.4 619.4
------- -------
Total $3,203.4 $2,800.1
======= =======
See Financial Notes.
(Concluded)
- 4 -
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
Quarter Ended Nine Months Ended
December 31 December 31
------------------- -------------------
1993 1992 1993 1992
------ ------ ------ ------
(in millions - except per share amounts)
REVENUES $3,253.6 $3,011.4 $9,251.3 $8,717.6
COSTS AND EXPENSES
Cost of sales 2,971.1 2,737.6 8,405.3 7,896.3
Selling, distribution
and administration 216.2 215.1 652.0 646.4
Interest 10.3 11.5 30.7 37.0
------- ------- ------- -------
Total 3,197.6 2,964.2 9,088.0 8,579.7
------- ------- ------- -------
SPECIAL ITEMS
Gain on sale and donation of
subsidiary stock - - 55.1 -
Donation to McKesson Foundation - - (4.3) -
Termination of swap arrangements - - (13.4) -
------- ------- ------- -------
- - 37.4 -
------- ------- ------- -------
INCOME BEFORE TAXES ON INCOME 56.0 47.2 200.7 137.9
TAXES ON INCOME (22.7) (18.9) (79.1) (55.1)
------- ------- ------- -------
INCOME BEFORE MINORITY INTEREST 33.3 28.3 121.6 82.8
MINORITY INTEREST IN NET
INCOME OF SUBSIDIARY (1.6) (0.5) (4.9) (1.9)
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 31.7 27.8 116.7 80.9
EXTRAORDINARY ITEM -
DEBT EXTINGUISHMENT - - (4.2) -
CUMULATIVE EFFECT
OF ACCOUNTING CHANGE - - (15.8) -
------- ------- ------- -------
NET INCOME $ 31.7 $ 27.8 $ 96.7 $ 80.9
======= ======= ======= =======
(Continued)
- 5 -
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
Quarter Ended Nine Months Ended
December 31 December 31
------------------- -------------------
1993 1992 1993 1992
------ ------ ------ ------
(in millions - except per share amounts)
PER COMMON SHARE
Fully diluted earnings
Continuing operations $ .69 $ .60 $ 2.59 $ 1.77
Extraordinary item - - (.10) -
Cumulative effect
of accounting change - - (.36) -
------- ------- ------- -------
Total $ .69 $ .60 $ 2.13 $ 1.77
======= ======= ======= =======
Primary earnings
Continuing operations $ .73 $ .64 $ 2.74 $ 1.90
Extraordinary item - - (.10) -
Cumulative effect
of accounting change - - (.39) -
------- ------- ------- -------
Total $ .73 $ .64 $ 2.25 $ 1.90
======= ======= ======= =======
Dividends $ .42 $ .40 $ 1.24 $ 1.20
======= ======= ======= =======
SHARES ON WHICH EARNINGS PER
COMMON SHARE WERE BASED
Fully diluted 44.1 44.8 44.0 44.9
Primary 40.9 40.7 40.6 39.7
See Financial Notes.
(Concluded)
- 6 -
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Nine Months Ended
December 31
----------------
1993 1992
------ ------
(in millions)
Operating Activities
Income before extraordinary item and
cumulative effect of accounting change $ 116.7 $ 80.9
Adjustments to reconcile to net cash
provided (used) by operating activities
Depreciation 49.3 47.8
Amortization 10.4 9.8
Provision for bad debts 5.6 10.9
Deferred taxes on income (1.5) 3.9
Gain on sale of subsidiary stock (52.0) -
Other (3.0) 8.4
------ ------
Total 125.5 161.7
------ ------
Effects of changes in
Receivables (114.0) (40.3)
Inventories (301.9) (237.5)
Accounts and drafts payable 241.1 429.3
Other (49.1) (9.5)
------ ------
Total (223.9) 142.0
------ ------
Net cash provided (used) by
continuing operations (98.4) 303.7
Discontinued operations 12.9 (3.7)
------ ------
Net cash provided (used) by
operating activities (85.5) 300.0
------ ------
Investing Activities
Property acquisitions (81.7) (51.1)
Properties sold 11.5 4.0
Proceeds from sales of
discontinued operations - 16.0
Proceeds from sale of subsidiary stock 78.7 -
Acquisitions of businesses, less cash and
short-term investments acquired (90.1) (3.0)
Other 1.5 (14.2)
------ ------
Net cash used by
investing activities (80.1) (48.3)
------ ------
(Continued)
- 7 -
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Nine Months Ended
December 31
----------------
1993 1992
------ ------
(in millions)
Financing Activities
Proceeds from issuance of debt $ 203.0 $ 1.9
Repayment of debt (78.6) (86.4)
Capital stock transactions
Treasury stock (31.5) (44.0)
Issuances 15.9 8.5
ESOP notes and guarantee 9.5 8.9
Dividends paid (59.3) (57.1)
------ ------
Net cash provided (used) by
financing activities 59.0 (168.2)
------ ------
Net Increase (Decrease) in Cash and
Short-Term Investments (106.6) 83.5
Cash and Short-Term Investments
at beginning of period 120.1 160.5
------ ------
Cash and Short-Term Investments
at end of period $ 13.5 $ 244.0
====== ======
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,
1993, and the results of its operations and its cash flows for the
nine months then ended. Such adjustments were of a normal
recurring nature. The results for the nine months ended December
31, 1993 include the effects of adopting Statement of Financial
Accounting Standards (SFAS) No. 112 "Employers' Accounting for
Postemployment Benefits."
The results of operations for the three and nine months
ended December 31, 1993 and 1992 are not necessarily indicative of
the results for the full years.
It is suggested that these financial statements be read in
conjunction with the financial statements, accounting policies and
financial notes thereto included in the Appendix to the Company's
1993 Proxy Statement which has previously been filed with the
Commission.
2. Special Items
- ------------------
Special items of $37.4 million ($24.5 million after-tax,
$.56 per fully diluted share) recorded in the nine months ended
December 31, 1993 included a gain of $55.1 million from the sale of
5,175,000 shares and the donation of 250,000 shares of the
Company's majority-owned Armor All Products Corporation subsidiary
("Armor All"). The shares donated to the McKesson Foundation had
a market value of $4.3 million. Also included in special items was
a loss of $13.4 million resulting from the termination of interest
rate swap arrangements. These interest rate swap arrangements had
been designated, through March 31, 1993, as a hedge of the
Company's short-term variable interest domestic borrowings. As a
result of the May 12, 1993 sale of Armor All shares and other
factors, the interest rate swap arrangements were no longer
considered effective as a hedge against the variable-rate
borrowings.
3. Extraordinary Loss
- -----------------------
An extraordinary loss of $4.2 million was recognized in
the nine months ended December 31, 1993 on the early retirement of
$50 million of 8 5/8% debt.
- 9 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
4. Accounting Change
- ----------------------
As of April 1, 1993, the Company adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits". The
cumulative effect of adopting the new standard resulted in a charge
to net income of $15.8 million, net of a $9.9 million tax benefit
($.36 per fully diluted share). The accounting change had no
significant impact on current period results.
5. Acquisitions
- -----------------
In April 1993, the Company acquired Clinical
Pharmaceuticals, Inc. ("CPI") and a 22.7% interest in Nadro S.A. de
C.V. ("Nadro"). CPI is an administrator of clinically based
managed prescription drug benefit programs. Nadro is the leading
pharmaceutical wholesale distributor in Mexico. The Company also
received an option to acquire an additional 9% of Nadro's common
stock.
In December 1993, the Company acquired an interest in
Technology Assessment Group (TAG), a consulting firm specializing
in health outcomes assessment.
- 10 -
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
(unaudited)
Operating Results
- -----------------
The operating results of the Company by business segment are as
follows:
Quarter Ended Nine Months Ended
December 31 December 31
------------------------ ------------------------
% %
1993 1992 Chg. 1993 1992 Chg.
------ ------ --- ------ ------ ---
(in millions)
REVENUES
Health Care Services(1) $3,160.8 $2,924.2 8.1 $8,949.0 $8,424.2 6.2
Water Products 56.6 54.4 4.0 180.1 177.3 1.6
Armor All 33.4 30.9 8.1 117.4 108.4 8.3
Corporate 2.8 1.9 4.8 7.7
------- ------- ------- -------
Total $3,253.6 $3,011.4 8.0 $9,251.3 $8,717.6 6.1
======= ======= ======= =======
OPERATING PROFIT
Health Care Services $ 60.7 $ 57.8 5.0 $ 172.0 $ 161.7 6.4
Water Products 8.5 7.9 7.6 27.6 22.7 21.6
Armor All 5.9 5.0 18.0 22.0 18.2 20.9
------- ------- ------- -------
Total 75.1 70.7 6.2 221.6 202.6 9.4
Interest - net(2) (9.9) (10.2) (29.7) (31.8)
Corporate and other (9.2) (13.3) (28.6) (32.9)
Special items - - 37.4 -
------- ------- ------- -------
Income before taxes $ 56.0 $ 47.2 18.6 $ 200.7 $ 137.9 45.5
======= ======= ======= =======
(1) Health Care Services Revenues includes:
Sales to customers'
warehouses $751.7 $715.5 5.1 $2,086.2 $1,937.9 7.7
International revenues 336.2 343.9 (2.2) 989.9 1,009.3 (1.9)
(2) Interest expense is shown net of corporate interest income.
- 11 -
McKESSON CORPORATION AND SUBSIDIARIES
FINANCIAL REVIEW
Revenues in the third quarter increased 8% to $3.25
billion, and net income was up 14% to $31.7 million, in comparison
to the third quarter of the prior year.
For the first nine months, revenues increased 6% to $9.25
billion and net income increased 20% to $96.7 million. Current
year results included an after-tax gain of $24.5 million for
special items, an extraordinary loss of $4.2 million after-tax on
the early retirement of $50 million of 8 5/8% debt and a $15.8
million after-tax charge for the cumulative effect of adopting
Statement of Financial Accounting Standards (SFAS) No. 112
"Employers' Accounting for Postemployment Benefits," all of which
were recorded in the first quarter of fiscal 1994.
The special items of $37.4 million ($24.5 million
after-tax, $.56 per fully diluted share) in continuing operations
included a pre-tax gain of $55.1 million from the sale of 5,175,000
shares and the donation of 250,000 shares of the Company's
majority-owned subsidiary, Armor All Products Corporation ("Armor
All"). The donated shares had a market value of $4.3 million.
Also included in special items was a loss of $13.4 million
resulting from the termination of interest rate swap arrangements.
These interest rate swap arrangements had been designated, through
March 31, 1993, as a hedge of the Company's short-term variable
interest domestic borrowings. As a result of the May 12, 1993 sale
of Armor All shares and other factors, the interest rate swap
arrangements were no longer considered effective as a hedge against
the variable-rate borrowings.
In April 1993, the Company acquired Clinical
Pharmaceuticals, Inc. ("CPI") and a 22.7% interest in Nadro S.A. de
C.V. ("Nadro"). CPI is an administrator of clinically based
managed prescription drug benefit programs. The results of CPI are
included in those of PCS Health Systems, Inc. ("PCS") since the
date of acquisition. Nadro is the leading pharmaceutical wholesale
distributor in Mexico. The Company also received an option to
acquire an additional 9% of Nadro's common stock.
In December 1993, the Company acquired an interest in
Technology Assessment Group (TAG), a consulting firm specializing
in health outcomes assessment.
SEGMENT RESULTS
Health Care Services
- --------------------
The Health Care Services segment includes the results of
the Company's U.S. pharmaceutical and health care products
- 12 -
McKESSON CORPORATION AND SUBSIDIARIES
FINANCIAL REVIEW
distribution businesses, its international pharmaceutical
operations (including Canada, Mexico and Central America) and PCS.
The segment accounts for approximately 97% of revenues and 78% of
operating profits in the nine months.
Sales of the U.S. distribution services businesses,
excluding sales to customers' warehouses, increased 10% in the
quarter and 7% in the nine months, reflecting real volume growth.
Operating profits for these businesses were down in the quarter and
nine months primarily due to lower gross margins resulting from the
competitive environment. In response to lower margins, the Company
has consolidated certain distribution centers, with the number down
to 38 from 45 a year ago, and reduced its workforce through a
restructuring of the sales organization and administrative
functions. In addition, other programs are being implemented to
reduce expenses and increase productivity through process
improvements. The full impact of these measures is expected to be
realized in the fiscal year starting April 1.
PCS revenues were up 67% in the quarter and 55% in the nine
months. Operating profits were up significantly, offsetting the
declines in the U.S. distribution services businesses. The
increased profits were due primarily to the rapid expansion of
PCS's managed prescription programs. PCS currently manages
prescription care services for 45 million people, up from about 20
million a year ago.
Revenues for the international pharmaceutical operations
were down moderately in the quarter and nine months as sales growth
has been slowed by the decline in tobacco sales in Canada. The
Canadian operation's results have also been impacted by the
unfavorable exchange rate. Operating profit from the international
pharmaceutical operations was up due to the inclusion of the
contribution of the Mexican and Central American operations, which
were not in the prior year's results.
Water Products
- --------------
Despite the continuing recession in California, Water
Products revenues were up 4% in the quarter and 2% in the nine
months due primarily to an increase in the number of customers
receiving direct delivery service. The year to date increase in
operating profits reflects cost reduction measures implemented in
the second half of last year. Operating profits were up 8% in the
quarter and included higher spending to upgrade customer service
and to increase customer retention.
- 13 -
McKESSON CORPORATION AND SUBSIDIARIES
FINANCIAL REVIEW
Armor All
- ---------
Armor All revenues increased 8% in the third quarter and
nine months. Operating profits were up primarily from the
reduction in selling and administrative costs as a percentage of
sales.
As a result of the sale and donation of Armor All stock in
the first quarter (see Financial Note 2), the Company currently
owns 57% of Armor All, down from 83% in the year-ago period.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments declined $107 million in
the first nine months of the year and the Company's debt-to-capital
ratio increased to 46.4% at December 31, 1993 compared to 41.2% at
March 31, 1993. These changes were due in part to management's
decision to temporarily increase inventory levels in the Company's
Health Care Services segment and the related timing of inventory
purchases during the quarter compared to last year. Funds were also
used for the acquisition of CPI and the investment in Nadro offset, in
part, by the proceeds from the sale of Armor All stock. In addition,
the Company repurchased approximately 800,000 shares of its common
stock for $31.5 million, in connection with its previously
announced share repurchase program. The $84 million increase in
cash and short-term investments in the prior year was due primarily
to lower working capital levels in the Company's Health Care
Services segment.
Net interest expense declined in the quarter and nine
months due to lower interest rates during the respective periods.
The effective tax rate, computed before the effect of
special items, increased in the nine months to 40.5% from 40% in
the prior year. The higher effective rate principally reflects the
enactment of the Omnibus Budget Reconciliation Act of 1993, which
increased the federal corporate income tax rate from 34% to 35%
retroactive to January 1993. The increase in the tax rate reduced
fully diluted earnings per share in the quarter by one cent and is
expected to reduce fiscal 1994 earnings per share by five cents.
- 14 -
PART II. OTHER INFORMATION
===========================
Item 1. Legal Proceedings
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
(11) Computation of Earnings per Common Share
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the
quarter ended December 31, 1993.
- 15 -
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: January 28, 1994 By /s/ Garret A. Scholz
-------------------------------
Garret A. Scholz
Vice President Finance
By /s/ Richard H. Hawkins
-------------------------------
Richard H. Hawkins
Vice President and Controller
- 16 -
INDEX TO EXHIBITS
Exhibit
Number
- -----------
(11) Computation of Earnings per Common Share
- 17 -
Exhibit (11)
McKESSON CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(unaudited)
(in millions except per share amounts)
Quarter Ended Nine Months Ended
December 31 December 31
---------------- ----------------
1993 1992 1993 1992
------ ------ ------ ------
FULLY DILUTED EARNINGS PER SHARE
Income after taxes before
extraordinary item and cumulative
effect of accounting change $ 31.7 $ 27.8 $116.7 $ 80.9
Interest charges on convertible
debentures - net of tax - - - 1.4
Contribution adjustment - Series B ESOP
convertible preferred stock(1) (0.8) (1.1) (2.7) (2.9)
----- ----- ----- -----
30.9 26.7 114.0 79.4
Extraordinary item - - (4.2) -
Cumulative effect of accounting change - - (15.8) -
----- ----- ----- -----
Total $ 30.9 $ 26.7 $ 94.0 $ 79.4
===== ===== ===== =====
Fully diluted shares
Common shares outstanding(2) 40.9 40.7 40.6 39.7
Convertible securities - dilutive 3.2 4.1 3.4 5.2
----- ----- ----- -----
Total 44.1 44.8 44.0 44.9
===== ===== ===== =====
Fully diluted earnings per share
Continuing operations $ .69 $ .60 $ 2.59 $ 1.77
Extraordinary item - - (.10) -
Cumulative effect of accounting change - - (.36) -
----- ----- ----- -----
Total $ .69 $ .60 $ 2.13 $ 1.77
===== ===== ===== =====
PRIMARY EARNINGS PER SHARE
Income after taxes before
extraordinary item and cumulative
effect of accounting change $ 31.7 $ 27.8 $116.7 $ 80.9
Dividend requirements -
preferred stocks(1) (1.6) (1.8) (5.2) (5.4)
----- ----- ----- -----
30.1 26.0 111.5 75.5
Extraordinary item - - (4.2) -
Cumulative effect of accounting change - - (15.8) -
----- ----- ----- -----
Total $ 30.1 $ 26.0 $ 91.5 $ 75.5
===== ===== ===== =====
Primary shares
Common shares outstanding(2) 40.9 40.7 40.6 39.7
===== ===== ===== =====
Primary earnings per share
Continuing operations $ .73 $ .64 $ 2.74 $ 1.90
Extraordinary item - - (.10) -
Cumulative effect of accounting change - - (.39) -
----- ----- ----- -----
Total $ .73 $ .64 $ 2.25 $ 1.90
===== ===== ===== =====
(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 9 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).
