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, 1994
[ ] 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 Identification No.)
incorporation or organization)
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 No X
----- -----
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, 1994
- ---------------------------- --------------------------------
Common stock, $.01 par value 43,929,298 shares
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
==============================
Pages
-----
Item
- ----
1. Financial Statements
Consolidated Balance Sheets
December 31, 1994 and March 31, 1994 3 - 4
Statements of Consolidated Income
Quarter and Nine months ended
December 31, 1994 and 1993 5 - 6
Statements of Consolidated Cash Flows
Nine months ended December 31, 1994 and 1993 7 - 8
Financial Notes 9 - 13
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Review 14 - 18
PART II. OTHER INFORMATION
===========================
Item
- ----
6. Exhibits and Reports on Form 8-K 19
Index to Exhibits 21
PART I. FINANCIAL INFORMATION
==============================
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, March 31,
1994 1994
-------- --------
(in millions)
ASSETS
- ------
Current Assets
Cash and short-term investments $ 144.2 $ 89.0
Marketable securities (Note 7) 496.1 -
Receivables (Note 3) 826.5 744.4
Inventories (Note 3) 1,219.4 93.5
Prepaid expenses 73.5 46.6
------- -------
Total 2,759.7 1,873.5
------- -------
Property, Plant and Equipment (Note 3)
Land 42.7 43.4
Buildings, machinery and equipment 707.2 744.7
------- -------
Total 749.9 788.1
Accumulated depreciation (398.9) (391.5)
------- -------
Net 351.0 396.6
Goodwill and other intangibles (Note 3) 216.3 281.4
Other assets (Notes 3 and 4) 178.1 283.5
------- -------
Total $3,505.1 $2,835.0
======= =======
(Continued)
3
PART I. FINANCIAL INFORMATION
==============================
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, March 31,
1994 1994
-------- --------
(in millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Drafts payable $ 228.6 $ 205.1
Accounts payable - trade 1,085.9 925.4
Short-term borrowings 78.4 57.2
Current portion of long-term debt 22.1 18.5
Salaries and wages 46.7 38.4
Taxes 132.7 28.1
Interest and dividends 20.5 28.5
Other 171.7 127.0
------- -------
Total 1,786.6 1,428.2
------- -------
Postretirement Obligations and
Other Noncurrent Liabilities 213.0 214.8
------- -------
Long-Term Debt 459.4 462.3
------- -------
Minority Interest in Subsidiary 56.5 51.1
------- -------
Stockholders' Equity (Note 4)
Preferred stocks - 125.3
Common stock .4 89.2
Other capital 299.5 164.9
Retained earnings 862.1 610.3
Accumulated translation adjustment (43.4) (22.3)
ESOP notes and guarantee (129.0) (165.1)
Treasury shares, at cost - (123.7)
------- -------
Net 989.6 678.6
------- -------
Total $3,505.1 $2,835.0
======= =======
See Financial Notes.
(Concluded)
4
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
Quarter Ended Nine Months Ended
December 31 December 31
--------------- --------------
1994 1993 1994 1993
---- ---- ---- ----
(in millions - except
per share amounts)
REVENUES $3,350.0 $3,206.4 $9,841.0 $9,126.9
COSTS AND EXPENSES
Cost of sales (Note 3) 3,113.7 2,947.8 9,060.4 8,345.8
Selling, distribution
and administration (Note 3) 452.5 205.0 897.1 640.8
Interest 11.3 10.3 33.6 30.7
------ ------- ------- -------
Total 3,577.5 3,163.1 9,991.1 9,017.3
GAIN ON SALE AND DONATION
OF SUBSIDIARY STOCK (Note 3) 3.1 - 5.4 55.1
------ ------- ------- -------
INCOME (LOSS) BEFORE
TAXES ON INCOME (Note 3) (224.4) 43.3 (144.7) 164.7
TAXES ON INCOME (Note 3) (50.0) (17.5) (81.5) (64.5)
------ ------- ------- -------
INCOME (LOSS) BEFORE
MINORITY INTEREST (274.4) 25.8 (226.2) 100.2
Minority interest in net
income of subsidiary (1.9) (1.6) (6.6) (4.9)
------ ------- ------- -------
INCOME (LOSS) AFTER TAXES
Continuing operations (276.3) 24.2 (232.8) 95.3
Discontinued operations(Note 5) 3.0 7.5 21.0 21.4
Discontinued operations - gain
on sale of PCS (Notes 1 & 5) 576.7 - 576.7 -
Extraordinary item (Note 6) - - - (4.2)
Cumulative effect of accounting
change (Note 7) - - - (16.7)
------ ------- ------- -------
NET INCOME $ 303.4 $ 31.7 $ 364.9 $ 95.8
======= ======= ======= =======
(Continued)
5
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
Quarter Ended Nine Months Ended
December 31 December 31
--------------- --------------
1994 1993 1994 1993
---- ---- ---- ----
(in millions - except
per share amounts)
EARNINGS (LOSS) PER COMMON SHARE
Fully diluted earnings
Continuing operations (Note 3) $(6.06) $ .52 $(5.20) $ 2.10
Disc. operations (Note 5) .07 .17 .47 .49
Disc. operations - gain on
sale of PCS (Notes 1 and 5) 12.64 - 12.78 -
Extraordinary item (Note 6) - - - (.10)
Cumulative effect of
accounting change (Note 7) - - - (.38)
----- ----- ----- -----
Total $ 6.65 $ .69 $ 8.05 $ 2.11
===== ===== ===== =====
Primary earnings
Continuing operations (Note 3) $(6.24) $ .54 $(5.55) $ 2.21
Dis. operations (Note 5) .07 .19 .50 .53
Discontinued operations - gain
on sale of PCS (Notes 1 & 5) 13.03 - 13.54 -
Extraordinary item (Note 6) - - - (.10)
Cumulative effect of
accounting change (Note 7) - - - (.41)
----- ----- ----- -----
Total $ 6.86 $ .73 $ 8.49 $ 2.23
===== ===== ===== =====
Dividends $ .25 $ .42 $ 1.09 $ 1.24
===== ===== ===== =====
SHARES ON WHICH EARNINGS PER
COMMON SHARE WERE BASED
Fully diluted 45.6 44.1 45.1 44.0
Primary 44.2 40.9 42.6 40.6
See Financial Notes.
(Concluded)
6
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Nine Months Ended
December 31
-----------------
1994 1993
---- ----
(in millions)
Operating Activities
Income (loss) after taxes from
continuing operations $(232.8) $ 95.3
Adjustments to reconcile to net cash
provided (used) by operating activities
Depreciation 44.4 41.2
Amortization 8.7 8.6
Gain on sale of subsidiary stock - (52.0)
Other noncash charges 183.3 (0.6)
------ ------
Total 3.6 92.5
------ ------
Effects of changes in
Receivables (128.2) (75.7)
Inventories (260.0) (301.7)
Accounts and drafts payable 186.6 142.6
Other 142.3 (49.3)
------ ------
Total (59.3) (284.1)
------ ------
Net cash used by continuing operations (55.7) (191.6)
------ ------
Discontinued operations 85.4 106.6
------ ------
Net cash provided (used)
by operating activities 29.7 (85.0)
------ ------
Investing Activities
Purchases of marketable securities (496.0) -
Property acquisitions (55.0) (55.5)
Properties sold 5.9 7.4
Proceeds from sale of PCS Business 568.5 -
Proceeds from sales of subsidiary stock - 78.7
Acquisitions of businesses, less cash and
short-term investments acquired (0.7) (56.1)
Investing activities - discontinued operations (12.3) (62.0)
Other 11.6 7.4
------ ------
Net cash provided (used)
by investing activities 22.0 (80.1)
------ ------
(Continued)
7
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Nine Months Ended
December 31
-----------------
1994 1993
---- ----
(in millions)
Financing Activities
Proceeds from issuance of debt $ 76.5 $ 202.6
Repayment of debt (34.2) (78.6)
Capital stock transactions
Share repurchases - (31.5)
Redemption of preferred shares (3.1) -
Issuances 7.8 15.9
ESOP notes and guarantee 11.0 9.5
Dividends paid (58.4) (59.3)
Financing activities - discontinued operations 3.9 0.4
------ ------
Net cash provided by
financing activities 3.5 59.0
------ ------
Net Increase (Decrease) in Cash and
Short-Term Investments 55.2 (106.1)
Cash and Short-Term Investments
at beginning of period 89.0 111.5
------ ------
Cash and Short-Term Investments
at end of period $ 144.2 $ 5.4
====== ======
See Financial Note 4 for description
of noncash equity transactions.
See Financial Notes.
(Concluded)
8
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
1. Sale of the PCS Business
On July 10, 1994, McKesson Corporation ("McKesson") entered
into an Agreement and Plan of Merger and Reorganization and
Distribution Agreement ("Merger Agreement" and "Distribution
Agreement", respectively) providing for the acquisition by Eli
Lilly and Company ("Eli Lilly") of McKesson's pharmaceutical
benefits management business (the "PCS Business"), which was
primarily operated by PCS Health Systems, Inc. and Clinical
Pharmaceuticals, Inc., both of which were wholly-owned subsidiaries
of McKesson, for approximately $4 billion.
As required by the Merger Agreement, on July 15, 1994 ECO
Acquisition Corporation ("ECO"), a subsidiary of Eli Lilly,
commenced a cash tender offer to purchase from McKesson
shareholders all outstanding shares of McKesson Common Stock (the
"Shares") at a price of $76.00 net per Share (the "Offer"). The
Offer was completed on November 21, 1994 with ECO purchasing over
90% of the Shares. Following the purchase of Shares under the
Offer, McKesson and ECO merged (the "Merger") and each Share not
purchased in the Offer (other than Shares held by Eli Lilly and
certain other related entities) was converted into the right to
receive $76.00 in cash, without interest.
Simultaneous with the completion of the Offer and pursuant to
the terms of the Distribution Agreement, McKesson (i) transferred
all of its assets and liabilities, other than those related to the
PCS Business, to SP Ventures, Inc., a newly-formed corporation
("New McKesson") and (ii) declared a dividend of one share of
common stock of New McKesson, par value of $.01 per share, for each
Share held of record as of the record date (collectively, the
"Spin-Off"). After giving effect to the Spin-Off and the
completion of the Offer, the current business of McKesson (other
than the PCS Business) is being continued through New McKesson.
The net result of the Offer, Merger and Spin-Off (collectively, the
"PCS Transaction") is that each existing McKesson shareholder
received a cash payment of $76 per Share (representing the proceeds
from the sale of the PCS Business) together with one share of
common stock of New McKesson representing their continuing interest
in the retained businesses.
For financial statement purposes, New McKesson ("the Company")
is the continuing entity and has retained the name McKesson
Corporation. The accompanying unaudited consolidated financial
statements reflect the PCS Business as a discontinued operation.
Approximately $600 million of the $4 billion consideration
paid by Eli Lilly was received by the Company. That sum, less
certain related tax and transaction costs, is available for the
general corporate purposes of the Company, including the funding of
investments in new and current businesses. An additional $24
million of the $4 billion consideration was received from Eli Lilly
to fund deferred vested stock option payments. In the quarter
ended December 31, 1994, the Company recorded a gain on the sale of
the PCS Business of $576.7 million, after transaction costs and
other expenses.
9
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
2. 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, 1994, and
the results of its operations and its cash flows for the nine
months ended December 31, 1994 and 1993. Such adjustments were of
a normal recurring nature other than those discussed in Notes 3, 4,
5, 6 and 7 herein.
The results of operations for the nine months ended December
31, 1994 and 1993 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 1994 consolidated financial information which has
previously been filed with the Commission in a Report on Form 8-K
dated July 29, 1994.
3. Continuing Operations
CURRENT YEAR
- ------------
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 the transfer of
assets and liabilities from McKesson to New McKesson to effect 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.
The $61.9 million of compensation expense in continuing
operations (classified in selling, distribution and administration)
consists of $23.6 million in compensation costs associated with an
allocation of cash and shares to ESOP plan participants resulting
from a paydown of ESOP debt by the ESOP trust and $38.3 million of
compensation cost associated with the Company's vested stock
options and other compensation programs.
The $208.9 million of charges for restructuring, asset
impairment and other operating items in continuing operations in
the quarter ($36.9 million included in cost of sales and $172.0
million included in selling, distribution and administration)
resulted, in part, from the initiation by the Company's management
of several measures designed to streamline operations and improve
productivity in the Company's distribution and Water Products
businesses. These measures include consolidation of certain
10
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
facilities, workforce reductions and divestiture of
under-performing assets. Approximately half of the charge is
related to a writedown of the Company's investment in its service
merchandising business as a result of recent significant changes in
that businesses' customer base and marketplace. Other charges
consist primarily of writedowns to fair value less costs to sell
for assets to be disposed of, impairment losses on capitalized
software due to changes in technology, severance for an announced
company-wide workforce reduction of approximately 350 individuals,
writedowns of inventory associated with the discontinuation of
certain product lines and receivable reserves related to facility
closures and a reassessment of credit risks in the Company's
distribution businesses. The assets to be disposed of are
associated with facility consolidations in the distribution and
Water Products businesses and surplus properties held by the
Company. The disposition of these properties is expected to occur
over a two to three year period.
The charges taken in the quarter consisted of the following:
Quarter Ended
December 31, 1994
-----------------
(in millions)
Costs associated with facility closures and
surplus properties- primarily writedowns
of assets to be disposed of to fair value
less costs to sell $27.6
Severance costs for announced workforce reductions 10.3
Asset writedowns resulting from
changed business conditions:
Goodwill 56.3
Facilities and equipment 27.3
Software 24.6
Discontinuation of product lines 21.5
Receivable reserves 20.7
Other operating items 20.6
-----
Total $208.9
=====
The writedowns associated with assets to be disposed of and
asset impairments due to changed business conditions were based
primarily on independent appraisals. Cash amounts for severance
benefits are expected to be paid out over the next twelve months.
The current year contributions to the McKesson Foundation
consisted of shares of the Company's majority-owned Armor All
Products Corporation subsidiary. A pre-tax gain of $5.4 million
was recorded on the donations. The shares donated to the McKesson
Foundation had a market value of $7.4 million, which was recorded
as a contribution expense within selling, distribution and
administration.
11
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
PRIOR YEAR
- ----------
Included in continuing operations in the prior year nine
months are special items of $37.4 million ($24.5 million after-tax)
which include a gain of $55.1 million from the sale of 5,175,000
shares and the donation of 250,000 shares of Armor All. The shares
donated to the McKesson Foundation had a market value of $4.3
million, which was recorded as a contribution expense within
selling, distribution and administration. Also included in
selling, distribution and administration expense 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 Company's 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 as the Company, at that time, no longer expected to
borrow domestically on a short-term basis in fiscal 1994.
4. Stockholders' Equity
Changes in stockholders' equity for the nine months ended
December 31, 1994 are as follows (in millions):
<TABLE>
<CAPTION>
Accumulated ESOP Treasury Total
Preferred Common Other Retained translation notes and shares, stockholders'
stocks stock capital earnings adjustment guarantee at cost equity
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994 $125.3 $89.2 $164.9 $610.3 $(22.3) $(165.1) $(123.7) $678.6
Conversion, cancellation
or redemption of shares (125.3) (1.5) 5.0 118.7 (3.1)
Change in par value of
common stock from $2.00
to $.01 per share (87.4) 87.4 -
Issuance of shares under
employee plans .1 2.7 5.0 7.8
ESOP note payments 26.9 36.1 63.0
Distribution of net assets
of the PCS Business (65.1) (65.1)
Other (primarily tax benefit
on exercise of stock options) 12.6 2.4 15.0
Translation adjustment (21.1) (21.1)
Net income 364.9 364.9
Dividends (50.4) (50.4)
----- ----- ----- ----- ----- ----- ----- -----
Balance, December 31, 1994 $ - $ .4 $299.5 $862.1 $(43.4) $(129.0) $ - $989.6
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Noncash conversions of preferred stock to common stock
amounted to $123.5 million during the nine month period ended
December 31, 1994. Other noncash transactions to the Company
included the $23.6 million paydown of ESOP debt by the ESOP trust
and $65.1 million of net assets of the PCS Business distributed in
connection with the PCS Transaction and charged to retained
earnings.
12
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
5. Discontinued Operations
Earnings from discontinued operations were $579.7 million in
the quarter and $597.7 million in the nine months, including a gain
on the sale of the PCS Business of $576.7 million. The results of
the PCS Business are included in discontinued operations through
the date of disposition, November 21, 1994. Revenues generated by
the PCS Business through the date of sale were $31.7 million in the
quarter and $135.4 million in the nine months.
Discontinued operations in the nine months also included $1.6
million from settlements recovered in insurance litigation related
to environmental matters associated with the former operations of
the Company's chemical businesses, which were divested in fiscal
1987.
6. Extraordinary Loss
An extraordinary loss of $4.2 million was recognized in the
prior year upon the early retirement of $50 million of 8-5/8% debt.
7. Accounting Changes
Effective April 1, 1994 the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which requires
investments in debt and equity securities to be carried at fair
value. The adoption of SFAS No. 115, effective April 1, 1994, did
not have a material effect on the Company's financial statements.
Pursuant to SFAS No. 115, the Company has classified its
investments in U.S. Treasury securities as available for sale.
Accordingly, the net unrealized gains and losses computed in
marking these securities to market have been reported within
stockholders' equity. At December 31, 1994, the difference between
the fair value and the original cost of these securities was
immaterial.
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 fiscal 1994 net income of $16.7 million, net of a $10.4 million
tax benefit ($0.38 per fully diluted share).
13
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Overview of Results
- -------------------
Third quarter net income was $303.4 million or $6.65 per fully
diluted share and includes amounts related to the completion of the
PCS Transaction (see Financial Note 1 for discussion of the "Sale
of the PCS Business") and initiatives taken by the Company to
enhance the productivity of its businesses. The Company recorded
income of $579.7 million from discontinued operations in the
quarter, including a gain on the sale of the PCS Business of $576.7
million.
The results from continuing operations for the quarters ended
December 31, 1994 and 1993 include the following:
Quarter Ended December 31,
----------------------------
1994 1993
------------- ------------
Pre- After- Pre- After-
tax tax tax tax
--- --- --- ---
(in millions)
Compensation costs related
to the PCS Transaction $ (61.9) $ (46.8)
Income tax expense related to the
transfer of assets and liabilities
from McKesson to New McKesson to
effect the PCS Transaction (107.0)
Charges for restructuring,
asset impairment and
other operating items (208.9) (149.6)
Contribution of Armor All
shares to McKesson Foundation (1.2) 0.6
Other income from
continuing operations 47.6 28.4 $43.3 $25.8
Minority interest in
net income of Armor All (1.9) (1.6)
----- ----- ---- ----
Income (loss) from
continuing operations $(224.4) $(276.3) $43.3 $24.2
===== ===== ==== ====
The $61.9 million ($46.8 million after-tax) of compensation
expense in continuing operations consists of $23.6 million in
compensation cost associated with an allocation of cash and shares
to ESOP plan participants resulting from a paydown of ESOP debt by
the ESOP trust and $38.3 million of compensation cost associated
with the Company's vested stock options and other compensation
programs.
The $208.9 million ($149.6 million after-tax) of charges for
restructuring, asset impairment and other operating items in
continuing operations resulted, in part, from the initiation by the
Company's management of several measures designed to streamline
operations and improve productivity in the Company's distribution
and Water Products businesses. These measures include
consolidation of certain facilities, workforce reductions and
14
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
divestiture of under-performing assets and are expected to reduce
operating expenses, improve working capital efficiency and enhance
customer service. Approximately half of the charge is related to
a writedown of the Company's investment in its service
merchandising business as a result of recent significant changes in
that businesses' customer base and marketplace. Other charges
consist primarily of writedowns to fair value less costs to sell
for assets to be disposed of, impairment losses on capitalized
software due to changes in technology, severance for an announced
company-wide workforce reduction of approximately 350 individuals,
writedowns of inventory associated with the discontinuation of
certain product lines and receivable reserves related to facility
closures and a reassessment of credit risks in the Company's
distribution businesses. The assets to be disposed of are
associated with facility consolidations in the distribution and
Water Products businesses and surplus properties held by the
Company. The disposition of these properties is expected to occur
over a two to three year period.
Nine month net income of $364.9 million or $8.05 per fully
diluted share includes a loss from continuing operations of $232.8
million and income from discontinued operations of $597.7 million,
including the $576.7 million gain from the sale of the PCS
Business. The $232.8 million loss from continuing operations in
the nine months includes the $46.8 million of after-tax
compensation costs related to the PCS Transaction, $107 million of
income tax expense related to the transfer of assets and
liabilities from McKesson to New McKesson to effect the PCS
Transaction, $156.6 million of after-tax charges for restructuring,
asset impairment and other operating items and a $1.0 million
benefit from contributions of Armor All shares to the McKesson
Foundation.
Prior year results included an after-tax gain of $24.5 million
for special items within continuing operations, $21.4 million in
earnings from discontinued operations, an extraordinary loss of
$4.2 million after-tax upon the early retirement of $50 million of
8-5/8% debt and a $16.7 million after-tax charge for the cumulative
effect of adopting SFAS No. 112 "Employers' Accounting for
Postemployment Benefits."
The $37.4 million ($24.5 million after-tax) of special items
in continuing operations in the prior year nine months included a
pre-tax gain on the sale and donation of Armor All stock of $55.1
million, partially offset by a contribution to the McKesson
Foundation of $4.3 million and a loss on the termination of
interest rate swap arrangements of $13.4 million. 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 Company's 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 as the Company, at that time, no
longer expected to borrow domestically on a short-term basis in
fiscal 1994.
15
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
<TABLE>
<CAPTION>
Segment Results
- ---------------
The operating profits of the Company's continuing
operations by business segment were impacted in the current year
quarter and nine months 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. Prior year nine month
corporate and other results include the previously discussed income
from special items.
Quarter Ended Nine Months Ended
December 31 December 31
--------------------- --------------------
% %
1994 1993 Chg. 1994 1993 Chg.
---- ---- ---- ---- ---- ----
(in millions)
REVENUES
<S> <C> <C> <C> <C> <C> <C>
Health Care Services(1) $3,248.9 $3,113.6 4.3 $9,508.4 $8,824.6 7.7
Water Products 57.5 56.6 1.6 188.1 180.1 4.4
Armor All 39.2 33.4 17.4 136.9 117.4 16.6
Corporate 4.4 2.8 7.6 4.8
------- ------- ------- -------
Total $3,350.0 $3,206.4 4.5 $9,841.0 $9,126.9 7.8
======= ======= ======= =======
OPERATING PROFIT
Health Care Services $ (123.4) $ 48.0 $ (41.9) $ 135.3
Water Products (12.4) 8.5 6.5 27.6
Armor All 6.4 5.9 24.5 22.0
------ ------ ------ ------
Total (129.4) 62.4 (10.9) 184.9
Interest - net(2) (7.6) (10.0) (28.4) (29.7)
Corporate and other (87.4) (9.1) (105.4) 9.5
------ ------ ------ ------
Income (loss)
before taxes $ (224.4) $ 43.3 $ (144.7) $ 164.7
====== ====== ====== ======
1 Health Care Services Revenues includes:
Sales to customers'
warehouses $708.1 $751.7 (5.8) $2,148.6 $2,086.2 3.0
International revenues 379.9 336.2 13.0 1,057.6 989.9 6.8
2 Interest is shown net of corporate interest income.
</TABLE>
16
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
HEALTH CARE SERVICES -- The Health Care Services segment
includes the results of the Company's U.S. pharmaceutical and
health care products distribution businesses and its international
pharmaceutical operations (including Canada, Mexico, and Central
America). The segment accounted for 97% of consolidated revenues
in the quarter.
Sales of the U.S. distribution services businesses, excluding
sales to customers' warehouses, increased 7% in the quarter and 10%
in the nine months, primarily reflecting real volume growth. The
increase in volume was driven by increased sales to Valu-Rite
pharmacies offset, in part, by sales declines in the segment's
service merchandising unit. The Valu-Rite program was expanded
during fiscal year 1994 to provide more profit-improvement
opportunities for customers including the establishment of a
pharmacy provider network and the implementation of expanded
generic drug and private label programs.
The operating loss in the quarter and nine months includes
$176.7 million and $188.2 million, respectively, of charges for
restructuring, asset impairment and other operating items. The
underlying operating margin trend in the Company's U.S.
distribution businesses was favorable in the quarter, reflecting
lower operating expense ratios.
Revenues for the international pharmaceutical operations,
principally Canada, were up 13% in the quarter and 7% in the nine
months. Operating profits in the international pharmaceutical
operations increased in the quarter and the nine months.
WATER PRODUCTS -- Revenues in the Water Products segment were
up 2% in the quarter and 4% in the nine months. Operating results
in the quarter and nine months include $17.3 million of charges for
restructuring, asset impairment and otheroperating items. Results
were also unfavorably impacted in the quarter and nine months by
expenses related to the introduction of a new line of
single-service bottled water products, promotional expenses and
increased raw material prices for bottles and packaging in the
grocery products division.
ARMOR ALL -- Revenues in the Armor All segment increased 17%
in both the quarter and nine months. The increase in the quarter
reflects increased sales of new products and protectant. Operating
profits grew at a slower rate than revenues, up 8% in the quarter
and 11% in the nine months, primarily due to increased promotional
spending for protectant products and start-up costs associated with
new products.
CORPORATE AND OTHER -- Corporate and other in the quarter
includes $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 nine months. Prior year nine month
results include $37.4 million of income from special items.
17
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
DISCONTINUED OPERATIONS -- Earnings from discontinued
operations were $579.7 million in the quarter and $597.7 million in
the nine months, including a gain on the sale of the PCS Business
of $576.7 million. The results of the PCS Business are included in
discontinued operations through the date of disposition, November
21, 1994. Revenues generated by the PCS Business through the date
of sale were $31.7 million in the quarter and $135.4 million in the
nine months.
Discontinued operations in the nine months also included $1.6
million from settlements recovered in insurance litigation related
to environmental matters associated with the former operations of
the Company's chemical businesses, which were divested in fiscal
1987.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash, short-term investments and marketable securities
increased $551.3 million in the nine months compared to a $106.1
million decline in the prior year. The increase in the current
year is due primarily to the proceeds received from the PCS
Transaction.
Net interest expense decreased in the quarter and the nine
months primarily due to the investment of the proceeds received
from the PCS Transaction in the third quarter. Until redeployed,
the cash is being invested in U.S. Treasury securities. The
Company's debt-to-capital ratio was 36% at December 31, 1994
compared to 44% at March 31, 1994, reflecting the increase in
equity resulting from the gain on the sale of the PCS Business.
Taxes on income in continuing operations consist of the
following:
Quarter 9 Months
Ended Ended
12/31/94 12/31/94
-------- --------
(in millions)
Tax expense on corporate restructuring to
effect the PCS Transaction $107.0 $107.0
Tax benefit on compensation costs related
to the PCS Transaction (15.1) (15.1)
Tax benefit on charges for restructuring,
asset impairment and other operating items (59.3) (63.8)
Tax benefit on contributions of Armor All
stock to McKesson Foundation (1.8) (3.0)
Tax expense on other income from
continuing operations 19.2 56.4
----- -----
Taxes on income from continuing operations $ 50.0 $ 81.5
===== =====
The effective tax rate for the nine months ended December 31,
1994 is impacted by $81.5 million of pre-tax nondeductible charges
for certain compensation costs and a writedown of goodwill.
Fully diluted shares increased to 45.1 million in the nine
months from 44.0 million in the prior year primarily reflecting the
exercise of employee stock options.
-18-
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, 1994.
19
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 10, 1995 By /s/ Kevin B. Ferrell
--------------------------
Kevin B. Ferrell
Vice President and
Chief Financial Officer
By /s/ Richard H. Hawkins
---------------------------
Richard H. Hawkins
Vice President and
Controller
20
INDEX TO EXHIBITS
Exhibit
Number
- ------
(11) Computation of Earnings per Common Share
(27) Financial Data Schedule
21
Exhibit (11)
McKESSON CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(unaudited)
(in millions except per share amounts)
<TABLE>
<CAPTION>
Quarter Nine Months
Ended Ended
December 31 December 31
------------ ------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
FULLY DILUTED EARNINGS PER SHARE
Income (loss) after taxes from
continuing operations $(276.3) $ 24.2 $(232.8) $ 95.3
Contribution adjustment - Series B ESOP
convertible preferred stock(1) - (0.9) (1.8) (2.7)
----- ----- ----- -----
(276.3) 23.3 (234.6) 92.6
Discontinued operations 3.0 7.5 21.0 21.4
Discontinued operations
- gain on sale of PCS 576.7 - 576.7 -
Extraordinary item - - - (4.2)
Cumulative effect of accounting change - - - (16.7)
----- ----- ----- -----
Total $ 303.4 $ 30.8 $ 363.1 $ 93.1
===== ===== ===== =====
Fully diluted shares
Common shares outstanding(2) 44.2 40.9 42.6 40.6
Convertible securities - dilutive 1.4 3.2 2.5 3.4
----- ----- ----- -----
Total 45.6 44.1 45.1 44.0
===== ===== ===== =====
Fully diluted earnings (loss) per share
Continuing operations $ (6.06) $ .52 $ (5.20) $ 2.10
Discontinued operations .07 .17 .47 .49
Discontinued operations
- gain on sale of PCS 12.64 - 12.78 -
Extraordinary item - - - (.10)
Cumulative effect of accounting change - - - (.38)
----- ----- ----- -----
Total $ 6.65 $ .69 $ 8.05 $ 2.11
===== ===== ===== =====
PRIMARY EARNINGS PER SHARE
Income (loss) after taxes from
continuing operations $(276.3) $ 24.2 $(232.8) $ 95.3
Dividend requirements
- preferred stocks(1) - (1.6) (3.5) (5.2)
----- ----- ----- -----
(276.3) 22.6 (236.3) 90.1
Discontinued operations 3.0 7.5 21.0 21.4
Discontinued operations
- gain on sale of PCS 576.7 - 576.7 -
Extraordinary item - - - (4.2)
Cumulative effect of accounting change - - - (16.7)
----- ----- ----- -----
Total $ 303.4 $ 30.1 $ 361.4 $ 90.6
===== ===== ===== =====
Primary shares
Common shares outstanding(2) 44.2 40.9 42.6 40.6
===== ===== ===== =====
Primary earnings (loss) per share
Continuing operations $ (6.24) $ .54 $ (5.55) $ 2.21
Discontinued operations .07 .19 .50 .53
Discontinued operations
- gain on sale of PCS 13.03 - 13.54 -
Extraordinary item - - - (.10)
Cumulative effect of accounting change - - - (.41)
----- ----- ----- -----
Total $ 6.86 $ .73 $ 8.49 $ 2.23
===== ===== ===== =====
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).
</TABLE>
Exhibit (27)
McKESSON CORPORATION
FINANCIAL DATA SCHEDULE
December 31, 1994
(in millions except per share amounts)
<TABLE>
<CAPTION>
This schedule contains summary financial information extracted from the
McKesson Corporation Consolidated Financial Statements as of December 31, 1994
and March 31, 1994 and for the nine months ended December 31, 1994 and 1993 and
is qualified in its entirety by reference to such financial statements.
REGULATION
NUMBER STATEMENT CAPTION FY95 FY94
- ------------- ----------------- ---- ----
<S> <C> <C> <C>
5-02(1) Cash and cash items $ 144.2 $ 89.0
5-02(2) Marketable securities 496.1 -
5-02(3)(a)(1) Accounts receivable - trade 891.2 775.2
5-02(4) Allowance for doubtful accounts (64.7) (30.8)
5-02(6) Inventory 1,219.4 993.5
5-02(9) Total current assets 2,759.7 1,873.5
5-02(13) Property, plant and equipment 749.9 788.1
5-02(14) Accumulated depreciation (398.9) (391.5)
5-02(18) Total assets 3,505.1 2,835.0
5-02(21) Total current liabilities 1,786.6 1,428.2
5-02(22) Bonds, mortgages and similar debt 459.4 -
5-02(28) Preferred stock - mandatory redemption - -
5-02(29) Preferred stock - no mandatory redemption - 125.3
5-02(30) Common stock .4 89.2
5-02(31) Other stockholders' equity 989.2 464.1
5-02(32) Total liabilities & stockholders' equity 3,505.1 2,835.0
5-03(b)(1)(a) Net sales of tangible products 9,841.0 9,126.9
5-03(b)(1) Total revenues 9,841.0 9,126.9
5-03(b)(2)(a) Cost of tangible goods sold 9,060.4 8,345.8
5-03(b)(2) Total costs & exp. appl. to sales & revenues 9,060.4 8,345.8
5-03(b)(3) Other costs and expenses - -
5-03(b)(5) Provision for doubtful accounts & notes 44.2 6.2
5-03(b)(8) Interest & amortization of debt discount 33.6 30.7
5-03(b)(10) Income before taxes & other items (144.7) 164.7
5-03(b)(11) Income tax expense (81.5) (64.5)
5-03(b)(14) Income/loss from continuing operations (232.8) 95.3
5-03(b)(15) Discontinued operations 597.7 21.4
5-03(b)(17) Extraordinary items - (4.2)
5-03(b)(18) Cumulative effect-chngs. in acctg. prin. - (16.7)
5-03(b)(19) Net income or loss 364.9 95.8
5-03(b)(20) Earnings per share - primary 8.49 2.23
5-03(b)(20) Earnings per share - fully diluted 8.05 2.11
</TABLE>
February 10, 1995
Securities and Exchange Commission
File Desk, Room 1004
450 Fifth Street, NW
Washington, DC 20549
RE: McKesson Corporation - Direct Transmission
Quarterly Report on Form 10-Q -
Quarter Ended December 31, 1994
SEC File No. 1-13252
- -----------------------------------------------
Gentlemen/Ladies:
On behalf of McKesson Corporation (the "Company"), we submit for
filing via direct transmission the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1994, together with
all exhibits.
Should you have any questions regarding this filing, please
telephone me collect at (415)983-8301.
Very truly yours,
/s/ Nancy A. Miller
NANCY A. MILLER
Vice President and Corporate Secretary
cc: New York Stock Exchange, Inc.
Listed Company Marketing Division
20 Broad Street
New York, NY 10005
(w/1 exectued copy)
The Pacific Stock Exchange
301 Pine Street
San Francisco, CA 94104
Attn: Filing Desk - MS#7070
(w/1 conformed copy)
The Nasdaq Stock Market, Inc.
1735 K Street, NW
Washington, DC 20006-1500
Attn: Perry Peregoy
Managing Director
Nasdaq Market Services
(w/3 conformed copies)
