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 September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission file number 1-13252
McKESSON CORPORATION
- -----------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3207296
- ------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Post Street, San Francisco, California 94104
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(415) 983-8300
- -----------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at September 30, 1996
- ---------------------------- ---------------------------------
Common stock, $.01 par value 41,941,126 shares
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
==============================
Item Page
- ---- ----
1. Financial Statements
Consolidated Balance Sheets
September 30, 1996 and March 31, 1996 3 - 4
Statements of Consolidated Income
Three and Six month periods ended
September 30, 1996 and 1995 5
Statements of Consolidated Cash Flows
Six month periods ended
September 30, 1996 and 1995 6 - 7
Financial Notes 8
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Review 9 - 11
PART II. OTHER INFORMATION
===========================
6. Exhibits and Reports on Form 8-K 12
Exhibit Index 14
PART I. FINANCIAL INFORMATION
==============================
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, March 31,
1996 1996
-------- --------
(in millions)
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 188.3 $ 281.8
Marketable securities available for sale 57.0 195.4
Receivables 989.2 781.4
Inventories 1,342.7 1,379.1
Prepaid expenses 41.1 27.3
------- -------
Total 2,618.3 2,665.0
------- -------
Property, Plant and Equipment
Land 38.9 39.0
Buildings, machinery and equipment 794.3 760.6
------- -------
Total 833.2 799.6
Accumulated depreciation (444.3) (419.8)
------- -------
Net 388.9 379.8
Goodwill and other intangibles 279.2 223.4
Other assets 277.2 235.7
------- -------
Total Assets $3,563.6 $3,503.9
======= =======
(Continued)
-3-
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, March 31,
1996 1996
-------- --------
(in millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Drafts payable $ 248.0 $ 200.4
Accounts payable - trade 1,208.3 1,188.6
Short-term borrowings 95.0 6.6
Current portion of long-term debt 24.2 28.3
Salaries and wages 31.8 30.3
Taxes 104.1 97.0
Interest and dividends 20.1 20.6
Other 137.1 150.8
------- -------
Total 1,868.6 1,722.6
------- -------
Postretirement Obligations and
Other Noncurrent Liabilities 213.2 217.0
------- -------
Long-Term Debt 445.7 442.5
------- -------
Minority Interest in Subsidiary 58.2 57.2
------- -------
Stockholders' Equity
Common stock 0.4 0.4
Other capital 293.3 295.8
Retained earnings 1,007.4 968.9
Accumulated translation adjustment (42.8) (49.7)
ESOP notes and guarantee (120.2) (122.5)
Treasury shares, at cost (160.2) (28.3)
------- -------
Net 977.9 1,064.6
------- -------
Total Liabilities and
Stockholders' Equity $3,563.6 $3,503.9
======= =======
See Financial Notes.
(Concluded)
-4-
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
Three Months Ended Six Months Ended
September 30 September 30
------------------ ------------------
1996 1995 1996 1995
------ ------ ------ ------
(in millions - except per share amounts)
REVENUES $3,566.5 $3,348.4 $7,068.0 $6,684.4
COSTS AND EXPENSES
Cost of sales 3,286.5 3,063.2 6,496.8 6,116.9
Selling, distribution
and administration 221.0 218.7 448.0 430.8
Interest 10.5 12.0 22.1 24.4
------- ------- ------- -------
Total 3,518.0 3,293.9 6,966.9 6,572.1
------- ------- ------- -------
INCOME BEFORE
TAXES ON INCOME 48.5 54.5 101.1 112.3
TAXES ON INCOME (18.9) (21.5) (39.4) (44.9)
------- ------- ------- -------
INCOME BEFORE
MINORITY INTEREST 29.6 33.0 61.7 67.4
Minority interest in
net income of subsidiary (1.5) (1.3) (3.5) (2.9)
------- ------- ------- -------
NET INCOME $ 28.1 $ 31.7 $ 58.2 $ 64.5
======= ======= ======= =======
EARNINGS PER COMMON SHARE
Fully diluted earnings $0.64 $0.68 $1.30 $1.38
==== ==== ==== ====
Primary earnings $0.64 $0.68 $1.30 $1.38
==== ==== ==== ====
Dividends $0.25 $0.25 $0.50 $0.50
==== ==== ==== ====
SHARES ON WHICH EARNINGS
PER COMMON SHARE WERE BASED
Fully diluted 43.8 46.7 44.6 46.8
==== ==== ==== ====
Primary 43.8 46.7 44.6 46.7
==== ==== ==== ====
See Financial Notes.
-5-
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Six Months Ended
September 30
-------------------
1996 1995
-------- --------
(in millions)
Operating Activities
Net Income $ 58.2 $ 64.5
Adjustments to reconcile to net cash
(used) provided by operating activities
Depreciation 33.6 29.7
Amortization 6.2 4.7
Provision for bad debts 3.3 4.2
Deferred taxes on income 2.0 (5.2)
Gain on sale of subsidiary - (11.2)
Other non-cash (2.3) (1.3)
------- -------
Total 101.0 85.4
------- -------
Effects of changes in
Receivables (208.8) (37.7)
Inventories 37.6 49.3
Accounts and drafts payable 67.2 104.3
Taxes 17.5 (56.3)
Other (36.9) (99.3)
------- -------
Total (123.4) (39.7)
------- -------
Net cash (used) provided by
operating activities (22.4) 45.7
------- -------
Investing Activities
Purchases of marketable securities (0.2) (130.3)
Maturities of marketable securities 141.8 49.9
Property acquisitions (42.1) (39.7)
Properties sold 1.3 5.8
Acquisitions of businesses, less cash
and short-term investments acquired (61.4) (11.3)
Proceeds from sale of subsidiary - 36.1
Other (24.1) 3.1
------- -------
Net cash provided (used) by
investing activities 15.3 (86.4)
------- -------
(Continued)
-6-
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
Six Months Ended
September 30
-------------------
1996 1995
-------- --------
(in millions)
Financing Activities
Proceeds from issuance of debt $ 95.7 $ 72.3
Repayment of debt (24.7) (4.7)
Capital stock transactions
Treasury stock acquired (145.2) (25.7)
Issuances 6.6 3.8
ESOP notes and guarantee 2.4 2.2
Dividends paid (21.2) (21.8)
------- -------
Net cash (used) provided
by financing activities (86.4) 26.1
------- -------
Net Decrease in Cash and Cash Equivalents (93.5) (14.6)
Cash and Cash Equivalents
at beginning of period 281.8 385.4
------- -------
Cash and Cash Equivalents
at end of period $ 188.3 $ 370.8
======= =======
See Financial Notes.
(Concluded)
-7-
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 September 30, 1996 and
the results of its operations and its cash flows for the six months
ended September 30, 1996 and 1995. Such adjustments were of a
normal recurring nature.
The results of operations for the six months ended September
30, 1996 and 1995 are not necessarily indicative of the results for
the full years.
It is suggested that these interim financial statements be
read in conjunction with the annual audited financial statements,
accounting policies and financial notes thereto included in the
Appendix to the Company's 1996 Proxy Statement which has previously
been filed with the Securities and Exchange Commission.
2. Acquisitions
------------
In April 1996, the Company acquired Automated Healthcare,
Inc. ("AHI") for $61.4 million in cash and the assumption of $3.2
million of employee stock incentives. AHI designs, manufactures
and installs automated pharmaceutical dispensing equipment for use
by health care institutions. The goodwill related to the
acquisition is being amortized on a straight-line basis over a 20
year period.
3. Subsequent Event
----------------
On November 11, 1996, the Company announced the completion of
its acquisition of the healthcare distribution business of FoxMeyer
Corporation ("FoxMeyer"), pursuant to an expedited auction process
in the FoxMeyer bankruptcy proceeding in Wilmington, Delaware. The
Company received regulatory clearance and court approval enabling
the transaction to close on November 8, 1996. Through an amended
sale agreement, the Company paid approximately $23 million in cash
to the debtors, paid off approximately $500 million in secured debt
and assumed an additional $75 million in other liabilities. The
Company acquired assets consisting primarily of accounts receivable
and inventories of approximately $650 million, customer contracts
and fixed assets. The Company utilized proceeds from commercial
paper issuances and a note payable to a bank to fund the
transaction. The commercial paper issuances were backed by the
Company's revolving credit agreements that were recently increased
to provide borrowing availability of $500 million.
-8-
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Segment Results
- ---------------
The revenues and operating profits of the Company by business
segment are as follows:
Three Months Ended
September 30
-------------------------
%
1996 1995 Chg.
------ ------ ------
($ in millions)
REVENUES
Health Care Services
Direct Delivery
U.S. $2,272.7 $1,935.8 17.4
International 375.0 387.1 (3.1)
------- -------
Total Direct Delivery 2,647.7 2,322.9 14.0
Sales to Customers' Warehouses 679.7 762.6 (10.9)
------- -------
Total Health Care Services 3,327.4 3,085.5 7.8
Service Merchandising 118.2 143.4 (17.6)
Water Products 77.6 74.1 4.7
Armor All 37.4 39.8 (6.0)
Corporate 5.9 5.6
------- -------
Total $3,566.5 $3,348.4 6.5
======= =======
OPERATING PROFIT
Health Care Services $ 45.3 $ 45.1 0.4
Service Merchandising 1.3 3.8 (65.8)
Water Products 14.4 13.6 5.9
Armor All 5.1 4.2 21.4
------- -------
Total 66.1 66.7 (0.9)
Interest - net(1) (7.7) (2.6)
Corporate and other (9.9) (9.6)
------- -------
Income before taxes $ 48.5 $ 54.5 (11.0)
======= =======
(1) Interest expense is shown net of corporate interest income.
(Continued)
-9-
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Segment Results
- ---------------
Six Months Ended
September 30
-------------------------
%
1996 1995 Chg.
------ ------ ------
($ in millions)
REVENUES
Health Care Services
Direct Delivery
U.S. $4,492.6 $3,864.3 16.3
International 751.8 770.2 (2.4)
------- -------
Total Direct Delivery 5,244.4 4,634.5 13.2
Sales to Customers' Warehouses 1,335.8 1,513.6 (11.7)
------- -------
Total Health Care Services 6,580.2 6,148.1 7.0
Service Merchandising 237.3 290.2 (18.2)
Water Products 148.0 138.1 7.2
Armor All 92.7 90.0 3.0
Corporate 9.8 18.0
------- -------
Total $7,068.0 $6,684.4 5.7
======= =======
OPERATING PROFIT
Health Care Services $ 96.8 $ 94.0 3.0
Service Merchandising 3.2 9.1 (64.8)
Water Products 24.0 22.5 6.7
Armor All 12.2 9.9 23.2
------- -------
Total 136.2 135.5 0.5
Interest - net(1) (16.1) (5.9)
Corporate and other (19.0) (17.3)
------- -------
Income before taxes $ 101.1 $ 112.3 (10.0)
======= =======
(1) Interest expense is shown net of corporate interest income.
(Concluded)
-9-
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Overview of Results
- -------------------
Net income for the second quarter decreased to $28.1 million,
$.64 per fully-diluted share, from $31.7 million, $.68 per share in
the prior year. For the six month period, net income decreased to
$58.2 million, $1.30 per share, from $64.5 million, $1.38 per share
for the comparable period in the prior year. The increase in
earnings in the Health Care Services segment, including costs
associated with strategic initiatives, was more than offset by
lower earnings from the Service Merchandising segment and higher
net interest expense.
HEALTH CARE SERVICES
The Health Care Services segment includes the operations of
the Company's U.S. pharmaceutical and health care products
distribution businesses and its international pharmaceutical
operations (Canada and Mexico). This segment accounted for 93% of
consolidated revenues and 69% of operating profit for the second
quarter, and 93% and 71%, respectively, for the six month period
ended September 30, 1996.
Segment revenues increased by 8% and 7% for the three and six
month periods, respectively, from the comparable periods in the
prior year. U.S. Health Care direct delivery revenue growth of 17%
in the second quarter and 16% for the six month period was
partially offset by declines in U.S. sales to customers'
warehouses and international sales. Year to year comparisons for
international operations were affected by the sale of the Company's
Central American pharmaceutical manufacturing operation in the
second quarter of fiscal 1996.
Operating profit for the quarter was flat with the prior year
but increased by 3% for the six month period. Results for the
three and six month periods include $4.0 million and $8.2 million,
respectively, of costs associated with a series of strategic
initiatives designed to improve the Company's competitiveness in
the retail and institutional market segments. These costs were
partially offset by continued growth in the Company's direct
delivery business in every customer segment (independents, chain
stores and hospitals) and operating expense efficiencies. The
prior year second quarter results included a pretax gain of $11.2
million from the sale of the Central American operation. This gain
was offset by research and development costs associated with retail
and institutional initiatives and expenses incurred to further
streamline operating and administrative functions.
-10-
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
SERVICE MERCHANDISING
Segment revenues decreased by 18% for both the three and six
month periods from the comparable periods in the prior year.
Strong competitive pressures and customer consolidations resulted
in the loss of volume from several large customers in fiscal 1996.
Operating profit for the quarter decreased by 66% and by 65% for
the six month period due primarily to the impact of fixed expenses
over a lower revenue base.
WATER PRODUCTS
Segment revenues increased by 5% and 7% for the three and six
month periods, respectively, from the comparable periods in the
prior year. Operating profit for the quarter increased by 6% and
by 7% for the six month period. This improvement reflects sales
growth in the direct delivery and grocery products businesses which
have more than offset the costs of continuing geographic expansion
into Washington and Texas.
ARMOR ALL
Armor All Products Corp., which is 55% owned by the Company,
experienced a decrease in revenue of 6% for the quarter but an
increase of 3% for the six month period, compared with the prior
year. The increase for the six month period is primarily
attributable to sales growth of Armor All Protectant and to sales
of two new products introduced in December, 1995. In the second
quarter, sales were down across all domestic product lines.
Operating profit increased by 21% in the quarter and by 23% in the
six month period due primarily to a focus on controlling selling
and marketing costs.
(continued)
-11-
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents decreased $93.5 million during the
six months to $188.3 million primarily due to a temporary increase
in certain customer receivable balances, stock repurchase activity,
the cost of the acquisition referred to in Financial Note 2 and
investments in technology associated with strategic initiatives.
During the first six months of fiscal 1997, the Company
repurchased 3.2 million shares of its common stock for $145 million
under a share repurchase program initiated in June 1995 and
expanded in May 1996. As of September 30, 1996, authorization to
purchase up to an additional 2.4 million shares remained.
The Company's debt-to-capital ratio increased from 31% at
March 31, 1996 to 37% at September 30, 1996 largely as a result of
short-term borrowings by its health care products distribution
operations in Canada.
On November 11, 1996, the Company announced the completion of
the acquisition referred to in Financial Note 3.
(concluded)
-11-
PART II. OTHER INFORMATION
===========================
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
1. There were no reports on Form 8-K filed during
the quarter ended September 30, 1996.
2. The following report on Form 8-K was filed
October 9, 1996.
Item 5. Other Events
----------------------
The registrant announced that it had executed
a definitive agreement to acquire
substantially all of the assets of the
healthcare distribution business of FoxMeyer
Corporation.
-12-
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: November 13, 1996 By /s/Richard H. Hawkins
-----------------------------
Richard H. Hawkins
Vice President and
Chief Financial Officer
By /s/Heidi E. Yodowitz
-----------------------------
Heidi E. Yodowitz
Controller
-13-
EXHIBIT INDEX
Exhibit
Number Description
- ------- ----------------------------------------------
27 Financial Data Schedule
-14-
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