-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, DdiIQngEyB8nnSy+EhNLPDNzdKhwKJX/9quzk79k6xiQsdTxlaNZYKE0x0PwZZDT 9NKTBL1OtEzqSbD4gNgYLw== 0000927653-95-000003.txt : 19950214 0000927653-95-000003.hdr.sgml : 19950214 ACCESSION NUMBER: 0000927653-95-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950213 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCKESSON CORP CENTRAL INDEX KEY: 0000927653 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 943207296 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-86536 FILM NUMBER: 95509367 BUSINESS ADDRESS: STREET 1: ONE POST ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4159838300 FORMER COMPANY: FORMER CONFORMED NAME: SP VENTURES INC DATE OF NAME CHANGE: 19940728 10-Q 1 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):
Accumulated ESOP Treasury Total Preferred Common Other Retained translation notes and shares, stockholders' stocks stock capital earnings adjustment guarantee at cost equity ------ ------ ------ ------ ------ ------ ------ ------ 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 ===== ===== ===== ===== ===== ===== ===== =====
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
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 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.
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)
Quarter Nine Months Ended Ended December 31 December 31 ------------ ------------ 1994 1993 1994 1993 ---- ---- ---- ---- 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).
Exhibit (27) McKESSON CORPORATION FINANCIAL DATA SCHEDULE December 31, 1994 (in millions except per share amounts)
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 - ------------- ----------------- ---- ---- 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
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) -----END PRIVACY-ENHANCED MESSAGE-----