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 June 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 June 30, 1996 - ---------------------------- ---------------------------- Common stock, $.01 par value 42,820,705 shares
2 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION ============================== Item Page - ---- ---- 1. Financial Statements Consolidated Balance Sheets June 30, 1996 and March 31, 1996 3 - 4 Condensed Statements of Consolidated Income Quarter ended June 30, 1996 and 1995 5 Statements of Consolidated Cash Flows Quarter ended June 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 =========================== 4. Submission of Matters to a Vote of Security Holders 12 6. Exhibits and Reports on Form 8-K 12 Exhibit Index 14
3 PART I. FINANCIAL INFORMATION ============================== McKESSON CORPORATION and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) June 30, March 31, 1996 1996 -------- --------- (in millions) ASSETS - ------ Current Assets Cash and cash equivalents $ 163.1 $ 281.8 Marketable securities available for sale 139.3 195.4 Receivables 866.8 781.4 Inventories 1,327.7 1,379.1 Prepaid expenses 36.4 27.3 ------- ------- Total 2,533.3 2,665.0 ------- ------- Property, Plant and Equipment Land 39.0 39.0 Buildings, machinery and equipment 776.4 760.6 ------- ------- Total 815.4 799.6 Accumulated depreciation (432.3) (419.8) ------- ------- Net 383.1 379.8 Goodwill and other intangibles 282.5 223.4 Other assets 249.0 235.7 ------- ------- Total Assets $3,447.9 $3,503.9 ======= ======= (Continued)
4 McKESSON CORPORATION and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) June 30, March 31, 1996 1996 -------- --------- (in millions) LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities Drafts payable $ 158.9 $ 200.4 Accounts payable - trade 1,157.7 1,188.6 Short-term borrowings 85.8 6.6 Current portion of long-term debt 27.9 28.3 Salaries and wages 28.1 30.3 Taxes 106.8 97.0 Interest and dividends 22.2 20.6 Other 149.3 150.8 ------- ------- Total 1,736.7 1,722.6 ------- ------- Postretirement Obligations and Other Noncurrent Liabilities 216.2 217.0 ------- ------- Long-Term Debt 444.8 442.5 ------- ------- Minority Interest in Subsidiary 57.8 57.2 ------- ------- Stockholders' Equity Common stock 0.4 0.4 Other capital 295.3 295.8 Retained earnings 989.1 968.9 Accumulated translation adjustment (50.0) (49.7) ESOP notes and guarantee (120.7) (122.5) Treasury shares, at cost (121.7) (28.3) ------- ------- Net 992.4 1,064.6 ------- ------- Total Liabilities and Stockholders' Equity $3,447.9 $3,503.9 ======= ======= See Financial Notes. (Concluded)
5 McKESSON CORPORATION and SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED INCOME (unaudited) Quarter Ended June 30 --------------------- 1996 1995 -------- -------- (in millions - except per share amounts) REVENUES $3,501.5 $3,336.0 COSTS AND EXPENSES Cost of sales 3,210.3 3,053.7 Selling, distribution and administration 227.0 212.1 Interest 11.6 12.4 ------- ------- Total 3,448.9 3,278.2 ------- ------- INCOME BEFORE TAXES ON INCOME 52.6 57.8 TAXES ON INCOME (20.5) (23.4) ------- ------- INCOME BEFORE MINORITY INTEREST 32.1 34.4 Minority interest in net income of subsidiary (2.0) (1.6) ------- ------- NET INCOME $ 30.1 $ 32.8 ======= ======= EARNINGS PER COMMON SHARE Fully diluted $ .66 $ .70 Primary $ .66 $ .70 DIVIDENDS PER COMMON SHARE $ .25 $ .25 SHARES ON WHICH EARNINGS PER COMMON SHARE WERE BASED Fully diluted 45.5 46.9 Primary 45.5 46.8 See Financial Notes.
6 McKESSON CORPORATION and SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited) Quarter Ended June 30 --------------------- 1996 1995 -------- -------- (in millions) Operating Activities Net income $ 30.1 $ 32.8 Adjustments to reconcile to net cash used by operating activities Depreciation 16.4 14.4 Amortization 2.9 2.3 Provision for bad debts 2.0 1.0 Deferred taxes on income 1.0 0.2 Other 1.2 (7.8) ------- ------- Total 53.6 42.9 ------- ------- Effects of changes in Receivables (85.4) (14.4) Inventories 52.3 79.7 Accounts and drafts payable (72.6) (50.9) Taxes 17.0 (46.0) Other (20.7) (35.0) ------- ------- Total (109.4) (66.6) ------- ------- Net cash used by operating activities (55.8) (23.7) ------- ------- Investing Activities Purchases of marketable securities (0.2) (131.8) Maturities of marketable securities 58.3 35.0 Property acquisitions (20.1) (16.0) Properties sold 0.2 3.6 Acquisitions of businesses, less cash and short-term investments acquired (61.4) (11.2) Other (15.2) 1.6 ------- ------- Net cash used by investing activities (38.4) (118.8) ------- ------- (Continued)
7 McKESSON CORPORATION and SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited) Quarter Ended June 30 --------------------- 1996 1995 -------- -------- (in millions) Financing Activities Proceeds from issuance of debt $ 84.4 $ 61.1 Repayment of debt (3.4) (3.3) Capital stock transactions Treasury stock acquired (101.9) (4.7) Issuances 5.3 1.5 ESOP notes and guarantee 1.8 1.6 Dividends paid (10.7) (10.2) ------- ------- Net cash (used) provided by financing activities (24.5) 46.0 ------- ------- Net Decrease in Cash and Cash Equivalents (118.7) (96.5) Cash and Cash Equivalents at beginning of period 281.8 385.4 ------- ------- Cash and Cash Equivalents at end of period $ 163.1 $ 288.9 ======= ======= See Financial Notes. (Concluded)
8 McKESSON CORPORATION and SUBSIDIARIES FINANCIAL NOTES 1. Interim Financial Statements ---------------------------- In the opinion of the Company, these unaudited consolidated financial statements include all adjustments necessary for a fair presentation of its financial position as of June 30, 1996 and the results of its operations and its cash flows for the three months ended June 30, 1996 and 1995. Such adjustments were of a normal recurring nature. The results of operations for the three months ended June 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 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 will be amortized on a straight-line basis over a 20 year period.
9 McKESSON CORPORATION and SUBSIDIARIES FINANCIAL REVIEW Segment Results - --------------- The operating profits of the Company by business segment are as follows: Quarter Ended June 30 ------------------------- % 1996 1995 Chg. ------ ------ ---- (in millions) REVENUES Health Care Services Direct Delivery US $2,219.9 $1,928.5 15.1 International 376.8 383.1 (1.6) ------- ------- Total Direct Delivery 2,596.7 2,311.6 12.3 Sales to Customers' Warehouses 656.1 751.0 (12.6) ------- ------- Total Health Care Services 3,252.8 3,062.6 6.2 Service Merchandising 119.1 146.8 (18.9) Water Products 70.4 64.0 10.0 Armor All 55.3 50.2 10.2 Corporate 3.9 12.4 ------- ------- Total $3,501.5 $3,336.0 5.0 ======= ======= OPERATING PROFIT Health Care Services $ 51.5 $ 48.9 5.3 Service Merchandising 1.9 5.3 (64.2) Water Products 9.6 8.9 7.9 Armor All 7.1 5.7 24.6 ------- ------- Total 70.1 68.8 1.9 Interest - net(1) (8.4) (3.3) Corporate and other (9.1) (7.7) ------- ------- Income before taxes $ 52.6 $ 57.8 (9.0) ======= ======= (1) Interest is shown net of corporate interest income.
10 McKESSON CORPORATION and SUBSIDIARIES FINANCIAL REVIEW Overview of Results - ------------------- Net income for the first quarter decreased to $30.1 million, $.66 per fully-diluted share, from $32.8 million, $.70 per share in the prior year. Earnings growth 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 73% of operating profit for the first quarter. Segment revenues increased by 6% for the three months compared with the prior year. Revenue growth of 15% in the U.S. Health Care direct delivery businesses was partially offset by declines in U.S. sales to customer warehouses and sales at Medis, the Company's Canadian unit. Operating profit for the quarter increased by 5% from the prior year due to direct delivery sales growth in every customer segment (independents, chain stores and hospitals) and to cost reduction efforts. First quarter results include $ 4.2 million of costs associated with a series of strategic initiatives designed to improve the Company's competitiveness in the retail and institutional market segments. SERVICE MERCHANDISING Revenues in the Service Merchandising segment declined 19% for the three months compared with the prior year. Strong competitive pressures and customer consolidations resulted in the loss of several large customers in fiscal 1996. Operating profit decreased 64% to $1.9 million due primarily to the impact of fixed expenses over a lower revenue base. These trends are expected to continue and to adversely affect the Company's earnings for the rest of the fiscal year.
11 McKESSON CORPORATION and SUBSIDIARIES FINANCIAL REVIEW WATER PRODUCTS Revenues in the Water Products segment increased by 10% for the three months compared with the prior year. Operating profit increased 8% to $9.6 million from $8.9 million for the first quarter, compared with the same quarter in the prior year. This improvement reflects growth in the direct delivery and packaged water businesses, and the favorable impact of the segment's ongoing programs to improve customer service which have reduced customer turnover expenses. ARMOR ALL Armor All Products Corp., which is 55% owned by the Company, experienced an increase in revenue of 10% for the three months compared with the prior year. The increase was primarily attributable to sales growth of Armor All Protectant(R) and to sales of two new products introduced in December, 1995. Operating profit increased by 25% due to an increased proportion of higher margin automotive products in the sales mix. Liquidity and Capital Resources - ------------------------------- Cash, equivalents and marketable securities decreased $174.8 million during the first quarter to $302.4 million primarily due to stock repurchase activity and the cost of the acquisition referred to in Financial Note 2. During the first three months of fiscal 1997, the Company repurchased 2.2 million shares of its common stock for $102 million under a share repurchase program initiated in June 1995 and expanded in May 1996. As of June 30, 1996, 3.4 million shares remain to be repurchased under the program. The Company's debt-to-capital ratio increased from 31% at March 31, 1996 to 36% at June 30, 1996 as debt increased from short-term borrowings by its health care products distribution operations in Canada and equity was reduced by the share repurchases.
12 PART II. OTHER INFORMATION =========================== Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------- The Company's Annual Meeting of stockholders was held on July 31, 1996. The only matter voted upon at the meeting was the election of three directors. In an uncontested election, the Board of Directors' nominees for director as listed in the proxy statement were each elected to serve for a three year term expiring at the Annual Meeting in 1999. The vote was as follows: Votes For Votes Withheld ---------- -------------- Carl E. Reichardt 39,067,430 545,654 Alan Seelenfreund 39,150,553 462,531 Jane E. Shaw 39,237,898 375,186 The terms of office of the following named directors continued after the annual meeting: Mary G. F. Bitterman Tully M. Friedman John M. Pietruski Mark A. Pulido Robert H. Waterman, Jr. Item 6. Exhibits and Reports on Form 8-K - ------------------------------------------ (a) Exhibits 3 Restated By-Laws of the Company, as amended effective July 31, 1996 10.1 Form of Employment Agreement effective as of January 31, 1996 by and between the Company and a corporate Vice President and President of its Health Systems unit 10.2 McKesson Corporation Severance Policy for Executive Employees, amended and restated as of May 31, 1996 27 Financial Data Schedule (b) Reports on Form 8-K 1. Form 8-K dated April 8, 1996 Item 5. Other Events ---------------------- The Registrant announced that David E. McDowell was resigning as President and Chief Operating Officer of the company, effective upon commencement of employment of his successor. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits --------------------------------------------------- 2. Form 8-K dated April 29, 1996 Item 5. Other Events ---------------------- The Registrant announced that Mark A. Pulido had been elected President and Chief Operating Officer and a Director of the Registrant, effective May 20, 1996. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits ---------------------------------------------------
13 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: August 14, 1996 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
14 EXHIBIT INDEX Exhibit Number Description - ------- ------------------------------------------------- 3 Restated By-Laws of the Company, as amended effective July 31, 1996 10.1 Form of Employment Agreement effective as of January 31, 1996 by and between the Company and a corporate Vice President and President of its Health Systems unit 10.2 McKesson Corporation Severance Policy for Executive Employees, amended and restated as of May 31, 1996 27 Financial Data Schedule