QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | ||
(State or other jurisdiction of incorporation or organization) | 94-3207296 (IRS Employer Identification No.) | |
One Post Street, San Francisco, California | ||
(Address of principal executive offices) | 94104 (Zip Code) |
Class | Outstanding at | |
Common stock, $0.01 par value |
1
TABLE OF CONTENTS
Item | Page | |||||||
PART I. FINANCIAL INFORMATION | ||||||||
1. | Financial Statements | |||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6-18 | ||||||||
2. | 19-27 | |||||||
3. | 28 | |||||||
4. | 28 | |||||||
PART II. OTHER INFORMATION | ||||||||
1. | 28 | |||||||
2. | 28 | |||||||
6. | 28 | |||||||
29 | ||||||||
EXHIBIT 31.1 | ||||||||
EXHIBIT 31.2 | ||||||||
EXHIBIT 32 |
Item | Page |
2
June 30, | March 31, | |||||||||||||||
December 31, | March 31, | 2005 | 2005 | |||||||||||||
2004 | 2004 | |||||||||||||||
ASSETS | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 1,032.9 | $ | 708.0 | $ | 2,409 | $ | 1,800 | ||||||||
Marketable securities | 8.9 | 9.8 | ||||||||||||||
Marketable securities available for sale | 9 | 9 | ||||||||||||||
Receivables, net | 5,615.6 | 5,418.8 | 5,782 | 5,721 | ||||||||||||
Inventories | 8,316.7 | 6,735.1 | 7,228 | 7,495 | ||||||||||||
Prepaid expenses and other | 335.3 | 132.5 | 317 | 337 | ||||||||||||
Total | 15,309.4 | 13,004.2 | 15,745 | 15,362 | ||||||||||||
Property, Plant and Equipment, net | 612.0 | 599.9 | 628 | 616 | ||||||||||||
Capitalized Software Held for Sale | 130.1 | 129.4 | 128 | 130 | ||||||||||||
Notes Receivable | 160.1 | 172.2 | 161 | 163 | ||||||||||||
Goodwill and Other Intangibles | 1,514.0 | 1,490.2 | 1,534 | 1,529 | ||||||||||||
Other Assets | 958.6 | 844.3 | 933 | 975 | ||||||||||||
Total Assets | $ | 18,684.2 | $ | 16,240.2 | $ | 19,129 | $ | 18,775 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Drafts and accounts payable | $ | 8,821.7 | $ | 7,362.1 | $ | 8,762 | $ | 8,733 | ||||||||
Deferred revenue | 610.7 | 503.2 | 573 | 593 | ||||||||||||
Current portion of long-term debt | 259.9 | 274.8 | 8 | 9 | ||||||||||||
Securities Litigation | 1,200.0 | — | 1,221 | 1,200 | ||||||||||||
Other | 1,155.8 | 1,276.2 | 1,245 | 1,257 | ||||||||||||
Total | 12,048.1 | 9,416.3 | 11,809 | 11,792 | ||||||||||||
Postretirement Obligations and Other Noncurrent Liabilities | 509.6 | 448.8 | 593 | 506 | ||||||||||||
Long-Term Debt | 1,201.8 | 1,209.8 | 992 | 1,202 | ||||||||||||
Other Commitments and Contingent Liabilities (Note 12) | ||||||||||||||||
Other Commitments and Contingent Liabilities (Note 11) | ||||||||||||||||
Stockholders’ Equity: | ||||||||||||||||
Preferred stock, $0.01 par value, 100.0 shares authorized, no shares issued or outstanding | — | — | ||||||||||||||
Common stock, $0.01 par value | ||||||||||||||||
Shares authorized: 800.0; shares issued: December 31, 2004 - 302.0 and March 31, 2004 - 297.1 | 3.0 | 3.0 | ||||||||||||||
Stockholders’ Equity | ||||||||||||||||
Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding | — | — | ||||||||||||||
Common stock, $0.01 par value, 800 shares authorized, shares issued: June 30, 2005 - 316 and March 31, 2005 - 306 | 3 | 3 | ||||||||||||||
Additional paid-in capital | 2,203.3 | 2,047.1 | 2,713 | 2,320 | ||||||||||||
Other capital | (39.8 | ) | (43.2 | ) | ||||||||||||
Other | (55 | ) | (42 | ) | ||||||||||||
Retained earnings | 2,952.4 | 3,420.6 | 3,346 | 3,194 | ||||||||||||
Accumulated other comprehensive income (loss) | 37.5 | (15.6 | ) | |||||||||||||
Accumulated other comprehensive income | 23 | 32 | ||||||||||||||
ESOP notes and guarantees | (36.2 | ) | (52.5 | ) | (33 | ) | (36 | ) | ||||||||
Treasury shares, at cost, December 31, 2004 and March 31, 2004 - 6.8 | (195.5 | ) | (194.1 | ) | ||||||||||||
Treasury shares, at cost, June 30, 2005 - 8 and March 31, 2004 - 7 | (262 | ) | (196 | ) | ||||||||||||
Total Stockholders’ Equity | 4,924.7 | 5,165.3 | 5,735 | 5,275 | ||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 18,684.2 | $ | 16,240.2 | $ | 19,129 | $ | 18,775 | ||||||||
3
Quarter Ended | Nine Months Ended | Quarter Ended June 30, | ||||||||||||||||||||||
December 31, | December 31, | 2005 | 2004 | |||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||
Revenues | $ | 20,781.9 | $ | 18,231.9 | $ | 59,902.8 | $ | 51,566.2 | $ | 21,058 | $ | 19,175 | ||||||||||||
Cost of Sales | 19,941.3 | 17,476.4 | 57,475.2 | 49,212.5 | 20,133 | 18,326 | ||||||||||||||||||
Gross Profit | 840.6 | 755.5 | 2,427.6 | 2,353.7 | 925 | 849 | ||||||||||||||||||
Operating Expenses | 606.0 | 571.0 | 1,803.4 | 1,690.5 | 612 | 589 | ||||||||||||||||||
Securities Litigation Charge | 1,200.0 | — | 1,200.0 | — | 52 | — | ||||||||||||||||||
Total Operating Expenses | 1,806.0 | 571.0 | 3,003.4 | 1,690.5 | 664 | 589 | ||||||||||||||||||
Operating Income (Loss) | (965.4 | ) | 184.5 | (575.8 | ) | 663.2 | ||||||||||||||||||
Operating Income | 261 | 260 | ||||||||||||||||||||||
Other Income, Net | 28 | 15 | ||||||||||||||||||||||
Interest Expense | (30.6 | ) | (30.2 | ) | (90.4 | ) | (90.0 | ) | (25 | ) | (30 | ) | ||||||||||||
Other Income, Net | 15.8 | 9.7 | 45.7 | 36.7 | ||||||||||||||||||||
Income (Loss) Before Income Taxes | (980.2 | ) | 164.0 | (620.5 | ) | 609.9 | ||||||||||||||||||
Income from Continuing Operations Before Income Taxes | 264 | 245 | ||||||||||||||||||||||
Income Taxes | 314.8 | (43.8 | ) | 204.8 | (177.6 | ) | (94 | ) | (82 | ) | ||||||||||||||
Net Income (Loss) | $ | (665.4 | ) | $ | 120.2 | $ | (415.7 | ) | $ | 432.3 | ||||||||||||||
Income from Continuing Operations | 170 | 163 | ||||||||||||||||||||||
Discontinued Operations | 1 | 1 | ||||||||||||||||||||||
Earnings (Loss) Per Common Share | ||||||||||||||||||||||||
Net Income | $ | 171 | $ | 164 | ||||||||||||||||||||
Earnings Per Common Share | ||||||||||||||||||||||||
Diluted | $ | (2.26 | ) | $ | 0.41 | $ | (1.42 | ) | $ | 1.46 | $ | 0.55 | $ | 0.55 | ||||||||||
Basic | $ | (2.26 | ) | $ | 0.41 | $ | (1.42 | ) | $ | 1.49 | $ | 0.57 | $ | 0.56 | ||||||||||
Dividends Declared Per Common Share | $ | 0.06 | $ | 0.06 | $ | 0.18 | $ | 0.18 | $ | 0.06 | $ | 0.06 | ||||||||||||
Weighted Average Shares | ||||||||||||||||||||||||
Diluted | 293.8 | 298.7 | 292.7 | 299.0 | 313 | 300 | ||||||||||||||||||
Basic | 293.8 | 290.2 | 292.7 | 290.0 | 302 | 291 |
4
Nine Months Ended | Quarter Ended June 30, | |||||||||||||||
December 31, | 2005 | 2004 | ||||||||||||||
2004 | 2003 | |||||||||||||||
Operating Activities | ||||||||||||||||
Net income (loss) | $ | (415.7 | ) | $ | 432.3 | |||||||||||
Adjustments to reconcile to net cash provided (used) by operating activities: | ||||||||||||||||
Depreciation | 83.1 | 73.8 | ||||||||||||||
Amortization | 102.7 | 91.5 | ||||||||||||||
Provision for bad debts | 17.5 | 54.3 | ||||||||||||||
Securities Litigation charge, net of deferred tax benefit | 810.0 | — | ||||||||||||||
Deferred taxes on income | 32.0 | 139.2 | ||||||||||||||
Income from continuing operations | $ | 170 | $ | 163 | ||||||||||||
Adjustments to reconcile to net cash provided by (used in) operating activities: | ||||||||||||||||
Depreciation and amortization | 64 | 61 | ||||||||||||||
Securities Litigation charge, net of tax | 35 | — | ||||||||||||||
Securities Litigation settlement payments | (31 | ) | — | |||||||||||||
Deferred taxes | 33 | 107 | ||||||||||||||
Other non-cash items | (6.0 | ) | (21.4 | ) | (1 | ) | 1 | |||||||||
Total | 623.6 | 769.7 | 270 | 332 | ||||||||||||
Effects of changes in: | ||||||||||||||||
Receivables | (220.6 | ) | (710.3 | ) | (23 | ) | (92 | ) | ||||||||
Inventories | (1,534.6 | ) | (1,047.2 | ) | 262 | (636 | ) | |||||||||
Drafts and accounts payable | 1,396.2 | 617.9 | 48 | 670 | ||||||||||||
Deferred revenue | 106.5 | 81.7 | 129 | (35 | ) | |||||||||||
Taxes | 57.1 | (1.6 | ) | 35 | (49 | ) | ||||||||||
Proceeds from sale of notes receivable | 59.3 | 42.2 | — | 21 | ||||||||||||
Other | 46.6 | 5.5 | (84 | ) | (100 | ) | ||||||||||
Total | (89.5 | ) | (1,011.8 | ) | 367 | (221 | ) | |||||||||
Net cash provided (used) by operating activities | 534.1 | (242.1 | ) | |||||||||||||
Net cash provided by operating activities | 637 | 111 | ||||||||||||||
Investing Activities | ||||||||||||||||
Property acquisitions | (90.9 | ) | (71.6 | ) | (44 | ) | (22 | ) | ||||||||
Capitalized software expenditures | (93.2 | ) | (131.0 | ) | (32 | ) | (36 | ) | ||||||||
Acquisitions of businesses, less cash and cash equivalents acquired | (85.7 | ) | (45.6 | ) | (8 | ) | (37 | ) | ||||||||
Proceeds from sale of business | 12.3 | — | ||||||||||||||
Other | (22.8 | ) | 16.4 | (7 | ) | 16 | ||||||||||
Net cash used by investing activities | (280.3 | ) | (231.8 | ) | ||||||||||||
Net cash used in investing activities | (91 | ) | (79 | ) | ||||||||||||
Financing Activities | ||||||||||||||||
Proceeds from issuance of debt | — | 217.6 | — | 23 | ||||||||||||
Repayment of debt | (17.6 | ) | (10.7 | ) | (11 | ) | (13 | ) | ||||||||
Capital stock transactions | ||||||||||||||||
Capital stock transactions: | ||||||||||||||||
Issuances | 117.1 | 81.8 | 155 | 83 | ||||||||||||
Share repurchases | — | (115.3 | ) | (66 | ) | — | ||||||||||
ESOP notes and guarantees | 16.4 | 9.1 | 3 | 13 | ||||||||||||
Dividends paid | (52.7 | ) | (52.3 | ) | (18 | ) | (18 | ) | ||||||||
Other | 7.9 | 22.2 | — | 9 | ||||||||||||
Net cash provided by financing activities | 71.1 | 152.4 | 63 | 97 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 324.9 | (321.5 | ) | |||||||||||||
Net increase in cash and cash equivalents | 609 | 129 | ||||||||||||||
Cash and cash equivalents at beginning of period | 708.0 | 522.0 | 1,800 | 708 | ||||||||||||
Cash and cash equivalents at end of period | $ | 1,032.9 | $ | 200.5 | $ | 2,409 | $ | 837 | ||||||||
5
2004.
Commission.
Certain prior year amounts have been reclassified to conform to the current year presentation.
We implemented FIN Nos. 46 and 46(R) on a retroactive basis as required in 2004. As a result of the implementation, the Company no longer consolidates its investment in the McKesson Financing Trust (the “Trust”) as the Company was not designated as the Trust’s primary beneficiary. In accordance with this accounting standard, the Company now recognizes the debentures issued to the Trust as long-term debt in its consolidated financial statements in lieu of the preferred securities that the Trust issued to third parties. Additionally, the consolidated financial statements include interest expense on the debentures and no longer report dividends on the preferred securities, net of tax. These changes increased the Company’s net debt to net capital employed ratio slightly but did not have a material impact on our consolidated financial statements, including diluted earnings per share.
In April 2003, the FASB issued Statement of Financial Accounting StandardsStandard (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments154, “Accounting Changes and Hedging Activities.Error Corrections,” which replaces Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 149 amends154 requires retrospective application to prior periods’ financial statements for reporting a voluntary change in accounting principle, unless impracticable. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This standard also distinguishes between retrospective application and restatement. It redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. SFAS No. 133 for decisions made as part of the FASB’s Derivatives Implementation Group process, other FASB projects dealing with financial instruments, and in connection with implementation issues raised in relation to the application of the definition of a derivative. This statement is generally154 becomes effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard did not have a material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 clarifies the definition of a liability as currently definedus in FASB Concepts Statement No. 6, “Elements of Financial Statements,” as well as other planned revisions. This statement requires a financial instrument that embodies an obligation of an issuer to be classified as a liability. In addition, the statement establishes standards for the initial and subsequent measurement of these financial instruments and disclosure requirements. SFAS No. 150 is effective for financial instruments entered into or
6
McKESSON CORPORATION
FINANCIAL NOTES (Continued)(Unaudited)
modified after May 31, 2003 and for all other matters, at the beginning of our second quarter 2004. The adoption of this standard did not have a material impact on our consolidated financial statements.
In December 2003, the Staff of the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which supersedes SAB No. 101, “Revenue Recognition in Financial Statements.” SAB No. 104’s primary purpose is to rescind the accounting guidance contained in SAB No. 101 related to multiple-element revenue arrangements that was superseded as a result of the issuance of Emerging Issues Task Force (“EITF”) Issue No. 00-21. Additionally, SAB No. 104 rescinds the SEC’s related Revenue Recognition in Financial Statements Frequently Asked Questions and Answers issued with SAB No. 101 that had previously been codified by the SEC. While the wording of SAB No. 104 reflects the issuance of EITF Issue No. 00-21, the revenue recognition principles of SAB No. 101 remain largely unchanged by the issuance of SAB No. 104, which was effective upon issuance. The adoption of SAB No. 104 did not have a material effect on our consolidated financial position or results of operations.
In January 2004, the FASB issued Financial Staff Position (“FSP”) No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) allows employers that sponsor a postretirement plan providing a qualifying or eligible prescription drug benefit to receive a federal subsidy. As permitted by FSP No. 106-1, we elected to defer recognizing the effects of the Act until authoritative guidance on accounting for the new subsidy was issued. In May 2004, the FASB issued FSP No. FAS 106-2 which provides accounting guidance for this new subsidy. Management has concluded that the prescription drug benefits provided to our Medicare-eligible retirees are actuarially equivalent based on the current interpretation of the guidance included in the Act and accordingly, the Company adopted the provisions of FSP No. 106-2 in the second quarter of 2005. The expected subsidy had the effect of reducing the Company’s accumulated postretirement benefit obligation by approximately $19 million. This reduction is recognized as an actuarial gain and will be amortized over three years. The expected subsidy will result in a reduction in interest cost of approximately $1 million in 2005. As required by the FSP, the Company recognized reductions in postretirement benefit expense of $3.7 million in the second quarter, including amounts attributable to the first quarter, and $1.8 million in the third quarter of 2005.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting guidance included in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing” related to abnormal amounts of idle facility expense, freight, handling and spoilage costs. SFAS No. 151 is effective for inventory costs incurred during 2007. We are currently assessing the impact of SFAS No. 151 on our consolidated financial statements; however, we do not believe the adoption of this standardSFAS No. 154 will have a material effect on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Compensation,” which requires the recognition of cost resulting from transactions in which the Company acquires goods and services by issuing its shares, share options, or other equity instruments. This standard requires a fair value-based measurement method in accounting for share-based payment transactions with both employees and nonemployees. This standard replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, the use of the intrinsic value method as provided under APB Opinion No. 25 will be eliminated. SFAS No. 123(R) is effective for all awards of share-based payments granted, modified, or cancelled after June 15, 2005. In addition, compensation cost for the unvested portion of awards issued prior to and outstanding as of June 15, 2005 would continue to be recognized at the grant-date fair value as the remaining requisite service is rendered. We are currently assessing the impact of SFAS No. 123(R) on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29,” which eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets that do not culminate an earning process under APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” SFAS No. 153 requires the measurement based on the recorded amount of the assets relinquished for nonmonetary exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the
7
McKESSON CORPORATION
FINANCIAL NOTES (Continued)(Unaudited)
exchange. This standard is effective for nonmonetary asset exchanges occurring in 2007. We do not believe the adoption of this standard will have a material impact on our consolidated financial statements.
In December 2004, the FASB issued FSP No. FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004.” On October 22, 2004, the American Jobs Creation Act of 2004 (the “AJCA”) was signed into law. The AJCA provides a new deduction for certain qualified domestic production activities. FSP No. 109-1 is effective immediately and clarifies that such deduction should be accounted for as a special deduction, not as a tax rate reduction, under SFAS No. 109, “Accounting for Income Taxes,” no earlier than the year in which the deduction is reported on the tax return. We are currently evaluating whether such deduction may be available to us and its impact on our consolidated financial statements. We anticipate that we will recognize the tax benefit of such deductions, if any, beginning in 2006.
In December 2004, the FASB issued FSP No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” The AJCA provides a one-time 85% dividends received deduction for certain foreign earnings that are repatriated under a plan for reinvestment in the United States, provided certain criteria are met. FSP No. 109-2 is effective immediately and provides accounting and disclosure guidance for the repatriation provision. FSP No. 109-2 allows companies additional time to evaluate the effects of the law on its unremitted earnings for the purpose of applying the “indefinite reversal criteria” under APB Opinion No. 23, “Accounting for Income Taxes — Special Areas,” and requires explanatory disclosures from companies that have not yet completed the evaluation. The Company is currently evaluating the effects of the repatriation provision and their impact on our consolidated financial statements. We do not expect to complete this evaluation before the end of 2006. The range of possible amounts of unremitted earnings that is being considered for repatriation under this provision is between zero and $500 million. The related potential range of income tax is between zero and $27.7 million.
Employee Stock-Based Compensation. We account for our employee stock-based compensation plans using the intrinsic value method under APB Opinion No. 25, and“Accounting for Stock Issued to Employees.” We apply the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Had compensation cost for our employee stock-based compensation been recognized based on the fair value method, consistent with the provisions of SFAS No. 123, net income (loss) and earnings (loss) per share would have been as follows:
Quarter Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
(In millions, except per share amounts) | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Net income (loss), as reported | $ | (665.4 | ) | $ | 120.2 | $ | (415.7 | ) | $ | 432.3 | ||||||
Compensation expense, net of tax: | ||||||||||||||||
APB Opinion No. 25 expense included in net income (loss) | 1.6 | 1.6 | 4.6 | 4.4 | ||||||||||||
SFAS No. 123 expense | (15.5 | ) | (24.8 | ) | (38.6 | ) | (75.3 | ) | ||||||||
Pro forma net income (loss) | $ | (679.3 | ) | $ | 97.0 | $ | (449.7 | ) | $ | 361.4 | ||||||
Earnings (loss) per share: | ||||||||||||||||
Diluted – as reported | $ | (2.26 | ) | $ | 0.41 | $ | (1.42 | ) | $ | 1.46 | ||||||
Diluted – pro forma | (2.31 | ) | 0.33 | (1.54 | ) | 1.22 | ||||||||||
Basic – as reported | (2.26 | ) | 0.41 | (1.42 | ) | 1.49 | ||||||||||
Basic – pro forma | (2.31 | ) | 0.33 | (1.54 | ) | 1.25 | ||||||||||
Quarter Ended June 30, | ||||||||
(In millions, except per share amounts) | 2005 | 2004 | ||||||
Net income, as reported | $ | 171 | $ | 164 | ||||
Compensation expense, net of tax: | ||||||||
APB Opinion No. 25 expense included in net income | 2 | 1 | ||||||
SFAS No. 123 expense | (4 | ) | (8 | ) | ||||
Pro forma net income | $ | 169 | $ | 157 | ||||
Earnings per common share: | ||||||||
Diluted — as reported | $ | 0.55 | $ | 0.55 | ||||
Diluted — pro forma | 0.54 | 0.53 | ||||||
Basic — as reported | 0.57 | 0.56 | ||||||
Basic — pro forma | 0.56 | 0.54 |
SFAS No. 123 compensation expense, as indicated in the above table, decreased in the quarter and nine months ended December 31,
8
McKESSON CORPORATION
FINANCIAL NOTES (Continued)(Unaudited)
before March 31, 2005 and have2005. Prior to 2004, stock options typically vested over a sevenfour year term. Historically, options grantedperiod. These actions were approved by the Company generally vest over four years and have a term of ten years.
The Compensation Committee of the Company’s Board of Directors (the “Board”) approved the accelerated vesting in 2004 and the shorter vesting period for certain 2005 stock option grants for employee retention purposes and in anticipation of the requirements of SFAS No. 123(R)., "Share–Based Payment." As discloseda result of the 2004 accelerated vesting and 2005 shorter vesting periods, compensation expense, as indicated in Note 1,the above table, was nominal.
6
In November 2004,
2006 and is subject to regulatory approval and other customary conditions. Upon completion of the acquisition, the results of Medcon’s operations will be included in the consolidated financial statements within our Provider Technologies segment.
We
investments. Purchase prices have been allocated based on estimated fair values at the date of acquisition and may be subject to change. Pro forma results of operations for our business acquisitions have not been presented for any of the above acquisitions asbecause the effects were not material to the condensed consolidated financial statements on either an individual or aggregate basis.
3. Contract Losses
As disclosed in our annual report on Form 10-K for the year ended March 31, 2004, we recorded a $51.0 million provision for expected losses to fulfill our obligations on five multi-year contracts in our Provider Technologies segment’s international business in 2003.
During the third quarter of 2004, the Company and a customer decided to exit one contract and had commenced discussions to mutually terminate the contract and negotiate settlement terms and conditions, and as a result, we recorded an incremental $20.0 million contract loss provision. In the fourth quarter of 2004, we reduced our accrued
9
McKESSON CORPORATION
FINANCIAL NOTES (Continued)(Unaudited)
contract loss provision by $15.2 million primarily to reflect the final terms and conditions of our termination agreement with this customer.
4. Restructuring Activities
We recorded net reductions in restructuring reserves of $0.7 million and net charges from restructuring activities of $0.4 million for the quarter and the nine months ended December 31, 2004. The net reductions primarily related to adjustments for prior years’ restructuring plans due to changes in estimated costs to complete these activities.
The following table summarizes restructuring activities for the nine months ended December 31, 2004:
Pharmaceutical | Medical-Surgical | Provider | ||||||||||||||||||||||||||||||
Solutions | Solutions | Technologies | Corporate | |||||||||||||||||||||||||||||
Exit- | Exit- | Exit- | ||||||||||||||||||||||||||||||
(In millions) | Severance | Related | Severance | Related | Severance | Related | Severance | Total | ||||||||||||||||||||||||
Balance, March 31, 2004 | $ | 0.4 | $ | 5.2 | $ | 1.7 | $ | 1.9 | $ | 0.2 | $ | 1.9 | $ | 10.5 | $ | 21.8 | ||||||||||||||||
Current year expenses | — | 0.2 | 0.7 | — | — | — | — | 0.9 | ||||||||||||||||||||||||
Adjustments to prior years’ expenses | — | 0.4 | (0.2 | ) | (0.2 | ) | (0.1 | ) | (0.4 | ) | — | (0.5 | ) | |||||||||||||||||||
Net expense for the period | — | 0.6 | 0.5 | (0.2 | ) | (0.1 | ) | (0.4 | ) | — | 0.4 | |||||||||||||||||||||
Liabilities related to the MMC acquisition | — | — | 4.0 | — | — | — | — | 4.0 | ||||||||||||||||||||||||
Cash expenditures | (0.3 | ) | (2.4 | ) | (2.6 | ) | (0.5 | ) | — | (0.4 | ) | (9.8 | ) | (16.0 | ) | |||||||||||||||||
Balance, December 31, 2004 | $ | 0.1 | $ | 3.4 | $ | 3.6 | $ | 1.2 | $ | 0.1 | $ | 1.1 | $ | 0.7 | $ | 10.2 | ||||||||||||||||
Accrued restructuring liabilities are included in other liabilities in the accompanying condensed consolidated balance sheets. In connection with the April 2004 acquisition of MMC, we recorded $4.0 million of liabilities for employee severance costs. These costs have been recognized as liabilities assumed in the purchase price of MMC.
In addition to the above restructuring activities, we are still managing a 2001/2000 restructuring plan associated with customer settlements for the discontinuance of overlapping and nonstrategic products and other product development projects within our Provider Technologies segment. Customer settlement allowances, which are included as a reduction of accounts receivable in the accompanying condensed consolidated balance sheets, were reduced by $1.0 million in non-cash settlements during the first nine months of 2005 to $5.2 million at December 31, 2004 from $6.2 million at March 31, 2004. Total cash and non-cash settlements of $45.3 million and $96.0 million have been incurred since the inception of this restructuring plan. Non-cash settlements represent write-offs of customer receivables. There have been no significant offsetting changes in estimates that increased the provision for customer settlements. During the nine months ended December 31, 2003, $19.7 million of the allowance was reversed into operating expenses due to favorable settlements and continued negotiations with affected customers. At March 31, 2004, we substantially completed our negotiations with the affected customers. As a result, we do not anticipate additional significant increases to the allowance for customer settlements. However, as settlement negotiations with the remaining customers are finalized, additional adjustments to the reserve may be necessary.
10
McKESSON CORPORATION
FINANCIAL NOTES (Continued)(Unaudited)
5. Pension and Other Postretirement Benefit Plans
The following table provides the components of the net periodic expense for the Company’s defined benefit pension and postretirement plans:
Quarter Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||||||||
Pension | Postretirement | Pension | Postretirement | |||||||||||||||||||||||||||||
(In millions) | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||||||||||
Service cost — benefits earned during the period | $ | 1.4 | $ | 1.6 | $ | 0.5 | $ | 0.5 | $ | 4.2 | $ | 4.8 | $ | 1.5 | $ | 1.5 | ||||||||||||||||
Interest cost on projected benefit obligation | 6.4 | 6.8 | 2.7 | 2.9 | 19.2 | 20.4 | 8.0 | 8.7 | ||||||||||||||||||||||||
Expected return on assets | (7.4 | ) | (6.4 | ) | — | — | (22.2 | ) | (19.2 | ) | — | — | ||||||||||||||||||||
Amortization of unrecognized loss and prior service costs | 2.2 | 3.0 | 5.5 | 5.8 | 6.5 | 9.0 | 16.5 | 17.4 | ||||||||||||||||||||||||
Immediate recognition of pension cost | 0.6 | — | — | — | 1.4 | — | — | — | ||||||||||||||||||||||||
Settlements and other | — | — | — | — | 16.6 | — | — | — | ||||||||||||||||||||||||
Net periodic expense | $ | 3.2 | $ | 5.0 | $ | 8.7 | $ | 9.2 | $ | 25.7 | $ | 15.0 | $ | 26.0 | $ | 27.6 | ||||||||||||||||
As described in Note 1, we adopted the provisions of FSP No. FAS 106-2 in the second quarter of 2005. The expected Medicare subsidy had the effect of reducing the Company’s accumulated postretirement benefit obligation by approximately $19 million. This reduction is recognized as an actuarial gain and amortized over three years. The expected subsidy results in a reduction in interest cost of approximately $1 million in 2005. As required by the FSP, the Company recognized reductions in postretirement benefit expense of $3.7 million in the second quarter, including amounts attributable to the first quarter, and $1.8 million in the third quarter of 2005.
During the first quarter of 2005, we made several lump sum payments totaling approximately $42 million from an unfunded U.S. pension plan. In accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” approximately $12 million in settlement charges associated with these payments were expensed in the first quarter of 2005. Substantially all of this expense was recorded in the Corporate segment.
6. Income Taxes
During the third quarter of 2005, we recorded an income tax benefit of $390 million for the Securities Litigation described in more detail in Note 12. We believe the settlement of the consolidated securities class action and the ultimate resolution of the lawsuits brought independently by other shareholders will be tax deductible. However, the tax attributes of the litigation are complex and the Company expects challenges from the appropriate taxing authorities, and accordingly such deductions will not be finalized until all the lawsuits are concluded and an examination of the Company’s tax returns is completed. Accordingly, we have provided a reserve of $85 million for future resolution of these uncertain tax matters. While we believe the tax reserve is adequate, the ultimate resolution of these tax matters may exceed or be below the reserve. During the third quarter of 2005, we also recorded a $4.9 million income tax expense arising primarily from settlements and adjustments with various taxing authorities.
During the nine months ended December 31, 2004, a $6.4 million income tax benefit was recorded primarily due to a reduction of a portion of a valuation allowance related to state income tax net operating loss carryforwards. We believe that the income tax benefit from a portion of these state net operating loss carryforwards will now be realized. In addition, we sold a business for net cash proceeds of $12.3 million. The disposition resulted in a pre-tax loss of $1.1 million and an after-tax loss of $4.6 million. The after-tax loss on the disposition was the result of a lower tax adjusted cost basis for the business. Financial results for this business were included in our Pharmaceutical Solutions segment and were not material to our condensed consolidated financial statements. Partially offsetting the tax impact of this disposition, a net income tax benefit of $2.2 million relating to favorable tax settlements and adjustments was recorded.
117
FINANCIAL NOTES (Continued)(Unaudited)(UNAUDITED)
During the third quarter of 2004, we recorded a $7.9 million income tax benefit arising from settlements and adjustments with various taxing authorities. The nine months ended December 31, 2003 also reflect a $15.3 million income tax benefit relating to favorable tax settlements with the U.S. Internal Revenue Service. This benefit, which was not previously recognized by the Company, resulted from the filing of amended tax returns by our subsidiary McKesson Information Solutions LLC (formerly known as HBO & Company (“HBOC”)) for the years ended December 31, 1997 and 1998.
As discussed in Note 1, on October 22, 2004, the AJCA was signed into law. The AJCA provides a one-time 85% dividends received deduction for certain foreign earnings that are repatriated under a plan for reinvestment in the United States, provided certain criteria are met. FSP No. 109-2 allows companies additional time to evaluate the effects of the law on its unremitted earnings for the purpose of applying the “indefinite reversal criteria” under APB Opinion No. 23, “Accounting for Income Taxes — Special Areas”, and requires explanatory disclosures from companies that have not yet completed the evaluation. The Company is currently analyzing the effects of the repatriation provision and their impact on our consolidated financial statements. We do not expect to complete such evaluation before the end of 2006. The range of possible amounts of unremitted earnings that is being considered for repatriation under this provision is between zero and $500 million. The related potential range of income tax is between zero and $27.7 million.
7.
Quarter Ended | Nine Months Ended | |||||||||||||||||||||||
December 31, | December 31, | Quarter Ended June 30, | ||||||||||||||||||||||
(In millions, except per share amounts) | 2004 | 2003 | 2004 | 2003 | 2005 | 2004 | ||||||||||||||||||
Net income (loss) | $ | (665.4 | ) | $ | 120.2 | $ | (415.7 | ) | $ | 432.3 | ||||||||||||||
Income from continuing operations | $ | 170 | $ | 163 | ||||||||||||||||||||
Interest expense on convertible junior subordinated debentures, net of tax benefit | — | 1.5 | — | 4.6 | 1 | 2 | ||||||||||||||||||
Net income (loss) — diluted | $ | (665.4 | ) | $ | 121.7 | $ | (415.7 | ) | $ | 436.9 | ||||||||||||||
Income from continuing operations — diluted | $ | 171 | $ | 165 | ||||||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||
Basic | 293.8 | 290.2 | 292.7 | 290.0 | 302 | 291 | ||||||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||||||
Options to purchase common stock | — | 2.7 | — | 3.1 | 5 | 3 | ||||||||||||||||||
Convertible junior subordinated debentures | — | 5.4 | — | 5.4 | 5 | 5 | ||||||||||||||||||
Restricted stock | — | 0.4 | — | 0.5 | 1 | 1 | ||||||||||||||||||
Diluted | 293.8 | 298.7 | 292.7 | 299.0 | 313 | 300 | ||||||||||||||||||
Earnings (loss) per common share: | ||||||||||||||||||||||||
Earnings per common share from continuing operations: | ||||||||||||||||||||||||
Basic | $ | (2.26 | ) | $ | 0.41 | $ | (1.42 | ) | $ | 1.49 | $ | 0.57 | $ | 0.56 | ||||||||||
Diluted | $ | (2.26 | ) | $ | 0.41 | $ | (1.42 | ) | $ | 1.46 | $ | 0.55 | $ | 0.55 | ||||||||||
For the quarter
12
McKESSON CORPORATION
FINANCIAL NOTES (Continued)(Unaudited)
8.5. Goodwill and Other Intangible Assets
Intangibles
Pharmaceutical | Medical-Surgical | Provider | Pharmaceutical | Medical-Surgical | Provider | |||||||||||||||||||||||||||
(In millions) | Solutions | Solutions | Technologies | Total | Solutions | Solutions | Technologies | Total | ||||||||||||||||||||||||
Balance, March 31, 2004 | $ | 297.7 | $ | 725.2 | $ | 382.9 | $ | 1,405.8 | ||||||||||||||||||||||||
Balance, March 31, 2005 | $ | 300 | $ | 744 | $ | 395 | $ | 1,439 | ||||||||||||||||||||||||
Goodwill acquired | 1.2 | 22.2 | 4.2 | 27.6 | 2 | — | 4 | 6 | ||||||||||||||||||||||||
Sale of business | (10.3 | ) | — | — | (10.3 | ) | ||||||||||||||||||||||||||
Translation adjustments | 1.3 | — | 8.9 | 10.2 | — | — | 3 | 3 | ||||||||||||||||||||||||
Balance, December 31, 2004 | $ | 289.9 | $ | 747.4 | $ | 396.0 | $ | 1,433.3 | ||||||||||||||||||||||||
Balance, June 30, 2005 | $ | 302 | $ | 744 | $ | 402 | $ | 1,448 | ||||||||||||||||||||||||
December 31, | March 31, | June 30, | March 31, | |||||||||||||
(In millions) | 2004 | 2004 | 2005 | 2005 | ||||||||||||
Customer lists | $ | 101.2 | $ | 92.9 | $ | 103 | $ | 103 | ||||||||
Technology | 65.4 | 61.2 | 70 | 71 | ||||||||||||
Trademarks and other | 25.0 | 23.8 | 35 | 33 | ||||||||||||
Total other intangibles, gross | 191.6 | 177.9 | 208 | 207 | ||||||||||||
Accumulated amortization | (110.9 | ) | (93.5 | ) | (122 | ) | (117 | ) | ||||||||
Total other intangibles, net | $ | 80.7 | $ | 84.4 | $ | 86 | $ | 90 | ||||||||
8
9.
In September 2004, we entered into a $1.3 billion five-year, senior unsecured revolving credit facility. Borrowings under the new credit facility bear interest at a fixed base rate, or a floating rate based on the London Interbank Offering Rate (“LIBOR”) rate or a Eurodollar rate. Effective as of the closing date of the new credit facility agreement, we terminated the commitments under a $550 million, three-year revolving credit facility that would have expired in September 2005 and a $650 million, 364-day credit facility that would have expired on September 28, 2004.
Activity
2006. At December 31, 2004 and March 31, 2004,June 30, 2005, there were no amounts were outstanding or utilized under any of the facilities. In addition, in 2005 and 2004, we sold customer lease receivables for cash proceeds of $59.3 million and $42.2 million. The sales of these receivables resulted in pre-tax gains of $1.3 million in 2005 and $3.0 million in 2004, which are included in Other Income, Net in the condensed consolidated statements of operations.
10.this facility.
Debentures
13
McKESSON CORPORATION
FINANCIAL NOTES (Continued)(Unaudited)
the principal amount.$206 million. The Debentures were purchased by theMcKesson Financing Trust which is wholly owned by the Company,(the “Trust”) with proceeds from its issuance of four million shares of preferred securities to the public and 123,720 common securities to us. These preferred securities are convertible at the holder’s option into the Company’s common stock. The Debentures representrepresented the sole assets of the Trust.
Trust and bore interest at an annual rate of 5%, payable quarterly. These preferred securities of the Trust were convertible into our common stock at the holder’s option.
We have guaranteed, on a subordinated basis, distributions and other payments due on
Quarter Ended June 30, | ||||||||
(In millions) | 2005 | 2004 | ||||||
Net income | $ | 171 | $ | 164 | ||||
Foreign currency translation adjustments and other | (9 | ) | (7 | ) | ||||
Comprehensive income | $ | 162 | $ | 157 | ||||
9
11.securities for 5 million shares of our newly issued common stock.
During the second quarter of 2004, one of our Pharmaceutical Solutions customers announced its bankruptcy. Accordingly, we reviewed all amounts owed to us from this customer as well as financial guarantees provided to third parties in favor of this customer, and as a result, we increased our provision for doubtful accounts by $30.0 million. During the first quarter of
At December 31, 2004, we had commitments of $9.6$8 million, primarily consisting of the purchase of services from our equity-held investments, for which no amounts had been accrued.
14
McKESSON CORPORATION
FINANCIAL NOTES (Continued)(Unaudited)
recorded as liabilities. Because the amounts of these indemnification obligations often are not explicitly stated, the overall maximum amount of these commitments cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, we have historically not made significant payments as a result of these indemnification provisions.
10
12.
Other than the Consolidated Action, noneproposed settlement, expressing objection to two non-monetary provisions of the previously reported Securities Litigationsettlement. On July 12, 2005, we and the Lead Plaintiff jointly submitted revised settlement documents which we believe address and resolve the Court’s objections; however the Court has not yet ruled on this renewed request for preliminary approval.
On December 20, 2004, the Delaware Court The range of Chancery (the “Delaware Court”) issued a decision on the defendants’ motions to dismiss in the previously disclosed derivative action captionedSaito v. McCall, et. al. As previously reported,possible resolutions of these proceedings could include judgments against the Company is a nominal defendant to this action, and would not be financially liable for any
15
McKESSON CORPORATION
FINANCIAL NOTES (Continued)(Unaudited)
monetary judgment in this action. Also as previously reported,or settlements that could require payments by the Company and other defendants moved to dismiss all of the claims on various grounds. The Delaware Court dismissed all claims against all defendants, except that the Delaware Court stayed (in favor of the Consolidated Action) the claim against the pre-merger McKesson directors based on alleged breaches of fiduciary duty arising out of the allegedly material false proxy statement issued in connection with the merger, and the Delaware Court denied the defendants’ motion to dismiss the claim against certain post-merger directors of McKesson for alleged failures to exercise oversight of the Company’s accounting practices from January 12, 1999 through April 28, 1999, leaving a single claim to be litigated in the Delaware Court. Pursuant to a stipulation and order entered by the court on January 10, 2005, the defendants must file an answeraddition to the fourth amended complaint by January 31, 2005. No trial date has been set.
II. Contingency
As discussed in our annual report on Form 10-K for the year ended March 31, 2004, in 2002, we entered into a $500 million, ten year contract with the National Health Services Information Authority (“NHS”), an organization of the British government charged with the responsibility of delivering healthcare in England and Wales. The contract engages the Company to develop, implement and operate a human resources and payroll system at more than 600 NHS locations.
To date, there have been delays to this contract which have caused increased costs and a decrease in the amount of time in which we can earn revenues. These delays have adversely impacted the contract’s projected profitability and no material revenue has yet been recognized on this contract. As of December 31, 2004, our consolidated balance sheet includes an investment of approximately $94 million in net assets, consisting of prepaid expenses, software and capital assets, net of cash received, related to this contract. While we believe it is likely that we can deliver and operate an acceptable system and recover our investment in this contract, we are currently negotiating with the NHS to amend certain key terms and conditions in the contract, and there is no certainty we will agree on an updated implementation plan. Our goal is to complete this negotiation by the end of fiscal 2005. However, the timing and the outcome of these negotiations is uncertain and failure to reach agreement on an updated implementation plan and amend certain key contract terms and conditions, and/or further delays in the implementation may result in losses that could be material. Even if we agree on amended contract terms and conditions and an updated implementation plan, it is possible that the terms of that agreement may result in the impairment of our net assets related to the contract as well as substantial penalties and charges,reserve, which could have a material adverse impact on our consolidatedMcKesson’s financial statements.
13. Stockholders’ Equity
Comprehensive income is as follows:position, results of operations and cash flows.
Quarter Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
(In millions) | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Net income (loss) | $ | (665.4 | ) | $ | 120.2 | $ | (415.7 | ) | $ | 432.3 | ||||||
Unrealized loss on marketable securities and investments, net of income taxes | (0.1 | ) | (0.2 | ) | (0.2 | ) | — | |||||||||
Additional minimum pension liability, net of income taxes | (0.6 | ) | — | (4.7 | ) | — | ||||||||||
Foreign currency translation adjustments | 32.9 | 32.9 | 58.0 | 55.2 | ||||||||||||
Comprehensive income (loss) | $ | (633.2 | ) | $ | 152.9 | $ | (362.6 | ) | $ | 487.5 | ||||||
During In July 2005, a verdict of “not guilty on all counts of the second quarter of 2005, the Board approved a plan to renew the common stock rights plan, whichIndictment” was scheduled to expireentered in the third quarterpreviously reported federal criminal action pending in the Northern District of 2005. Under the renewal of the plan, effective October 22, 2004, the Board declared a dividend distribution of one right (a “Right”) for each outstanding share of Company common stock. Each Right entitles the holder to purchase, upon the occurrence of certain triggering events, a unit consisting of one one-hundredth of a share of Series A Junior Participating Preferred Stock. Triggering events include, without limitation, the acquisition by another entity of 15% or more of the Company’s common stock without the prior approval of the Board. The Rights have certain anti-takeover effects that will cause substantial dilution to the
1611
FINANCIAL NOTES (Continued)(CONTINUED)(Unaudited)(UNAUDITED)
ownership interest of
During the nine months ended December 31, 2003, we repurchased 3.9 million shares having an aggregate cost of $115.3 million, which effectively completed the program approved by the Board in 2001 to repurchase up to $250.0 million common shares of the Company. In the third quarter of 2004, the Board approved a new program to repurchase up to $250.0 million of additional common stock ofpurported civil class action complaint was filed against the Company in open market or private transactions. Repurchased shares will be usedthe United States District Court, District of Massachusetts,New England Carpenters Health Benefits Fund et al. v. First DataBank, Inc. and McKesson Corporation,(Civil Action No.05-11148), alleging that commencing in late 2001 and early 2002 and continuing to the present day, the Company and co-defendant First DataBank have effectuated increases in the “Average Wholesale Price” of certain branded drugs, which alleged conduct resulted in higher drug reimbursement payments by plaintiffs and others similarly situated. The complaint purports to state claims based on the federal Racketeer Influenced and Corrupt Organizations Act, violations of the California Business and Professions Code and California Consumers Legal Remedies Act, and for general corporate purposes. No sharesnegligent misrepresentation. The plaintiffs seek injunctive relief, as well as compensatory and punitive damages, attorneys’ fees and costs. We have been repurchased duringnot yet responded to the quartercomplaint in this action, but we believe that we have meritorious defenses to these claims and nine months ended December 31, 2004.
14.intend to vigorously defend the matter.
In April 2004, we reconfigured our
Canada.
1712
FINANCIAL NOTES (Concluded)(CONCLUDED)(Unaudited)(UNAUDITED)
Quarter Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
(In millions) | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Revenues | ||||||||||||||||
Pharmaceutical Solutions | $ | 19,714.5 | $ | 17,224.1 | $ | 56,811.0 | $ | 48,550.1 | ||||||||
Medical-Surgical Solutions | 735.9 | 714.0 | 2,156.6 | 2,140.2 | ||||||||||||
Provider Technologies | 331.5 | 293.8 | 935.2 | 875.9 | ||||||||||||
Total | $ | 20,781.9 | $ | 18,231.9 | $ | 59,902.8 | $ | 51,566.2 | ||||||||
Operating profit | ||||||||||||||||
Pharmaceutical Solutions(1) | $ | 244.7 | $ | 205.4 | $ | 685.9 | $ | 692.1 | ||||||||
Medical-Surgical Solutions | 24.7 | 25.9 | 70.8 | 77.0 | ||||||||||||
Provider Technologies | 27.6 | 2.6 | 61.1 | 44.5 | ||||||||||||
Total | 297.0 | 233.9 | 817.8 | 813.6 | ||||||||||||
Corporate(2) | (1,246.6 | ) | (39.7 | ) | (1,347.9 | ) | (113.7 | ) | ||||||||
Interest expense | (30.6 | ) | (30.2 | ) | (90.4 | ) | (90.0 | ) | ||||||||
Income (loss) before income taxes | $ | (980.2 | ) | $ | 164.0 | $ | (620.5 | ) | $ | 609.9 | ||||||
December 31, | March 31, | Quarter Ended June 30, | ||||||||||||||
(In millions) | 2004 | 2004 | 2005 | 2004 | ||||||||||||
Segment assets, at period end | ||||||||||||||||
Revenues | ||||||||||||||||
Pharmaceutical Solutions | $ | 13,764.0 | $ | 12,050.5 | $ | 19,964 | $ | 18,168 | ||||||||
Medical-Surgical Solutions | 1,672.7 | 1,539.2 | 744 | 707 | ||||||||||||
Provider Technologies | 1,480.6 | 1,402.7 | 350 | 300 | ||||||||||||
Total | 16,917.3 | 14,992.4 | $ | 21,058 | $ | 19,175 | ||||||||||
Corporate | ||||||||||||||||
Cash, cash equivalents, and marketable securities | 1,041.8 | 717.8 | ||||||||||||||
Other | 725.1 | 530.0 | ||||||||||||||
Operating profit | ||||||||||||||||
Pharmaceutical Solutions | $ | 302 | $ | 290 | ||||||||||||
Medical-Surgical Solutions | 29 | 29 | ||||||||||||||
Provider Technologies | 31 | 14 | ||||||||||||||
Total | $ | 18,684.2 | $ | 16,240.2 | 362 | 333 | ||||||||||
Corporate Expenses, net | (21 | ) | (58 | ) | ||||||||||||
Securities Litigation charge | (52 | ) | — | |||||||||||||
Interest expense | (25 | ) | (30 | ) | ||||||||||||
Income from continuing operations before income taxes | $ | 264 | $ | 245 | ||||||||||||
June 30, | March 31, | |||||||
(In millions) | 2005 | 2005 | ||||||
Segment assets, at period end | ||||||||
Pharmaceutical Solutions | $ | 12,858 | $ | 13,115 | ||||
Medical-Surgical Solutions | 1,631 | 1,636 | ||||||
Provider Technologies | 1,479 | 1,450 | ||||||
Total | 15,968 | 16,201 | ||||||
Corporate | ||||||||
Cash, cash equivalents, and marketable securities | 2,418 | 1,809 | ||||||
Other | 743 | 765 | ||||||
Total | $ | 19,129 | $ | 18,775 | ||||
1813
Quarter Ended | Nine Months Ended | |||||||||||||||||||||||
December 31, | December 31, | |||||||||||||||||||||||
(Dollars in millions, except per | ||||||||||||||||||||||||
share data) | 2004 | 2003 | Change | 2004 | 2003 | Change | ||||||||||||||||||
Revenues | $ | 20,781.9 | $ | 18,231.9 | 14 | % | $ | 59,902.8 | $ | 51,566.2 | 16 | % | ||||||||||||
Net Income (Loss) | $ | (665.4 | ) | $ | 120.2 | NM | * | $ | (415.7 | ) | $ | 432.3 | NM | |||||||||||
Diluted Earnings (Loss) Per Share | $ | (2.26 | ) | $ | 0.41 | NM | $ | (1.42 | ) | $ | 1.46 | NM | ||||||||||||
Quarter Ended June 30, | ||||||||||||
(In millions, except per share data) | 2005 | 2004 | Change | |||||||||
Revenues | $ | 21,058 | $ | 19,175 | 10 | % | ||||||
Income from Continuing Operations Before Income Taxes | 264 | 245 | 8 | |||||||||
Net Income | 171 | 164 | 4 | |||||||||
Diluted Earnings Per Share | $ | 0.55 | $ | 0.55 | — |
Results of Operations
Revenues:
Quarter Ended | Nine Months Ended | |||||||||||||||||||||||
December 31, | December 31, | |||||||||||||||||||||||
(Dollars in millions) | 2004 | 2003 | Change | 2004 | 2003 | Change | ||||||||||||||||||
Pharmaceutical Solutions | ||||||||||||||||||||||||
U.S. Healthcare direct distribution and services | $ | 12,130.3 | $ | 10,197.4 | 19 | % | $ | 34,779.5 | $ | 29,187.4 | 19 | % | ||||||||||||
U.S. Healthcare sales to customers’ warehouses | 6,179.5 | 5,827.1 | 6 | 18,116.8 | 16,049.1 | 13 | ||||||||||||||||||
Subtotal | 18,309.8 | 16,024.5 | 14 | 52,896.3 | 45,236.5 | 17 | ||||||||||||||||||
Canada distribution and services | 1,404.7 | 1,199.6 | 17 | 3,914.7 | 3,313.6 | 18 | ||||||||||||||||||
Total Pharmaceutical Solutions | 19,714.5 | 17,224.1 | 14 | 56,811.0 | 48,550.1 | 17 | ||||||||||||||||||
Medical-Surgical Solutions | 735.9 | 714.0 | 3 | 2,156.6 | 2,140.2 | 1 | ||||||||||||||||||
Provider Technologies | ||||||||||||||||||||||||
Software and software systems | 65.9 | 46.6 | 41 | 166.5 | 159.7 | 4 | ||||||||||||||||||
Services | 235.1 | 220.7 | 7 | 685.8 | 641.6 | 7 | ||||||||||||||||||
Hardware | 30.5 | 26.5 | 15 | 82.9 | 74.6 | 11 | ||||||||||||||||||
Total Provider Technologies | 331.5 | 293.8 | 13 | 935.2 | 875.9 | 7 | ||||||||||||||||||
Total Revenues | $ | 20,781.9 | $ | 18,231.9 | 14 | $ | 59,902.8 | $ | 51,566.2 | 16 | ||||||||||||||
or $0.11 per diluted share. The increase in revenues for the quarternet income primarily reflects revenue and nine months ended December 31, 2004 reflectsoperating profit growth in our Pharmaceutical Solutions and Provider Technologies segments, and a decrease in Corporate expenses. These increases were partially offset by the net $35 million after-tax Securities Litigation charge.
Quarter Ended June 30, | ||||||||||||
(In millions) | 2005 | 2004 | Change | |||||||||
Pharmaceutical Solutions | ||||||||||||
U.S. Healthcare direct distribution & services | $ | 12,351 | $ | 11,000 | 12 | % | ||||||
U.S. Healthcare sales to customers’ warehouses | 6,126 | 5,916 | 4 | |||||||||
Subtotal | 18,477 | 16,916 | 9 | |||||||||
Canada distribution & services | 1,487 | 1,252 | 19 | |||||||||
Total Pharmaceutical Solutions | 19,964 | 18,168 | 10 | |||||||||
Medical-Surgical Solutions | 744 | 707 | 5 | |||||||||
Provider Technologies | ||||||||||||
Services | 254 | 222 | 14 | |||||||||
Software & software systems | 62 | 51 | 22 | |||||||||
Hardware | 34 | 27 | 26 | |||||||||
Total Provider Technologies | 350 | 300 | 17 | |||||||||
Total Revenues | $ | 21,058 | $ | 19,175 | 10 | |||||||
Increases inrevenues.
1914
Quarter Ended June 30, | ||||||||||||
(Dollars in millions) | 2005 | 2004 | Change | |||||||||
Gross Profit | ||||||||||||
Pharmaceutical Solutions | $ | 594 | $ | 557 | 7 | % | ||||||
Medical-Surgical Solutions | 169 | 159 | 6 | |||||||||
Provider Technologies | 162 | 133 | 22 | |||||||||
Total | $ | 925 | $ | 849 | 9 | |||||||
Gross Profit Margin | ||||||||||||
Pharmaceutical Solutions | 2.98 | % | 3.07 | % | (9 | )bp | ||||||
Medical-Surgical Solutions | 22.72 | 22.49 | 23 | |||||||||
Provider Technologies | 46.29 | 44.33 | 196 | |||||||||
Total | 4.39 | 4.43 | (4 | ) |
Provider Technologies segment revenues for the third quarter and nine months of 2005 increased2006 compared to the same periodsperiod a year ago reflecting greater demand for our clinical applications and imaging technology offerings and growth in automation revenue recognized.
Gross Profit:
Quarter Ended | Nine Months Ended | |||||||||||||||||||||||
December 31, | December 31, | |||||||||||||||||||||||
(Dollars in millions) | 2004 | 2003 | Change | 2004 | 2003 | Change | ||||||||||||||||||
Gross Profit | ||||||||||||||||||||||||
Pharmaceutical Solutions | $ | 520.2 | $ | 480.9 | 8 | % | $ | 1,512.4 | $ | 1,508.0 | — | % | ||||||||||||
Medical-Surgical Solutions | 162.2 | 153.2 | 6 | 482.8 | 450.5 | 7 | ||||||||||||||||||
Provider Technologies | 158.2 | 121.4 | 30 | 432.4 | 395.2 | 9 | ||||||||||||||||||
Total | $ | 840.6 | $ | 755.5 | 11 | $ | 2,427.6 | $ | 2,353.7 | 3 | ||||||||||||||
Gross Profit Margin | ||||||||||||||||||||||||
Pharmaceutical Solutions | 2.64 | % | 2.79 | % | (15 | )bp | 2.66 | % | 3.11 | % | (45 | )bp | ||||||||||||
Medical-Surgical Solutions | 22.04 | 21.46 | 58 | 22.39 | 21.05 | 134 | ||||||||||||||||||
Provider Technologies | 47.72 | 41.32 | 640 | 46.24 | 45.12 | 112 | ||||||||||||||||||
Total | 4.04 | 4.14 | (10 | ) | 4.05 | 4.56 | (51 | ) | ||||||||||||||||
Gross profit for the third quarter of 2005 increased 11% reflecting stronger buy profit in our Pharmaceutical Solutions segment due to a resumption of price increase activity following a period of lower price increases in the first half of 2005. Gross profit for the nine months ended December 31, 2004 increased 3% reflecting improvement in our Medical-Surgical Solutions and Provider Technologies segments.ago. As a percentage of revenues, gross profit margin decreased 104 basis points to 4.04% for the third quarter of 2005 and 51 basis points to 4.05% for the nine months ended December 31, 2004. This4.39% in 2006. The decrease in our gross profit margin primarily reflects a higher proportion of revenuesour revenue being attributable to our Pharmaceutical Solutions segment, which has lower margins relative to our other segments. Gross profit margins increased in our Medical-Surgical Solutions and Provider Technologies segments as well asprimarily due to a lowerchange in product mix.
During 2005, gross profitmargin for our Pharmaceutical Solutions segment was impacted by:
• | lower buy side margins due to reduced seasonality in manufacturer compensation resulting from the | ||
• | lower selling margins within our U.S. | ||
• | partially offsetting the above decreases, the benefit of increased sales of generic drugs with higher margins, | ||
• | the receipt of $51 million cash proceeds representing our share of a | ||
• | a |
20
McKESSON CORPORATIONFINANCIAL REVIEW (Continued)(Unaudited)
• | higher supplier cash discounts from a change in | ||
• | improved performance in the segment’s pharmacy outsourcing business. |
15
During the nine months ended December 31, 2004, gross profit for our Pharmaceutical Solutions segment was also impacted by a first quarter receipt of $41.2 million of cash proceeds representing our share of a settlement of an antitrust class action lawsuit brought against a drug manufacturer.
In the quarter ended December 31, 2003, gross profit for our Pharmaceutical Solutions segment benefited from the receipt of a $21.7 million cash settlement of an antitrust class action lawsuit involving a cardiac drug manufacturer. The segment also incurred an approximate $10 million loss on a fixed price pharmacy outsourcing contract that has since been renegotiated with more favorable terms.
Our Pharmaceutical Solutions segment uses the LIFO method of accounting for the majority of its inventories, which results in cost of sales that more closely reflects replacement cost than do other accounting methods, thereby mitigating the effects of inflation and deflation on gross profit. The practice in the Pharmaceutical Solutions distribution business is to pass on to customers published price changes from suppliers. Manufacturers generally provide us with price protection, which prevents inventory losses. Price declines on many generic pharmaceutical products in this segment over the last few years have moderated the effects of inflation in other product categories, which resulted in minimal overall price changes in those years.
Gross profit margin increased in our Medical-Surgical Solutions segment primarily due to a higher proportion of revenues being derived from our alternate site sector, which has higher margins relative to the segment’s other sectors. Gross profit margin increased in our Provider Technologies segment primarily reflecting a higher proportion of software and software systems revenues, which have higher margins relative to the segment’s other revenues. In addition, the third quarter of 2004 reflects a $20.0 million contract loss provision for certain multi-year contracts within this segment’s international business.
Quarter Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||
December 31, | December 31, | Quarter Ended June 30, | ||||||||||||||||||||||||||||||||||
(Dollars in millions) | 2004 | 2003 | Change | 2004 | 2003 | Change | 2005 | 2004 | Change | |||||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||||||
Pharmaceutical Solutions | $ | 281.2 | $ | 281.2 | — | % | $ | 843.5 | $ | 834.3 | 1 | % | $ | 300 | $ | 273 | 10 | % | ||||||||||||||||||
Medical-Surgical Solutions | 138.2 | 127.8 | 8 | 414.4 | 375.8 | 10 | 141 | 131 | 8 | |||||||||||||||||||||||||||
Provider Technologies | 132.5 | 121.1 | 9 | 377.1 | 359.3 | 5 | 133 | 120 | 11 | |||||||||||||||||||||||||||
Corporate | 54.1 | 40.9 | 32 | 168.4 | 121.1 | 39 | 38 | 65 | (42 | ) | ||||||||||||||||||||||||||
Subtotal | 606.0 | 571.0 | 6 | 1,803.4 | 1,690.5 | — | 612 | 589 | 4 | |||||||||||||||||||||||||||
Securities Litigation charge | 1,200.0 | — | — | 1,200.0 | — | — | 52 | — | — | |||||||||||||||||||||||||||
Total | $ | 1,806.0 | $ | 571.0 | 216 | $ | 3,003.4 | $ | 1,690.5 | 78 | $ | 664 | $ | 589 | 13 | |||||||||||||||||||||
Operating Expenses as a Percentage of Revenue | ||||||||||||||||||||||||||||||||||||
Operating Expenses as a Percentage of Revenues | ||||||||||||||||||||||||||||||||||||
Pharmaceutical Solutions | 1.43 | % | 1.63 | % | (20 | )bp | 1.49 | % | 1.72 | % | (23 | )bp | 1.50 | % | 1.50 | % | — | bp | ||||||||||||||||||
Medical-Surgical Solutions | 18.78 | 17.90 | 88 | 19.22 | 17.56 | 166 | 18.95 | 18.53 | 42 | |||||||||||||||||||||||||||
Provider Technologies | 39.97 | 41.22 | (125 | ) | 40.32 | 41.02 | (70 | ) | 38.00 | 40.00 | (200 | ) | ||||||||||||||||||||||||
Total | 8.69 | 3.13 | 556 | 5.01 | 3.28 | 173 | 3.15 | 3.07 | 8 | |||||||||||||||||||||||||||
Other Income, Net | ||||||||||||||||||||||||||||||||||||
Other Income | ||||||||||||||||||||||||||||||||||||
Pharmaceutical Solutions | $ | 5.7 | $ | 5.7 | — | % | $ | 17.0 | $ | 18.4 | (8 | )% | $ | 8 | $ | 6 | 33 | % | ||||||||||||||||||
Medical-Surgical Solutions | 0.7 | 0.5 | 40 | 2.4 | 2.3 | 4 | 1 | 1 | — | |||||||||||||||||||||||||||
Provider Technologies | 1.9 | 2.3 | (17 | ) | 5.8 | 8.6 | (33 | ) | 2 | 1 | 100 | |||||||||||||||||||||||||
Corporate | 7.5 | 1.2 | 525 | 20.5 | 7.4 | 177 | 17 | 7 | 143 | |||||||||||||||||||||||||||
Total | $ | 15.8 | $ | 9.7 | 63 | $ | 45.7 | $ | 36.7 | 25 | $ | 28 | $ | 15 | 87 | |||||||||||||||||||||
21
McKESSON CORPORATIONFINANCIAL REVIEW (Continued)(Unaudited)
Operating expenses for the quarter and nine months ended December 31, 2004 were $1.8 billion and $3.0 billion including the $1.2 billion charge relating to the Securities Litigation. Operating expenses,increased 13%, or 4% excluding the Securities Litigation charge were $606.0 million and $1,803.4 million, compared to $571.0 million and $1,690.5 million for the same prior year periods. As a percentage of revenue, operating expenses were 8.69% and 5.01% compared to 3.13% and 3.28% in the third quarters and the nine months ended December 31, 2004 and 2003.first quarter. As a percentage of revenues, operating expenses excludingincreased 8 basis points. Excluding the Securities Litigation charge, decreased 21 and 27 basis points to 2.92% and 3.01% for the quarter and nine months ended December 31, 2004. Asoperating expenses as a percentage of revenues operating expenses, excludingdecreased 16 basis points reflecting the decrease in Corporate expenses. Operating expense dollars increased primarily due to the Securities Litigation charge, decreased primarily due to the leveraging of our fixed cost infrastructure and productivity improvements in back-office and field operations within our Pharmaceutical Solutions segment. Increases in operating expense dollars for the third quarter of 2005 were primarily due to additional costs to support our sales volume growth, including distribution expenses, expensesemployee compensation. Employee compensation costs increased due to the timing of salary increases and other benefit accruals, and to a lesser extent, from the MMC business acquiredan increase in the first quarternumber of 2005employees. Partially offsetting these increases, 2006 operating expenses benefited from a change in estimate for certain other compensation and incremental Securities Litigation costs.benefit plans. In addition, operatingincluded in 2005 Corporate expenses for the nine months ended December 31, 2004 included approximatelywas $12 million of settlement charges pertaining to a non-qualified pension plan and a $7.4 million charge to increase Medical-Surgical Solutions litigation reserves.
Operating expenses for the quarter ended December 31, 2003 included a $9.0 million bad debt provision for a pharmacy outsourcing business and a $4.3 million gain from the sale of a surplus property. Expenses for the nine months ended December 31, 2003 also included a $30.0 million bad debt provision for a customer bankruptcy and $9.8 million in severance charges, partially offset by a credit of $19.7 million pertaining to the reversal of our customer settlement reserves due to favorable settlements and negotiations with affected customers, and $12.8 million of gains on the sale of two surplus properties.
plan. Other income for the quarter and nine months ended December 31, 2004 increased 63% to $15.8 million and 25% to $45.7 million, compared to the same periods a year ago, primarily reflecting higher interest income due to the higher interest earnings in 2005.
Company’s favorable cash balances.
Quarter Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||
December 31, | December 31, | Quarter Ended June 30, | ||||||||||||||||||||||||||||||||||
(Dollars in millions) | 2004 | 2003 | Change | 2004 | 2003 | Change | 2005 | 2004 | Change | |||||||||||||||||||||||||||
Segment Operating Profit(1) | ||||||||||||||||||||||||||||||||||||
Pharmaceutical Solutions | $ | 244.7 | $ | 205.4 | 19 | % | $ | 685.9 | $ | 692.1 | (1 | )% | $ | 302 | $ | 290 | 4 | % | ||||||||||||||||||
Medical-Surgical Solutions | 24.7 | 25.9 | (5 | ) | 70.8 | 77.0 | (8 | ) | 29 | 29 | — | |||||||||||||||||||||||||
Provider Technologies | 27.6 | 2.6 | 962 | 61.1 | 44.5 | 37 | 31 | 14 | 121 | |||||||||||||||||||||||||||
Total | 297.0 | 233.9 | 27 | 817.8 | 813.6 | — | 362 | 333 | 9 | |||||||||||||||||||||||||||
Corporate Expenses | (46.6 | ) | (39.7 | ) | 17 | (147.9 | ) | (113.7 | ) | 30 | ||||||||||||||||||||||||||
Corporate Expenses, net | (21 | ) | (58 | ) | (64 | ) | ||||||||||||||||||||||||||||||
Securities Litigation charge | (1,200.0 | ) | — | — | (1,200.0 | ) | — | — | (52 | ) | — | — | ||||||||||||||||||||||||
Interest Expense | (30.6 | ) | (30.2 | ) | 1 | (90.4 | ) | (90.0 | ) | — | (25 | ) | (30 | ) | (17 | ) | ||||||||||||||||||||
Income (Loss) Before Income Taxes | $ | (980.2 | ) | $ | 164.0 | $ | (620.5 | ) | $ | 609.9 | — | |||||||||||||||||||||||||
Income from Continuing Operations Before Income Taxes | $ | 264 | $ | 245 | 8 | |||||||||||||||||||||||||||||||
Segment Operating Profit Margin | ||||||||||||||||||||||||||||||||||||
Pharmaceutical Solutions | 1.24 | % | 1.19 | % | 5 | bp | 1.21 | % | 1.43 | % | (22 | )bp | 1.51 | % | 1.60 | % | (9 | )bp | ||||||||||||||||||
Medical-Surgical Solutions | 3.36 | 3.63 | (27 | ) | 3.28 | 3.60 | (32 | ) | 3.90 | 4.10 | (20 | ) | ||||||||||||||||||||||||
Provider Technologies | 8.33 | 0.88 | 745 | 6.53 | 5.08 | 145 | 8.86 | 4.67 | 419 | |||||||||||||||||||||||||||
(1) | Segment operating profit includes gross |
16
22
McKESSON CORPORATIONFINANCIAL REVIEW (Continued)(Unaudited)
the pharmacy outsourcing business. Operating profit for the nine months ended December 31, 2003 also included a $30.0 million bad debt provision for a customer bankruptcy.
Medical-Surgical Solutions segment’s operating profit as a percentage of revenues decreased primarily reflectingas improvements in the gross profit margin were more than fully offset by an increase in gross profit margins offset by a higher proportion of operating expenses. Operating expenses increased in both dollars and as a percentage of revenues primarily due to the acquisition of MMC, and a higher proportion ofadditional costs incurred to serve the segment’s alternate site customers, which have a higher cost-to-serve ratio than the segment’s other customers. Operating profit for 2005 was also impacted by the lack of flu vaccine supply. Expenses for the nine months ended December 31, 2004 also include $7.4 million for litigation reserves. During the fourth quarter of 2005, the segment anticipates completing an evaluation of its distribution center networkcustomers as a result of its MMC acquisition. Costs incurred in connection with the distribution network restructuring plan will either be expensed or treatedwell as part of the acquisition cost depending on the nature of such amounts.
increased employee compensation costs.
operate a satisfactory system under this revised agreement. To date, no revenue has been recognized on this contract.
Ina change in estimate for certain other compensation and benefits plans.
On January 12, 2005, we announced that we had reached an agreement to settle the action captionedIn re McKesson HBOC, Inc. Securities Litigation(N.D. Cal. Case No. C-99-20743-RMW) (the “Consolidated Action”). In general, under the agreement to settle the Consolidated Action, we will pay the settlement class a total of $960 million in cash. Plaintiffs’ attorneys’ fees will be deducted from the settlement amount prior to payments to class members. The parties have agreed on the terms of a stipulation of settlement and are finalizing the exhibits to the stipulation before submitting it to the Court. The settlement agreementCompany currently believes this accrual is subject to various conditions, including, but not limited to, preliminary approval by the Court, notice to the Class, and final approval by the Court after a hearing.
During the third quarter of 2005, we also established a reserve of $240.0 million, which the Company believes will be adequate to address its remaining potential exposure with respect to other previously reportedall of the Securities Litigation. However, in view of the number of remaining cases, the uncertainties of the timing and outcome of this type of litigation, and the substantial amounts involved, it is possible that the ultimate costs of these matters may exceed or be below the revised reserve.
The range of possible resolutions of these proceedings could include judgments against the Company or settlements that could require payments by the Company in addition to the reserve, which could have a material adverse impact on McKesson’s financial position, results of operations and cash flows.
2005.
23
McKESSON CORPORATIONFINANCIAL REVIEW (Continued)(Unaudited)
Litigation. We believe the settlement of the consolidated securities class action and the ultimate resolution of the lawsuits brought independently by other shareholders will be tax deductible. However, the tax attributes of the litigation are complex and the Company expects challenges from the appropriate taxing authorities, and accordingly such deductions will not be finalized until all the lawsuits are concluded and an examination of the Company’s tax returns is completed. Accordingly, we have provided a reserve of $85 million for future resolution of these uncertain tax matters. While we believe the tax reserve is adequate, the ultimate resolution of these tax matters may exceed or be below the reserve. During the third quarter of 2005, we also recorded a $4.9 million income tax expense arising primarily from settlements and adjustments with various taxing authorities. During the third quarter of 2004, we recorded an income tax benefit of $7.9 million relating to tax settlements made with various taxing authorities as well as other adjustments.
For the nine months ended December 31, 2004, and 2003, the effective income tax rates were 33.0% and 29.1%. In addition to the items described above, income tax expense for the nine months ended December 31, 2004 reflects a $6.4 million income tax benefitrate was primarily due to a reductionlower proportion of a portion of a valuation allowance relatedincome attributed to stateforeign countries that have lower income tax net operating loss carryforwards. We believe thatrates. During the income tax benefit from a portionfirst quarter of these state net operating loss carryforwards will now be realized. Also,2005, we sold a business for net cash proceeds of $12.3 million. The disposition resulted in a pre-tax loss of $1.1$1 million and an after-tax loss of $4.6$5 million. The after-tax loss on the disposition was the result of a lower tax adjusted cost basis for the business. Partially offsetting the tax impact of this disposition, we recorded a net income tax benefit of $2.2 million relating to favorable tax settlements and adjustments was recorded.
Duringadjustments.
17
$35 million or $0.11 per diluted share.
consolidated financial statements on either an individual or aggregate basis.
the sale of notes receivable.
18
24
McKESSON CORPORATIONFINANCIAL REVIEW (Continued)(Unaudited)
Selected Measures of Liquidity and Capital Resources
December 31, | March 31, | June 30, | March 31, | |||||||||||||
(Dollars in millions) | 2004 | 2004 | 2005 | 2005 | ||||||||||||
Cash, cash equivalents and marketable securities | $ | 1,041.8 | $ | 717.8 | $ | 2,418 | $ | 1,809 | ||||||||
Working capital | 3,261.3 | 3,587.9 | 3,936 | 3,570 | ||||||||||||
Debt net of cash, cash equivalents and marketable securities | 419.9 | 766.8 | ||||||||||||||
Debt, net of cash, cash equivalents and marketable securities | (1,418 | ) | (598 | ) | ||||||||||||
Debt to capital ratio(1) | 22.9 | % | 22.3 | % | 14.8 | % | 18.7 | % | ||||||||
Net debt to net capital employed(2) | 7.9 | 12.9 | (32.8 | ) | (12.8 | ) | ||||||||||
Return on stockholders’ equity(3) | (3.9 | ) | 13.4 | (2.8 | ) | (3.0 | ) | |||||||||
(1) | Ratio is computed as total debt divided by total debt and stockholders’ equity. | |
(2) | Ratio is computed as total debt, net of cash, cash equivalents and marketable securities (“net debt”), divided by net debt and stockholders’ equity (“net capital employed”). | |
(3) | Ratio is computed as |
We reduced ourvolume.
These facilities are primarily intended to support our commercial paper borrowings. We also have a $1.4 billion revolving receivables saleaccounts receivable sales facility, which was renewed in June 2004,2005, the terms of which are substantially similar to those previously in place with the exception that the facility was increased by $300.0 million. This facility expires in June 2005. At December 31, 2004 and at March 31, 2004, noplace. No amounts were outstanding or utilized under any of the Company’s credit facilities.these facilities at June 30, 2005.
19
25
McKESSON CORPORATIONFINANCIAL REVIEW (Continued)(Unaudited)
NEW ACCOUNTING PRONOUNCEMENTS
There are a number of new accounting pronouncements that may impact our financial results. These new accounting pronouncements are described in Financial Note 1, “Significant Accounting Policies,” to the accompanying condensed consolidated financial statements.
26
McKESSON CORPORATIONFINANCIAL REVIEW (Concluded)(Unaudited)
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
• | The resolution or outcome of pending Securities Litigation regarding the 1999 restatement of our historical financial statements; | |
• | the changing U.S. healthcare environment, including the impact of | |
• | consolidation of competitors, suppliers and customers and the development of large, sophisticated purchasing groups; | |
• | the ability to successfully market both new and existing products domestically and internationally; | |
• | changes in manufacturers’ pricing, selling, inventory, distribution or supply policies or practices; | |
• | substantial defaults in payment by large customers; | |
• | material reduction in purchases or the loss of a large customer or supplier relationship; | |
• | challenges in integrating or implementing our software or | |
• | the malfunction or failure of our segments’ information systems; | |
• | our ability to successfully identify, consummate and integrate strategic acquisitions; | |
• | changes in generally accepted accounting principles; | |
• | tax legislation initiatives; | |
• | foreign currency fluctuations; and | |
• | general economic and market conditions. |
2720
and Issuer Repurchases of Equity Securities
Share Repurchases(1) | ||||||||||||||||
Approximate Dollar | ||||||||||||||||
Total Number of Shares | Value of Shares | |||||||||||||||
Purchased As Part of | that May Yet Be | |||||||||||||||
Total Number of | Average Price Paid | Publicly Announced | Purchased Under the | |||||||||||||
(In millions except price per share) | Shares Purchased | Per Share | Program | Program | ||||||||||||
April 1, 2005 — April 30, 2005 | — | $ | — | — | $ | 208.6 | ||||||||||
May 1, 2005 — May 31, 2005 | 0.1 | 39.17 | 0.1 | 204.3 | ||||||||||||
June 1, 2005 — June 30, 2005 | 1.5 | 42.09 | 1.5 | 142.6 | ||||||||||||
Total | 1.6 | $ | 41.88 | 1.6 | $ | 142.6 | ||||||||||
(1) | In 2004, the Company’s Board of Directors approved a plan to repurchase up to $250 million per plan of the Company’s common stock. The plan has no expiration date. This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards. |
10.1 | Deed of Settlement and Amendment in Relation to Human Resources and Payroll Services Contract dated as of June 22, 2005 between the Secretary of State for Health for the United Kingdom and McKesson Information Solutions Limited. (Confidential treatment has been requested for certain portions of this exhibit and such confidential portions have been filed with the Securities and Exchange Commission. |
10.1 Letter Agreement and Annex A (Stipulation and Agreement of Settlement between Lead Plaintiff and Defendants McKesson HBOC, Inc. and HBO & Company) thereto (Exhibit 99.1 to Current Report on Form 8-K Date of Report January 18, 2005, File no. 1-13252).
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”).
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
2821
31.1 | Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
McKesson Corporation | ||||
Dated: | By | /s/ Jeffrey C. Campbell | ||
Jeffrey C. Campbell | ||||
Executive Vice President and Chief Financial Officer | ||||
By | /s/ Nigel A. Rees | |||
Nigel A. Rees | ||||
Vice President and Controller | ||||
2922