SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| (Mark One) | ||
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For quarter ended | ||
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from |
Commission file number 1-13252
McKESSON CORPORATION
| Delaware | 94-3207296 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer 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. YesxNoo
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 | |||
| Common stock, $0.01 par value | 290,957,175 shares | |||
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McKESSON CORPORATION
TABLE OF CONTENTS
Item Page PART I. FINANCIAL INFORMATION 1. Condensed Financial Statements Consolidated Balance Sheets September 30, 2002 and March 31, 2002 3 Consolidated Statements of Operations Quarter and six months ended September 30, 2002 and 2001 4 Consolidated Statements of Cash Flows Six months ended September 30, 2002 and 2001 5 Financial Notes 6-15 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition Financial Review 16-24 3. Quantitative and Qualitative Disclosures about Market Risk 25 4. Controls and Procedures 25 PART II. OTHER INFORMATION 1. Legal Proceedings 25 6. Exhibits and Reports on Form 8-K 25 Signatures 26
| Item | Page | |||||||||
PART I. FINANCIAL INFORMATION | ||||||||||
| 1. | Condensed Financial Statements | |||||||||
| Consolidated Balance Sheets December 31, 2002 and March 31, 2002 | 3 | |||||||||
| Consolidated Statements of Operations Quarter and nine months ended December 31, 2002 and 2001 | 4 | |||||||||
| Consolidated Statements of Cash Flows Nine months ended December 31, 2002 and 2001 | 5 | |||||||||
| Financial Notes | 6-16 | |||||||||
| 2. | Management’s Discussion and Analysis of Results of Operations and Financial Condition Financial Review | 17-24 | ||||||||
| 3. | Quantitative and Qualitative Disclosures about Market Risk | 25 | ||||||||
| 4. | Controls and Procedures | 25 | ||||||||
PART II. OTHER INFORMATION | ||||||||||
| 1. | Legal Proceedings | 26 | ||||||||
| 6. | Exhibits and Reports on Form 8-K | 26 | ||||||||
| Signatures | 26 | |||||||||
| Certifications of Chief Executive Officer and Chief Financial Officer | 27-28 | |||||||||
2
McKESSON CORPORATION
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| December 31, | March 31, | |||||||||
| 2002 | 2002 | |||||||||
ASSETS | ||||||||||
| Current Assets | ||||||||||
| Cash and equivalents | $ | 316.1 | $ | 557.8 | ||||||
| Marketable securities available for sale | 11.3 | 5.1 | ||||||||
| Receivables, net | 3,801.3 | 3,998.1 | ||||||||
| Inventories | 6,541.0 | 6,011.5 | ||||||||
| Prepaid expenses and other | 105.1 | 121.4 | ||||||||
| Total | 10,774.8 | 10,693.9 | ||||||||
| Property, Plant and Equipment, net | 582.4 | 592.2 | ||||||||
| Capitalized Software Held for Sale | 127.2 | 118.4 | ||||||||
| Notes Receivable | 182.4 | 237.7 | ||||||||
| Goodwill and Other Intangibles | 1,443.9 | 1,115.7 | ||||||||
| Other Assets | 693.5 | 566.1 | ||||||||
| Total Assets | $ | 13,804.2 | $ | 13,324.0 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
| Current Liabilities | ||||||||||
| Drafts and accounts payable | $ | 6,315.4 | $ | 6,334.4 | ||||||
| Deferred revenue | 474.0 | 387.9 | ||||||||
| Short-term borrowings | 30.0 | — | ||||||||
| Current portion of long-term debt | 9.3 | 141.2 | ||||||||
| Other | 804.8 | 724.5 | ||||||||
| Total | 7,633.5 | 7,588.0 | ||||||||
| Postretirement Obligations and Other Noncurrent Liabilities | 350.1 | 311.4 | ||||||||
| Long-Term Debt | 1,292.1 | 1,288.4 | ||||||||
| McKesson Corporation — Obligated Mandatorily Redeemable Convertible Preferred Securities of Subsidiary Grantor Trust Whose Sole Assets are Junior Subordinated Debentures of McKesson Corporation | 196.3 | 196.1 | ||||||||
| Other Commitments and Contingent Liabilities | ||||||||||
| Stockholders’ Equity | ||||||||||
| Preferred stock, $0.01 par value, 100.0 shares authorized, no shares issued or outstanding | — | — | ||||||||
| Common stock, $0.01 par value, 800.0 and 400.0 shares authorized, and 291.4 and 287.9 shares issued and outstanding at December 31, 2002 and March 31, 2002 | 2.9 | 2.9 | ||||||||
| Additional paid-in capital | 1,908.2 | 1,831.0 | ||||||||
| Other | (91.0 | ) | (94.9 | ) | ||||||
| Retained earnings | 2,681.7 | 2,357.2 | ||||||||
| Accumulated other comprehensive losses | (81.4 | ) | (81.6 | ) | ||||||
| ESOP notes and guarantees | (61.7 | ) | (74.5 | ) | ||||||
| Treasury shares, at cost, 1.0 shares at December 31, 2002 | (26.5 | ) | — | |||||||
| Total Stockholders’ Equity | 4,332.2 | 3,940.1 | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | 13,804.2 | $ | 13,324.0 | ||||||
September 30, March 31, 2002 2002 ASSETS Current Assets Cash and equivalents $ 300.3 $ 557.8 Marketable securities available for sale 11.3 5.1 Receivables 4,405.9 3,998.1 Inventories 5,993.8 6,011.5 Prepaid expenses and other 100.3 121.4 Total 10,811.6 10,693.9 Property, Plant and Equipment, net 584.1 592.2 Capitalized Software Held for Sale 119.4 118.4 Notes Receivable 256.6 237.7 Goodwill and Other Intangibles 1,445.8 1,115.7 Other Assets 651.6 566.1 Total Assets $ 13,869.1 $ 13,324.0 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Drafts and accounts payable $ 6,346.7 $ 6,334.4 Deferred revenue 371.6 387.9 Short-term borrowings 282.0 — Current portion of long-term debt 141.6 141.2 Other 691.1 724.5 Total 7,833.0 7,588.0 Postretirement Obligations and Other Noncurrent Liabilities 345.4 311.4 Long-Term Debt 1,295.4 1,288.4 McKesson Corporation - Obligated Mandatorily Redeemable Convertible Preferred Securities of Subsidiary Grantor Trust Whose Sole Assets are Junior Subordinated Debentures of McKesson Corporation 196.2 196.1 Other Commitments and Contingent Liabilities Stockholders’ Equity Preferred stock, $0.01 par value, 100.0 shares authorized, no shares issued or outstanding — — Common stock, $0.01 par value, 800.0 and 400.0 shares authorized, and 290.3 and 287.9 shares issued and outstanding at September 30, 2002 and March 31, 2002 2.9 2.9 Additional paid-in capital 1,881.6 1,831.0 Other (91.9 ) (94.9 ) Retained earnings 2,564.7 2,357.2 Accumulated other comprehensive losses (86.7 ) (81.6 ) ESOP notes and guarantees (70.7 ) (74.5 ) Treasury shares, at cost, 0.1 shares at September 30, 2002 (0.8 ) — Total Stockholders’ Equity 4,199.1 3,940.1 Total Liabilities and Stockholders’ Equity $ 13,869.1 $ 13,324.0
| 3 |
McKESSON CORPORATION
| Quarter Ended | Nine Months Ended | ||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||||
| Revenues | $ | 14,921.0 | $ | 13,194.8 | $ | 42,234.5 | $ | 37,001.3 | |||||||||||
| Cost of Sales | 14,193.4 | 12,508.3 | 40,016.8 | 34,996.0 | |||||||||||||||
| Gross Profit | 727.6 | 686.5 | 2,217.7 | 2,005.3 | |||||||||||||||
| Operating Expenses | 517.8 | 497.0 | 1,583.4 | 1,509.1 | |||||||||||||||
| Loss on Sales of Businesses, Net | — | — | — | 18.4 | |||||||||||||||
| Operating Income | 209.8 | 189.5 | 634.3 | 477.8 | |||||||||||||||
| Interest Expense | (27.9 | ) | (27.2 | ) | (88.5 | ) | (81.2 | ) | |||||||||||
| Other Income, Net | 24.1 | 9.4 | 38.2 | 23.8 | |||||||||||||||
| Income From Continuing Operations Before Income Taxes and Dividends on Preferred Securities of Subsidiary Trust | 206.0 | 171.7 | 584.0 | 420.4 | |||||||||||||||
| Income Taxes | (70.2 | ) | (60.1 | ) | (198.9 | ) | (120.9 | ) | |||||||||||
| Dividends on Preferred Securities of Subsidiary Trust, Net of Tax Benefit | (1.5 | ) | (1.5 | ) | (4.6 | ) | (4.6 | ) | |||||||||||
| Income (Loss) After Income Taxes | |||||||||||||||||||
| Continuing Operations | 134.3 | 110.1 | 380.5 | 294.9 | |||||||||||||||
| Discontinued Operations | — | (1.3 | ) | (4.1 | ) | (1.7 | ) | ||||||||||||
| Net Income | $ | 134.3 | $ | 108.8 | $ | 376.4 | $ | 293.2 | |||||||||||
| Earnings (Loss) Per Common Share | |||||||||||||||||||
| Diluted | |||||||||||||||||||
| Continuing Operations | $ | 0.46 | $ | 0.37 | $ | 1.28 | $ | 1.01 | |||||||||||
| Discontinued Operations | — | — | (0.01 | ) | (0.01 | ) | |||||||||||||
| Total Diluted | $ | 0.46 | $ | 0.37 | $ | 1.27 | $ | 1.00 | |||||||||||
| Basic | |||||||||||||||||||
| Continuing Operations | $ | 0.46 | $ | 0.38 | $ | 1.31 | $ | 1.04 | |||||||||||
| Discontinued Operations | — | — | (0.01 | ) | (0.01 | ) | |||||||||||||
| Total Basic | $ | 0.46 | $ | 0.38 | $ | 1.30 | $ | 1.03 | |||||||||||
| Dividends Declared Per Common Share | $ | 0.06 | $ | 0.06 | $ | 0.18 | $ | 0.18 | |||||||||||
| Weighted Average Shares | |||||||||||||||||||
| Diluted | 298.0 | 299.2 | 299.3 | 299.0 | |||||||||||||||
| Basic | 289.7 | 285.6 | 289.1 | 284.9 | |||||||||||||||
Quarter Ended Six Months Ended September 30, September 30, 2002 2001 2002 2001 Revenues $ 13,690.3 $ 12,156.3 $ 27,313.5 $ 23,806.5 Cost of Sales 12,951.0 11,494.4 25,823.4 22,487.7 Gross Profit 739.3 661.9 1,490.1 1,318.8 Operating Expenses 519.3 513.3 1,065.6 1,012.1 Loss on Sales of Businesses, Net — — — 18.4 Operating Income 220.0 148.6 424.5 288.3 Interest Expense (29.7 ) (27.0 ) (60.6 ) (54.0 ) Other Income, Net 4.1 6.7 14.1 14.4 Income From Continuing Operations Before Income Taxes and Dividends on Preferred Securities of Subsidiary Trust 194.4 128.3 378.0 248.7 Income Taxes (64.4 ) (46.9 ) (128.7 ) (60.8 ) Dividends on Preferred Securities of Subsidiary Trust, Net of Tax Benefit (1.6 ) (1.6 ) (3.1 ) (3.1 ) Income (Loss) After Income Taxes Continuing Operations 128.4 79.8 246.2 184.8 Discontinued Operations (3.6 ) (0.8 ) (4.1 ) (0.4 ) Net Income $ 124.8 $ 79.0 $ 242.1 $ 184.4 Earnings (Loss) Per Common Share Diluted Diluted Continuing Operations $ 0.43 $ 0.27 $ 0.83 $ 0.63 Discontinued Operations (0.01 ) — (0.01 ) — Total Diluted $ 0.42 $ 0.27 $ 0.82 $ 0.63 Basic Continuing Operations $ 0.44 $ 0.28 $ 0.85 $ 0.65 Discontinued Operations (0.01 ) — (0.01 ) — Total Basic $ 0.43 $ 0.28 $ 0.84 $ 0.65 Dividends Declared Per Common Share $ 0.06 $ 0.06 $ 0.12 $ 0.12 Weighted Average Shares Diluted 299.0 299.0 300.0 297.5 Basic 289.2 285.0 288.8 284.5
| 4 |
McKESSON CORPORATION
| Nine Months Ended | ||||||||||
| December 31, | ||||||||||
| 2002 | 2001 | |||||||||
Operating Activities | ||||||||||
| Income from continuing operations | $ | 380.5 | $ | 294.9 | ||||||
| Adjustments to reconcile to net cash provided by operating activities | ||||||||||
| Depreciation | 76.2 | 86.7 | ||||||||
| Amortization | 74.6 | 66.1 | ||||||||
| Provision for bad debts | 57.3 | 40.0 | ||||||||
| Deferred taxes on income | 18.7 | 9.5 | ||||||||
| Loss on sales of businesses, net | — | 18.4 | ||||||||
| Other non-cash items | 9.9 | 17.1 | ||||||||
| Total | 617.2 | 532.7 | ||||||||
| Effects of changes in: | ||||||||||
| Receivables | 155.1 | (321.8 | ) | |||||||
| Inventories | (522.9 | ) | (1,151.1 | ) | ||||||
| Accounts and drafts payable | (17.3 | ) | 892.2 | |||||||
| Deferred revenue | 92.4 | 52.8 | ||||||||
| Other | 33.8 | 79.9 | ||||||||
| Total | (258.9 | ) | (448.0 | ) | ||||||
| Net cash provided by continuing operations | 358.3 | 84.7 | ||||||||
| Discontinued operations | (0.9 | ) | (3.5 | ) | ||||||
| Net cash provided by operating activities | 357.4 | 81.2 | ||||||||
Investing Activities | ||||||||||
| Property acquisitions | (81.8 | ) | (74.7 | ) | ||||||
| Capitalized software expenditures | (132.1 | ) | (100.3 | ) | ||||||
| Acquisitions of businesses, less cash and short-term investments acquired | (356.8 | ) | (10.7 | ) | ||||||
| Notes receivable issuances, net | (42.4 | ) | (46.2 | ) | ||||||
| Proceeds from sale of notes receivable | 117.9 | — | ||||||||
| Other | 7.7 | 23.3 | ||||||||
| Net cash used by investing activities | (487.5 | ) | (208.6 | ) | ||||||
Financing Activities | ||||||||||
| Proceeds from issuance of debt | 30.0 | 18.9 | ||||||||
| Repayment of debt | (140.6 | ) | (23.6 | ) | ||||||
| Dividends paid on convertible preferred securities of subsidiary trust | (7.5 | ) | (7.5 | ) | ||||||
| Capital stock transactions | ||||||||||
| Issuances | 69.9 | 71.9 | ||||||||
| Share repurchases | (25.0 | ) | (44.2 | ) | ||||||
| ESOP notes and guarantees | 12.8 | 14.5 | ||||||||
| Dividends paid | (52.3 | ) | (51.4 | ) | ||||||
| Other | 1.1 | — | ||||||||
| Net cash used by financing activities | (111.6 | ) | (21.4 | ) | ||||||
| Net decrease in cash and equivalents | (241.7 | ) | (148.8 | ) | ||||||
| Cash and equivalents at beginning of period | 557.8 | 433.5 | ||||||||
| Cash and equivalents at end of period | $ | 316.1 | $ | 284.7 | ||||||
Six Months Ended September 30, 2002 2001 Operating Activities Income from continuing operations $ 246.2 $ 184.8 Adjustments to reconcile to net cash provided (used) by operating activities: Depreciation 52.2 58.3 Amortization 48.6 44.5 Provision for bad debts 47.0 28.3 Deferred taxes on income 13.9 26.1 Loss on sales of businesses, net — 18.4 Other non-cash items (0.4 ) 23.8 Total 407.5 384.2 Effects of changes in: Receivables (438.0 ) (363.1 ) Inventories 24.3 (543.0 ) Accounts and drafts payable 15.0 600.3 Deferred revenue (21.7 ) (77.4 ) Other (22.8 ) 6.6 Total (443.2 ) (376.6 ) Net cash provided (used) by continuing operations (35.7 ) 7.6 Discontinued operations (0.8 ) (3.7 ) Net cash provided (used) by operating activities (36.5 ) 3.9 Investing Activities Property acquisitions (55.9 ) (42.9 ) Capitalized software expenditures (86.6 ) (69.9 ) Notes receivable issuances, net (18.9 ) (30.0 ) Acquisitions of businesses, less cash and equivalents acquired (355.3 ) (7.4 ) Other 7.8 15.8 Net cash used by investing activities (508.9 ) (134.4 ) Financing Activities Proceeds from issuance of debt 282.0 4.2 Repayment of debt (6.0 ) (17.0 ) Dividends paid on convertible preferred securities of subsidiary trust (5.0 ) (5.0 ) Capital stock transactions: Issuances 46.7 41.4 ESOP notes and guarantees 3.8 8.9 Dividends paid (34.6 ) (34.3 ) Share repurchases — (15.1 ) Other 1.0 — Net cash provided (used) by financing activities 287.9 (16.9 ) Net decrease in cash and equivalents (257.5 ) (147.4 ) Cash and equivalents at beginning of period 557.8 433.5 Cash and equivalents at end of period $ 300.3 $ 286.1
| 5 |
McKESSON CORPORATION
FINANCIAL NOTES
(Unaudited)
| 1. |
| 2. |
6
McKESSON CORPORATION
FINANCIAL NOTES(Continued)NOTES (Continued)
(Unaudited)
3. Acquisitions In November 2002, the FASB issued Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and InvestmentsDisclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN No. 45 are effective for interim and annual periods ending after December 15, 2002, and we have adopted those requirements in the accompanying Financial Note 14. The initial recognition and measurement requirements of FIN No. 45 are effective prospectively for guarantees issued or modified after December 31, 2002. We are assessing what impact, if any, FIN No. 45 may have on our consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for our 2003 annual financial statements, whereas the interim disclosure provisions are effective for our first quarter of 2004. We are currently assessing the impact of the adoption of SFAS No. 148.
In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” This interpretation clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” and requires consolidation of variable interest entities by their primary beneficiaries if certain conditions are met. This interpretation applies to variable interest entities created or obtained after January 31, 2003, and as of July 1, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. We are evaluating what impact, if any, FIN No. 46 may have on our consolidated financial statements.
| 3. | Acquisitions and Investments |
In July 2002, we acquired 98.4% of the outstanding stock of A.L.I. Technologies Inc. (“A.L.I.”), of Vancouver, British Columbia, Canada, by means of a cash tender offer. The remaining 1.6% of A.L.I.’s outstanding common stock was acquired mid-Septemberin September 2002. A.L.I. provides digital medical imaging solutions which are designed to streamline access to diagnostic information, automate clinical workflow and eliminate the need for film. The acquisition of A.L.I. complements our Horizon Clinicals offering by incorporating medical images into a computerized patient record. The results of A.L.I.’s operations have been included in the condensed consolidated financial statements within our Information Solutions segment since the July acquisition date.
| (In millions) | |||||
| Current assets | $ | 21.2 | |||
| Long-term assets: | |||||
| Goodwill | 333.3 | ||||
| Other (primarily intangibles) | 17.3 | ||||
| Liabilities | (21.1 | ) | |||
| Net assets acquired, less cash and equivalents | $ | 350.7 | |||
(In millions) Current assets $ 21.2 Long-term assets: Goodwill 331.8 Other (primarily intangibles) 17.3 Liabilities (21.1 ) Net assets acquired, less cash and equivalents $ 349.2
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(Unaudited)
We are in the process of finalizing a third-party valuation of the intangible assets; thus, the allocation of the purchase price is subject to modification.refinement. The acquired intangibles represent technology assets and have a weighted-average useful life of 5five years. None of the amount assigned to goodwill is expected to be deductible for tax purposes.
| 4. |
7
McKESSON CORPORATION
FINANCIAL NOTES (Continued)(Unaudited)
| Quarter Ended | Nine Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| (In millions) | 2002 | 2001 | 2002 | 2001 | ||||||||||||
| Revenues | $ | — | $ | 3.6 | $ | 8.4 | $ | 13.5 | ||||||||
| Loss before income taxes | $ | — | $ | (1.9 | ) | $ | (0.6 | ) | $ | (2.6 | ) | |||||
| Loss on sale of business | — | — | (6.0 | ) | — | |||||||||||
| Income tax benefit | — | 0.6 | 2.5 | 0.9 | ||||||||||||
| Loss on discontinued operations | $ | — | $ | (1.3 | ) | $ | (4.1 | ) | $ | (1.7 | ) | |||||
Quarter Ended Six Months Ended September 30, September 30, (In millions) 2002 2001 2002 2001 Revenues $ 3.6 $ 3.8 $ 8.4 $ 9.9 Income (loss) before income taxes $ 0.1 $ (1.4 ) $ (0.6 ) $ (0.7 ) Loss on sale of business (6.0 ) — (6.0 ) — Income tax benefit 2.3 0.6 2.5 0.3 Loss on discontinued operations $ (3.6 ) $ (0.8 ) $ (4.1 ) $ (0.4 )
5. Special Charges (Credits)
Quarter Ended Six Months Ended September 30, September 30, (In millions) 2002 2001 2002 2001 Securities litigation costs incurred $ — $ 0.9 $ 0.1 $ 1.5 Loss on investments, net 4.8 2.5 7.4 4.8 — — — 18.4 Restructuring and related asset impairments (Financial Note 6) (10.6 ) 21.2 (6.1 ) 20.3 Other (0.9 ) 1.0 4.2 4.2 Total pre-tax special charges (credits) (6.7 ) 25.6 5.6 49.2 Income tax expense (benefit) 2.4 (9.3 ) (1.9 ) (48.0 ) Total after-tax special charges (credits) $ (4.3 ) $ 16.3 $ 3.7 $ 1.2 Diluted loss (income) per share attributable to special charges (credits) $ (0.01 ) $ 0.05 $ 0.01 $ —
(1) Excludes the September 2002 sale of the marketing fulfillment business, which was treated as a discontinued operation.
8
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(Unaudited)
a vendor that entitles us to a total $12.4 million credit against future purchases. We anticipate utilizing the remaining $11.9 million credit by the end of 2003 and will account for such recovery as a special credit, reducing operating expenses.
| 5. | Contract Losses |
Quarter Ended Six Months Ended September 30, September 30, (In millions) 2002 2001 2002 2001 Cost of sales $ — $ 4.8 $ — $ 4.8 Operating expenses (11.5 ) 19.3 (1.8 ) 22.2 Loss on sales of businesses, net — — — 18.4 Other income, net 4.8 1.5 7.4 3.8 Total pre-tax special charges (credits) $ (6.7 ) $ 25.6 $ 5.6 $ 49.2
| 6. | Restructuring and Related Asset Impairments |
6. Restructuring and Related Asset Impairments
| Quarter Ended | Nine Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| (In millions) | 2002 | 2001 | 2002 | 2001 | ||||||||||||
| Asset impairments | $ | — | $ | — | $ | 1.3 | $ | 1.2 | ||||||||
| Severance | (0.3 | ) | — | (4.5 | ) | 2.8 | ||||||||||
| Exit-related | 0.5 | — | (2.7 | ) | 16.3 | |||||||||||
| Total | $ | 0.2 | $ | — | $ | (5.9 | ) | $ | 20.3 | |||||||
Quarter Ended Six Months Ended September 30, September 30, (In millions) 2002 2001 2002 2001 Asset impairments $ 0.3 $ 0.6 $ 1.3 $ 1.2 Severance (5.1 ) 6.6 (4.2 ) 2.8 Exit-related (5.8 ) 14.0 (3.2 ) 16.3 Total $ (10.6 ) $ 21.2 $ (6.1 ) $ 20.3
Restructuring charges for the quarter and nine months ended December 31, 2001 primarily related to our Medical-Surgical Solutions segment distribution center network consolidation plan.
The following table summarizes program-to-date and plan restructuring activities:
| Program-to-Date | Plan | |||||||||||||||
| Number of: | Completed | Balance to Complete | Original | Revised | ||||||||||||
| Distribution center closures | 19 | 2 | 30 | 21 | ||||||||||||
| Distribution center openings | 5 | 1 | 8 | 6 | ||||||||||||
Employee terminations (1) | 523 | 131 | 985 | 654 | ||||||||||||
| (1) | Employee terminations primarily relate to distribution, delivery and associated back-office functions. |
9
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(Unaudited)
Program-to-Date Plan Balance to Number of: Completed Complete Original Revised Distribution center closures 18 3 30 21 Distribution center openings 5 1 8 6 481 173 985 654
(1) Employee terminations primarily relate to distribution, delivery and associated back-office functions.
| Pharmaceutical Solutions | Medical-Surgical Solutions | Information Solutions | Corporate | |||||||||||||||||||||||||||||||||
| (In millions) | Severance | Exit-Related | Severance | Exit-Related | Severance | Exit-Related | Severance | Exit-Related | Total | |||||||||||||||||||||||||||
Balance, March 31, 2002 | $ | 1.2 | $ | 4.4 | $ | 10.9 | $ | 14.3 | $ | 5.6 | $ | 4.5 | $ | 16.8 | $ | 0.3 | $ | 58.0 | ||||||||||||||||||
| Current period expense | 0.9 | 0.6 | — | — | — | — | — | — | 1.5 | |||||||||||||||||||||||||||
| Adjustment to prior year’s expense | — | 3.5 | (5.4 | ) | (6.8 | ) | — | — | — | — | (8.7 | ) | ||||||||||||||||||||||||
| Net expense for the period | 0.9 | 4.1 | (5.4 | ) | (6.8 | ) | — | — | — | — | (7.2 | ) | ||||||||||||||||||||||||
| Cash expenditures | (1.1 | ) | (1.6 | ) | (3.7 | ) | (2.8 | ) | (3.6 | ) | (1.2 | ) | (1.8 | ) | (0.3 | ) | (16.1 | ) | ||||||||||||||||||
Balance, December 31, 2002 | $ | 1.0 | $ | 6.9 | $ | 1.8 | $ | 4.7 | $ | 2.0 | $ | 3.3 | $ | 15.0 | $ | — | $ | 34.7 | ||||||||||||||||||
Pharmaceutical Medical-Surgical Information Solutions Solutions Solutions Corporate Exit- Exit- Exit- Exit- (In millions) Severance Related Severance Related Severance Related Severance Related Total $ 1.2 $ 4.4 $ 10.9 $ 14.3 $ 5.6 $ 4.5 $ 16.8 $ 0.3 $ 58.0 Current period expense 0.9 0.6 — — — — — — 1.5 Adjustment to prior year’s expense — 2.0 (5.1 ) (5.8 ) — — — — (8.9 ) Net expense for the period 0.9 2.6 (5.1 ) (5.8 ) — — — — (7.4 ) Cash expenditures (0.8 ) (0.7 ) (3.6 ) (1.7 ) (3.0 ) (0.7 ) (1.4 ) (0.3 ) (12.2 ) $ 1.3 $ 6.3 $ 2.2 $ 6.8 $ 2.6 $ 3.8 $ 15.4 $ — $ 38.4
Although the final outcome of these customer settlements cannot be determined, we believe that any additional liability and related expenditures will not have a material adverse effect on our financial position, results of operations or cash flows.
| 7. | Goodwill and Other Intangible Assets |
Changes in the carrying amount of goodwill, by business segment, are as follows:
| Pharmaceutical | Medical-Surgical | Information | ||||||||||||||
| (In millions) | Solutions | Solutions | Solutions | Total | ||||||||||||
Balance, March 31, 2002 | $ | 303.9 | $ | 689.4 | $ | 29.0 | $ | 1,022.3 | ||||||||
| Goodwill acquired | 2.2 | — | 333.3 | 335.5 | ||||||||||||
| Foreign currency translations and other | (0.8 | ) | (0.2 | ) | (11.7 | ) | (12.7 | ) | ||||||||
Balance, December 31, 2002 | $ | 305.3 | $ | 689.2 | $ | 350.6 | $ | 1,345.1 | ||||||||
10
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(Unaudited)
7. Goodwill and Other Intangible Assets
(In millions) Pharmaceutical
Solutions Medical-Surgical
Solutions Information
Solutions Total $ 303.9 $ 689.4 $ 29.0 $ 1,022.3 Goodwill acquired 2.2 — 331.8 334.0 Foreign currency translations and other (1.3 ) — (12.6 ) (13.9 ) $ 304.8 $ 689.4 $ 348.2 $ 1,342.4
| December 31, | March 31, | |||||||
| (In millions) | 2002 | 2002 | ||||||
| Customer lists | $ | 89.7 | $ | 88.1 | ||||
| Technology | 59.6 | 44.1 | ||||||
| Trademarks and other | 23.6 | 22.5 | ||||||
| Total intangibles | 172.9 | 154.7 | ||||||
| Accumulated amortization | (74.1 | ) | (61.3 | ) | ||||
| Intangibles, net | $ | 98.8 | $ | 93.4 | ||||
(In millions) September 30,
2002 March 31,
2002 Customer lists $ 91.8 $ 88.1 Technology 58.3 44.1 Trademarks and other 22.7 22.5 Total intangibles 172.8 154.7 Accumulated amortization (69.4 ) (61.3 ) Intangibles, net $ 103.4 $ 93.4
8. Short-Term Borrowings and Hedging8. Financing Activities
In addition, at September 30, 2002 and March 31, 2002, the revolving receivables sale facility was unused.
| • | increased our committed revolving receivables sales facility by $100.0 million to $950.0 million. This facility expires in June 2003. At December 31, 2002, $900.0 million was utilized under this facility and no amount was utilized at March 31, 2002, | ||
| • | sold customer lease receivables from our Pharmaceutical Solutions segment for cash proceeds of $117.9 million. The sale of these receivables resulted in a gain of $5.3 million which is included in Other income, in the condensed consolidated statement of operations, and | ||
| • | repaid $125.0 million of term debt that had matured. |
In order to hedge a portion of our fixed interest rate debt with variable interest rates, in April 2002, we entered into two interest rate swap agreements.agreements in the first quarter of 2003. The first agreement exchanges a fixed interest rate of 8.91% per annum to the London Inter Bank Offering Rate (“LIBOR”) plus 4.155%, on a notional amount of $100 million and matures in February 2005. The second agreement exchanges a fixed interest rate of 6.30% per annum to LIBOR plus 1.575%, on a notional amount of $150 million and matures in March 2005. These agreements are designated as fair value hedges and are intended to manage our ratio of variable to fixed interest rates.
11
| 9. | Convertible Preferred Securities |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)(Unaudited)
9. Convertible Preferred Securities
11
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(Unaudited)
Corporation common stock, subject to adjustment in certain circumstances. The preferred securities will be redeemed upon repayment of the Debentures and are callable by us at 102.5% of the liquidation amount.
| 10. |
In 2001, the Company’s Board of Directors approved plans to repurchase up to $250.0 million of common stock. During the third quarter of 2003, we repurchased 0.9 million shares of the Company’s common stock for a total of $25.0 million. In 2001 and 2002, we repurchased 3.5 million shares of the Company’s common stock for a total of $109.8 million.
| 11. | Comprehensive Income |
11. Comprehensive Income
| Quarter Ended September 30, | Six Months Ended September 30, | ||||||||||||||
| (In millions) | 2002 | 2001 | 2002 | 2001 | |||||||||||
| Net income | $ | 124.8 | $ | 79.0 | $ | 242.1 | $ | 184.4 | |||||||
| Unrealized loss on marketable securities and investments | — | (2.6 | ) | (1.3 | ) | (5.2 | ) | ||||||||
| Net gain (loss) on derivative instruments | (0.7 | ) | (0.9 | ) | (1.1 | ) | 1.3 | ||||||||
| Foreign currency translation adjustments | (14.6 | ) | (5.9 | ) | (2.7 | ) | (3.9 | ) | |||||||
| Comprehensive income | $ | 109.5 | $ | 69.6 | $ | 237.0 | $ | 176.6 | |||||||
| Quarter Ended | Nine Months Ended | ||||||||||||||||
| December 31, | December 31, | ||||||||||||||||
| (In millions) | 2002 | 2001 | 2002 | 2001 | |||||||||||||
| Net income | $ | 134.3 | $ | 108.8 | $ | 376.4 | $ | 293.2 | |||||||||
| Unrealized loss on marketable securities and investments | (0.1 | ) | (0.5 | ) | (1.4 | ) | (5.7 | ) | |||||||||
| Net gain (loss) on derivative instruments | 0.3 | (0.6 | ) | (0.8 | ) | 0.7 | |||||||||||
| Foreign currency translation adjustments | 5.1 | (0.7 | ) | 2.4 | (4.5 | ) | |||||||||||
| Comprehensive income | $ | 139.6 | $ | 107.0 | $ | 376.6 | $ | 283.7 | |||||||||
12
| 12. | Earnings Per Share |
McKESSON CORPORATION
FINANCIAL NOTES (Continued)(Unaudited)
12. Earnings Per Share
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(Unaudited)
The computations for basic and diluted earnings per share for continuing operations are as follows:
| Quarter Ended | Nine Months Ended | ||||||||||||||||
| December 31, | December 31, | ||||||||||||||||
| (In millions, except per share amounts) | 2002 | 2001 | 2002 | 2001 | |||||||||||||
| Income from continuing operations | $ | 134.3 | $ | 110.1 | $ | 380.5 | $ | 294.9 | |||||||||
| Dividends on preferred securities of subsidiary trust, net of tax benefit | 1.5 | 1.5 | 4.6 | 4.6 | |||||||||||||
| Income from continuing operations – diluted | $ | 135.8 | $ | 111.6 | $ | 385.1 | $ | 299.5 | |||||||||
| Weighted average common shares outstanding: | |||||||||||||||||
| Basic | 289.7 | 285.6 | 289.1 | 284.9 | |||||||||||||
| Effect of dilutive securities: | |||||||||||||||||
| Options to purchase common stock | 2.3 | 7.7 | 4.2 | 8.3 | |||||||||||||
| Trust convertible preferred securities | 5.4 | 5.4 | 5.4 | 5.4 | |||||||||||||
| Restricted stock | 0.6 | 0.5 | 0.6 | 0.4 | |||||||||||||
| Diluted | 298.0 | 299.2 | 299.3 | 299.0 | |||||||||||||
| Earnings per common share from continuing operations: | |||||||||||||||||
| Basic | $ | 0.46 | $ | 0.38 | $ | 1.31 | $ | 1.04 | |||||||||
| Diluted | $ | 0.46 | $ | 0.37 | $ | 1.28 | $ | 1.01 | |||||||||
Quarter Ended
September 30, Six Months Ended
September 30, 2002 2001 2002 2001 Income from continuing operations $ 128.4 $ 79.8 $ 246.2 $ 184.8 Dividends on preferred securities of subsidiary trust, net of tax benefit 1.6 1.6 3.1 3.1 Income from continuing operations – diluted $ 130.0 $ 81.4 $ 249.3 $ 187.9 Weighted average common shares outstanding: Basic 289.2 285.0 288.8 284.5 Effect of dilutive securities: Options to purchase common stock 3.9 8.2 5.3 7.3 Trust convertible preferred securities 5.3 5.4 5.3 5.4 Restricted stock 0.6 0.4 0.6 0.3 Diluted 299.0 299.0 300.0 297.5 Earnings from continuing operations per common share: Basic $ 0.44 $ 0.28 $ 0.85 $ 0.65 Diluted $ 0.43 $ 0.27 $ 0.83 $ 0.63
| 13. | Litigation |
13. LitigationI. Accounting Litigation
I. Accounting Litigation
On December 31, 2002, a consolidated amended complaint (the “CAC”) was filed in the previously reportedChang v. McKesson HBOC, Inc. et al., (N.D. Cal. No. C-00-20030 RMW), which, on June 3, 2002, had been consolidated with the previously reportedAdams v. McKesson Information Solutions, Inc., (N.D. Cal. No. C-02-0685 RMW). Judge Whyte granted plaintiffs 30 days leave to file a consolidated and amended complaint under the caption action captionedIn re McKesson HBOC, Inc. ERISA Litigation, (No. C00-20030 RMW). The CAC was filed by former employees of McKesson or HBOC who allege they participated in the HBO & Company Profit Sharing and Savings Plan (the “HBOC Plan”) or the McKesson Profit Sharing Investment Plan (the “McKesson Plan”). The CAC purports to seek relief on behalf of two putative sub-classes: (i) an HBOC sub-class defined as all participants in the HBOC Plan and their beneficiaries from March 31, 1996 to April 1, 1999, for whose benefit the HBOC Plan held and acquired HBOC stock and, after January 12, 1999, McKesson stock, and (ii) a McKesson sub-class defined as all participants in the McKesson Plan whose accounts were invested in McKesson Company stock at any time, who maintained an account balance under the McKesson Plan as of April 27, 1999, which included McKesson Company Stock, and who had not received a distribution from the McKesson Plan as of April 27, 1999. The CAC names as defendants, HBOC, an “HBOC Administrative Committee,” the alleged members of the HBOC Administrative Committee, the “HBOC Board of Directors,” certain individuals alleged to be former members of HBOC’s Board of Directors, McKesson, and certain current or former members of McKesson’s Board of Directors. Plaintiffs also named the McKesson Plan as a nominal defendant. The CAC generally alleges that HBOC breached its fiduciary duties and engaged in transactions prohibited by ERISA. Plaintiffs further allege that HBOC is liable
13
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(Unaudited)
under principles ofrespondeat superiorand agency for alleged breaches of fiduciary duties by other HBOC Plan fiduciaries. Plaintiffs also allege that McKesson is liable under principles ofrespondeat superiorand agency for alleged breaches of fiduciary duties by other McKesson Plan fiduciaries. The CAC seeks to have the defendants restore to the HBOC Plan and McKesson Plan losses allegedly caused by their alleged breaches of fiduciary duty, equitable relief, attorneys’ fees, costs and expenses. McKesson and HBOC have agreedare currently required to extend plaintiffs’ deadlinerespond to file an amended complaint to December 4, 2002.the CAC by February 21, 2003.
13
McKESSON CORPORATION
FINANCIAL NOTES (Continued)(Unaudited)
Fundamental Growth Fund, Inc. et al. v. McKesson HBOC, Inc. et al. (S.F.(S.F. Superior Ct. Case No. CGC-02-405792) (“Merrill Lynch”). These actions have been consolidated underJudge Mitchell has not yet issued an order on the captionThe State of Oregon, By and Through the Oregon Public Employees Retirement Board v. McKesson HBOC , Inc. et al. (Master File No. 307619). On October 16, 2002, plaintiffs inOregon, Minnesota andUtah filed a consolidated and amended complaint which consolidated the claims in those actions and, on October 11, 2002, plaintiffs inMerrill Lynch filed an amended complaint in theMerrill Lynch action.demurrers or motions to strike.
In another previously reported individual action,Kelly v. McKesson Corporation, (Del. Superior Ct. C.A. No. 99C-09-265), the court denied plaintiff’s motionpostponed the trial, which had been scheduled to vacatebegin on May 3, 2003. The parties are currently negotiating a new schedule, which will be presented to the stay of that action as to any purported class claims but granted plaintiff leave to proceed with his individual claims.court for its approval.
| II. |
The U.S. Attorney’s Office for the Southern District of Illinois is conducting an industry-wide civil and Claims
In our report on Form 10-Q for the buyer (now known asquarter ended September 30, 2002, we reported on certain asbestos litigation involving the Company. The discussions with Univar USA, Inc. referenced in that report are continuing.
| 14. | Financial Guarantees and Warranties |
Financial Guarantees:We have agreements with certain of our customers’ financial institutions under which we have guaranteed the repurchase of inventory at a discount in the event these customers are unable to meet certain obligations to those financial institutions. Among other limitations, these inventories must be in resalable condition. We have also guaranteed loans, credit facilities and the payment of leases for some customers; and we are a secured lender for substantially all of these guarantees. Customer guarantees range from one to ten years and were primarily provided to facilitate financing for certain strategic customers. At December 31, 2002, the maximum amounts of
14
McKESSON CORPORATION
FINANCIAL NOTES (Continued)
(Unaudited)
inventory repurchase guarantees and other customer guarantees were approximately $133.1 million and $68.4 million. We consider it unlikely to make significant payments under these guarantees, and accordingly, amounts accrued for these guarantees were nominal.
At December 31, 2002, we had commitments to provide $14.3 million of cash contributions to and to purchase $12.8 million of services from Verispan and other equity-held investments, of which no amounts have been accrued at December 31, 2002. In addition, our banks and insurance companies have issued $50.8 million of standby letters of credit and surety bonds on our behalf in order to meet the security requirements for statutory licenses and permits, court and fiduciary obligations, and our workers’ compensation and automotive liability programs.
In conjunction with certain transactions, primarily divestitures, we may provide routine indemnifications (e.g., “Univar”) to defendretention of previously existing environmental, tax and fully indemnifyemployee liabilities) whose terms vary in duration and often are not explicitly defined. Where appropriate, obligations for such indemnifications are recorded as liabilities. Because the Company from various claims including those alleging personal injury. The Company, throughamounts of these indemnification obligations often are not explicitly stated, the Former Division, has been namedoverall maximum amount of these commitments cannot be reasonably estimated. Other than obligations recorded as oneliabilities at the time of more than 200 defendants in 41 actions filed in state courts in Mississippidivestiture, we have not historically made significant payments as a result of these indemnifications.
Warranties:In the Former Division’s alleged distributionnormal course of asbestos. These actions typically involve multiple plaintiffs claiming personal injuriesbusiness, we provide warranties and unspecified compensatoryindemnifications for our products and punitive damages arisingservices. We provide warranties that the products we distribute are in compliance with the Food, Drug and Cosmetic Act and other applicable laws and regulations. We have received the same warranties from their alleged exposure to asbestos-containing materials. The Company has tendered each of these cases to Univar underour suppliers, who customarily are the termsmanufacturers of the Indemnity Agreement, and Univar is defending the Company in all cases. However, Univar has recently advised the Company that it wants to confer and discuss the extent of Univar’s obligations under the Indemnity Agreement. The Company has made no payments, nor paid or incurred any costs or expenses in connection with these actions to date.products. In addition, we have indemnity obligations to our customers for these products, which have also been provided to us from our suppliers, either through express agreement or by operation of law.
We also provide warranties regarding the Company believes that, if necessary,performance of software and automation products we sell. Our liability under these warranties is to bring the product into compliance with previously agreed to specifications. For software products, this may result in additional project costs and/or the payment of penalties or damages in accordance with the contract and are reflected in our estimates used for the percentage-of-completion method of accounting for these contracts. In addition, most of our customers who purchase our software and automation products also purchase annual maintenance agreements. Revenue from these maintenance agreements is recognized on a portionstraight-line basis over the contract period and the cost of theseservicing product warranties is charged to expense when claims would be covered by insurance.
15
14. Segment InformationMcKESSON CORPORATION
| 15. | Segment Information |
Our operating segments consist of Pharmaceutical Solutions, Medical-Surgical Solutions and Information Solutions. We evaluate the performance of our operating segments based on operating profit before interest expense, income taxes and discontinued operations. Our Corporate segment includes expenses associated with Corporate functions and projects, and certain employee benefits. Corporate expenses are allocated to the operating segments to the extent that these items can be directly attributable to the segment.
14 Financial information relating to our segments is as follows:
| Quarter Ended | Nine Months Ended | ||||||||||||||||
| December 31, | December 31, | ||||||||||||||||
| (In millions) | 2002 | 2001 | 2002 | 2001 | |||||||||||||
Revenues | |||||||||||||||||
| Pharmaceutical Solutions | $ | 13,933.1 | $ | 12,262.6 | $ | 39,349.6 | $ | 34,226.2 | |||||||||
| Medical-Surgical Solutions | 692.6 | 684.1 | 2,059.7 | 2,043.5 | |||||||||||||
| Information Solutions | 295.3 | 248.1 | 825.2 | 731.6 | |||||||||||||
| Total | $ | 14,921.0 | $ | 13,194.8 | $ | 42,234.5 | $ | 37,001.3 | |||||||||
Operating profit (loss) | |||||||||||||||||
| Pharmaceutical Solutions | $ | 241.0 | $ | 200.1 | $ | 687.2 | $ | 551.1 | |||||||||
| Medical-Surgical Solutions | 17.6 | 25.7 | 48.5 | 48.3 | |||||||||||||
| Information Solutions | 15.1 | 15.1 | 58.5 | 18.6 | |||||||||||||
| Total | 273.7 | 240.9 | 794.2 | 618.0 | |||||||||||||
| Corporate | (39.8 | ) | (42.0 | ) | (121.7 | ) | (116.4 | ) | |||||||||
| Interest expense | (27.9 | ) | (27.2 | ) | (88.5 | ) | (81.2 | ) | |||||||||
| Income from continuing operations before income taxes and dividends on preferred securities of subsidiary trust | $ | 206.0 | $ | 171.7 | $ | 584.0 | $ | 420.4 | |||||||||
| December 31, | March 31, | |||||||||
| (In millions) | 2002 | 2002 | ||||||||
Segment assets, at period end | ||||||||||
| Pharmaceutical Solutions | $ | 10,388.9 | $ | 10,178.2 | ||||||
| Medical-Surgical Solutions | 1,483.6 | 1,485.6 | ||||||||
| Information Solutions | 1,075.7 | 674.8 | ||||||||
| Total | 12,948.2 | 12,338.6 | ||||||||
| Corporate | ||||||||||
| Cash, equivalents and marketable securities | 327.4 | 562.9 | ||||||||
| Other | 528.6 | 422.5 | ||||||||
| Total | $ | 13,804.2 | $ | 13,324.0 | ||||||
16
McKESSON CORPORATION
FINANCIAL NOTES (Continued)(Unaudited)
Quarter Ended
September 30, Six Months Ended
September 30, (In millions) 2002 2001 2002 2001 Pharmaceutical Solutions $ 12,730.6 $ 11,234.7 $ 25,416.5 $ 21,963.6 Medical-Surgical Solutions 684.2 684.3 1,367.1 1,359.4 Information Solutions 275.5 237.3 529.9 483.5 Total $ 13,690.3 $ 12,156.3 $ 27,313.5 $ 23,806.5 Pharmaceutical Solutions $ 227.2 $ 180.7 $ 446.2 $ 351.0 Medical-Surgical Solutions 12.7 (3.3 ) 30.9 22.6 Information Solutions 24.9 14.6 43.4 3.5 Total 264.8 192.0 520.5 377.1 Corporate (40.7 ) (36.7 ) (81.9 ) (74.4 ) Interest expense (29.7 ) (27.0 ) (60.6 ) (54.0 ) Income from continuing operations before income taxes and dividends on preferred securities of subsidiary trust $ 194.4 $ 128.3 $ 378.0 $ 248.7 Pharmaceutical Solutions $ — $ (1.3 ) $ 6.8 $ (1.2 ) Medical-Surgical Solutions (10.8 ) 27.3 (9.6 ) 26.2 Information Solutions (0.7 ) (1.1 ) (0.7 ) 20.6 Corporate 4.8 0.7 9.1 3.6 Total $ (6.7 ) $ 25.6 $ 5.6 $ 49.2
September 30,
2002 March 31,
2002 Pharmaceutical Solutions $ 10,622.8 $ 10,178.2 Medical-Surgical Solutions 1,465.5 1,485.6 Information Solutions 1,026.9 674.8 Total 13,115.2 12,338.6 Corporate Cash, equivalents and marketable securities 311.6 562.9 Other 442.3 422.5 Total $ 13,869.1 $ 13,324.0
15
McKESSON CORPORATIONFINANCIAL REVIEW
(Unaudited)
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
Financial Overview
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||
| (In millions, except per share data) | 2002 | 2001 | Change | 2002 | 2001 | Change | |||||||||||||||||||
| Revenues | |||||||||||||||||||||||||
| Excluding Sales to Customers’ Warehouses | $ | 10,913.9 | $ | 9,627.1 | 13 | % | $ | 31,322.0 | $ | 27,085.6 | 16 | % | |||||||||||||
| Sales to Customers’ Warehouses | 4,007.1 | 3,567.7 | 12 | 10,912.5 | 9,915.7 | 10 | |||||||||||||||||||
| Total Revenues | $ | 14,921.0 | $ | 13,194.8 | 13 | $ | 42,234.5 | $ | 37,001.3 | 14 | |||||||||||||||
Operating Profit (1) | 273.7 | 240.9 | 14 | 794.2 | 618.0 | 29 | |||||||||||||||||||
| Net Income | 134.3 | 108.8 | 23 | 376.4 | 293.2 | 28 | |||||||||||||||||||
| Diluted Earnings Per Share | 0.46 | 0.37 | 24 | 1.27 | 1.00 | 27 | |||||||||||||||||||
Quarter Ended
September 30, Six Months Ended
September 30, (In millions, except per share data) 2002 2001 Change 2002 2001 Change Revenues Excluding Sales to Customers’ Warehouses $ 10,282.0 $ 8,914.8 15 % $ 20,408.1 $ 17,458.5 17 % Sales to Customers’ Warehouses 3,408.3 3,241.5 5 6,905.4 6,348.0 9 Total Revenues $ 13,690.3 $ 12,156.3 13 $ 27,313.5 $ 23,806.5 15 As Reported – U.S. GAAP 264.8 192.0 38 520.5 377.1 38 Net Income 124.8 79.0 58 242.1 184.4 31 Diluted Earnings Per Share 0.42 0.27 56 0.82 0.63 30 Operating Profit $ 253.3 $ 216.9 17 $ 517.0 $ 422.7 22 Net Income 124.1 96.1 29 249.9 186.0 34 Diluted Earnings Per Share 0.42 0.32 31 0.84 0.63 33
| (1) | Operating profit for our three business segments is defined as earnings from continuing operations before Corporate expenses, interest expense and income taxes. | |
As reported under U.S. generally accepted accounting principles (“U.S. GAAP”), netNet income increased 58%23% to $124.8$134.3 million for the secondthird quarter of 2003 compared to the same period a year ago, and diluted earnings per share increased $0.15$0.09 to $0.42.$0.46. For the sixnine months ended September 30,December 31, 2002, net income increased 31%28% to $242.1$376.4 million compared to the same period a year ago, and diluted earnings per share increased $0.19$0.27 to $0.82.
U.S. GAAP$1.27. Excluding the items noted below, which were included in income from continuing operations, increases were due to revenue growth and operating margin increases in our Pharmaceutical Solutions segment, offsetting flat revenues and a decline in operating profit in our Medical-Surgical Solutions segment. Increases in year-to-date financial results include pre-tax special creditswere also attributable to revenue growth and operating margin expansion in our Information Solutions segment.
Results from continuing operations included the following items:
For the quarter and nine months ended December 31, 2002: a $51.0 million provision for expected losses on five multi-year contracts within our Information Solutions’ international business, a $22.3 million credit for the reversal of $6.7a portion of customer settlement reserves also within our Information Solutions segment, and gains of $5.3 million and $4.5 million on sales of lease receivables and venture investments within our Pharmaceutical Solutions segment. Results for the nine months ended December 31, 2002 also include $12.2 million in reversals of prior year’s accrued restructuring charges and $11.0 million in additional bad debt reserves within our Medical-Surgical Solutions segment. These items total a pre-tax loss of $18.9 million and $17.7 million for the quarter and nine months ended December 31, 2002.
For the nine months ended December 31, 2001: restructuring charges of $25.6$24.3 million forassociated with the Medical-Surgical Solutions segment’s original distribution center consolidation plan, and $18.4 million pre-tax loss ($18.4 million after-tax gain) on sale of two businesses within our Information Solutions segment. These items total a pre-tax loss of $42.7 million.
In the second quarter of 2003, and 2002, or $4.3 million and $16.3 million (credit of $0.01 and a loss of $0.05 per diluted share) after-taxes. For the six months ended September 2002 and 2001, U.S. GAAP financial results include pre-tax special charges of $5.6 million and $49.2 million, or $3.7 million and $1.2 million ($0.01 and nil per diluted share) after-taxes.
U.S. GAAP financial results also include losses from discontinued operations of $3.6 million and $4.1 million ($0.01 per diluted share), for the quarter and six months ended September 30, 2002, and $0.8 million and $0.4 million for the comparable prior year periods (nil per diluted share). In September 2002, we sold a marketing fulfillment business which was previously included in our Pharmaceutical Solutions segment. Financial results for this business have been presented as a discontinued operation and accordingly, all periods presented have been reclassified.
We provide pro forma financial data, which excludes special charges and credits and Losses from discontinued operations as an alternative for understanding our results. We believe such discussion is the most informative representation of recurring and non-recurring, non-transactional-related operating results. These measures are not in accordance with, nor an alternative for, U.S. GAAP and may be different from pro forma measures used by other companies.
Pro forma net income and net income$4.1 million ($0.01 per diluted shareshare) for the second quarter of 2003 increased 29%nine months ended December 31, 2002, and 31% to $124.1$1.3 million and $0.42, compared to$1.7 million ($0.01 per diluted share) for the same period a year ago. For the sixquarter and nine months ended September 30, 2002, pro forma net income and net income per diluted share increased 34% and 33% to $249.9 million and $0.84, compared to the same period a year ago. The increase was due to revenue growth and operating margin improvement in our Pharmaceutical Solutions and Information Solutions segments, offsetting flat revenues and a decline in operating profit in our Medical-Surgical Solutions segment.December 31, 2001, were incurred.
The following discussion regarding our financial results excludes special charges and credits. Special charges and credits are discussed in detail commencing on page 20, which includes a reconciliation of pro forma financial results to those reported under U.S. GAAP. In addition, the Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.
1617
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
(Unaudited)
Results of Operations
Revenues:
Quarter Ended
September 30, Six Months Ended
September 30, (In millions) 2002 2001 Change 2002 2001 Change Pharmaceutical Solutions Pharmaceutical Distribution & Services U.S. Healthcare $ 8,504.7 $ 7,278.7 17 % $ 16,874.1 $ 14,188.6 19 % U.S. Healthcare Sales to Customers’ Warehouses 3,408.3 3,241.5 5 6,905.4 6,348.0 9 Total U.S. Healthcare 11,913.0 10,520.2 13 23,779.5 20,536.6 16 International 817.6 714.5 14 1,637.0 1,427.0 15 Total Pharmaceutical Solutions 12,730.6 11,234.7 13 25,416.5 21,963.6 16 Medical-Surgical Solutions 684.2 684.3 — 1,367.1 1,359.4 1 Information Solutions Software 50.7 42.2 20 95.8 87.6 9 Services 199.1 180.0 11 389.4 363.0 7 Hardware 25.7 15.1 70 44.7 32.9 36 Total Information Solutions 275.5 237.3 16 529.9 483.5 10 Total Revenues $ 13,690.3 $ 12,156.3 13 $ 27,313.5 $ 23,806.5 15 Revenues, Excluding Sales to Customers’ Warehouses: Pharmaceutical Solutions $ 9,322.3 $ 7,993.2 17 $ 18,511.1 $ 15,615.6 19 Medical-Surgical Solutions 684.2 684.3 — 1,367.1 1,359.4 1 Information Solutions 275.5 237.3 16 529.9 483.5 10 Total $ 10,282.0 $ 8,914.8 15 $ 20,408.1 $ 17,458.5 17
| Quarter Ended | Nine Months Ended | |||||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||||
| (In millions) | 2002 | 2001 | Change | 2002 | 2001 | Change | ||||||||||||||||||||||
| Pharmaceutical Solutions | ||||||||||||||||||||||||||||
| Pharmaceutical Distribution & Services | ||||||||||||||||||||||||||||
| U.S. Healthcare | $ | 9,039.7 | $ | 7,937.4 | 14 | % | $ | 25,913.8 | $ | 22,126.0 | 17 | % | ||||||||||||||||
| U.S. Healthcare Sales to Customers’ Warehouses | 4,007.1 | 3,567.7 | 12 | 10,912.5 | 9,915.7 | 10 | ||||||||||||||||||||||
| Total U.S. Healthcare | 13,046.8 | 11,505.1 | 13 | 36,826.3 | 32,041.7 | 15 | ||||||||||||||||||||||
| Canada | 886.3 | 757.5 | 17 | 2,523.3 | 2,184.5 | 16 | ||||||||||||||||||||||
| Total Pharmaceutical Solutions | 13,933.1 | 12,262.6 | 14 | 39,349.6 | 34,226.2 | 15 | ||||||||||||||||||||||
| Medical-Surgical Solutions | 692.6 | 684.1 | 1 | 2,059.7 | 2,043.5 | 1 | ||||||||||||||||||||||
| Information Solutions | ||||||||||||||||||||||||||||
| Software | 61.8 | 37.8 | 63 | 157.6 | 125.4 | 26 | ||||||||||||||||||||||
| Services | 206.2 | 187.2 | 10 | 595.6 | 550.2 | 8 | ||||||||||||||||||||||
| Hardware | 27.3 | 23.1 | 18 | 72.0 | 56.0 | 29 | ||||||||||||||||||||||
| Total Information Solutions | 295.3 | 248.1 | 19 | 825.2 | 731.6 | 13 | ||||||||||||||||||||||
| Total Revenues | $ | 14,921.0 | $ | 13,194.8 | 13 | $ | 42,234.5 | $ | 37,001.3 | 14 | ||||||||||||||||||
| Revenues, Excluding Sales to Customers’ Warehouses: | ||||||||||||||||||||||||||||
| Pharmaceutical Solutions | $ | 9,926.0 | $ | 8,694.9 | 14 | $ | 28,437.1 | $ | 24,310.5 | 17 | ||||||||||||||||||
| Medical-Surgical Solutions | 692.6 | 684.1 | 1 | 2,059.7 | 2,043.5 | 1 | ||||||||||||||||||||||
| Information Solutions | 295.3 | 248.1 | 19 | 825.2 | 731.6 | 13 | ||||||||||||||||||||||
| Total | $ | 10,913.9 | $ | 9,627.1 | 13 | $ | 31,322.0 | $ | 27,085.6 | 16 | ||||||||||||||||||
Revenues increased by 13% to $13,690.3$14,921.0 million and 15%by 14% to $27,313.5$42,234.5 million in the quarter and sixnine months ended September 30,December 31, 2002 compared to the same prior year periods. The increase was largely due to growth in our Pharmaceutical Solutions segment, which accounted for over 92%93% of consolidated revenues.
Increases in U.S. healthcare revenues, excluding sales to customers’ warehouses, were due toreflect market growth rates and the benefit of having one additional selling dayas well as new customers in our pharmaceutical distribution business, and growth in our automation, and specialty pharmaceutical products, and pharmacy outsourcing services businesses. Year-to-date revenues also reflect the impact of agreements that took effect in the first quarter of 2002 for new pharmaceutical distribution business that was previously direct or outside the distribution channel. Market growth rates reflect growing drug utilization and price increases which are offset in part by the increased use of generics. In the second halffourth quarter of 2003, the U.S. pharmaceutical distribution growth rate is expected to reflectbe in the range of the projected U.S. market growth rate.rate of 11-14%.
U.S. healthcare sales to customers’ warehouses increased as a result of growth from existing customers. Sales to customers’ warehouses represent large volume sales of pharmaceuticals to major self-warehousing drugstore chains whereby we act as an intermediary in the order and subsequent delivery of products directly from the manufacturer to the customers’ warehouses. These sales provide a benefit to our customers in that they can use one source for both their direct store-to-store business and their warehouse business.
InternationalIncreases in Canadian pharmaceutical revenues which are derived from our Canadian operations, grew primarily reflecting bothreflect market growth rates andas well as greater sales to our existing customers.
��Medical-Surgical Solutions segment revenues were flat or increased nominally asnominally. Revenues for the quarter reflect greater sales of extended care products, whereas, on a year-to-date basis, growth in primary and extended care products were fully orwas almost fully offset by a decline in revenues for acute care products. The segment’s decline in its acute care business
1718
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
(Unaudited)
segment’s decline in its acute care business reflects the competitive environment in which it operates and the continued self-warehousing strategy by a major customer.
Information Solutions segment revenues increased reflecting growth in all three categories: software, sales, services and hardware. In addition,Both software and services revenues benefited from the recently acquiredrecognition of previously deferred revenues and the acquisition of A.L.I. Technologies Inc. (“A.L.I.”) business contributed to the growth in this segment’s revenues..
As of September 30,December 31, 2002, the backlog for our Information Solutions segment, which includes firm contracts for maintenance fees, implementation and software contracts, and outsourcing agreements, was $2.09$2.08 billion compared to $2.06 billion at March 31, 2002 and $1.51$1.98 billion a year ago. The increase in backlog from September 30,December 31, 2001 was primarily due to a ten-year, $480 million outsourcing contract to provide a standardized, fully automated human resourcesan increase in deferred software and payroll system for the National Health Service of England and Wales, which was entered into during the third quarter of 2002.associated service bookings.
Gross Profit:
| Quarter Ended | Nine Months Ended | |||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||
| (In millions) | 2002 | 2001 | Change | 2002 | 2001 | Change | ||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||||||||
| Pharmaceutical Solutions | $ | 487.6 | $ | 437.6 | 11 | % | $ | 1,462.8 | $ | 1,264.7 | 16 | % | ||||||||||||||
| Medical-Surgical Solutions | 130.1 | 135.5 | (4 | ) | 389.7 | 396.2 | (2 | ) | ||||||||||||||||||
| Information Solutions | 109.9 | 113.4 | (3 | ) | 365.2 | 344.4 | 6 | |||||||||||||||||||
| Total | $ | 727.6 | $ | 686.5 | 6 | $ | 2,217.7 | $ | 2,005.3 | 11 | ||||||||||||||||
Gross Profit Margin (1) | ||||||||||||||||||||||||||
| Pharmaceutical Solutions | 4.91 | % | 5.03 | % | (12 | )bp(2) | 5.14 | % | 5.20 | % | (6 | )bp | ||||||||||||||
| Medical-Surgical Solutions | 18.78 | 19.81 | (103 | ) | 18.92 | 19.39 | (47 | ) | ||||||||||||||||||
| Information Solutions | 37.22 | 45.71 | (849 | ) | 44.26 | 47.07 | (281 | ) | ||||||||||||||||||
| Total | 6.67 | 7.13 | (46 | ) | 7.08 | 7.40 | (32 | ) | ||||||||||||||||||
Quarter Ended
September 30, Six Months Ended
September 30, (In millions) 2002 2001 Change 2002 2001 Change Pro Forma Gross Profit Pharmaceutical Solutions $ 481.5 $ 420.6 14 % $ 975.2 $ 827.1 18 % Medical-Surgical Solutions 128.1 132.5 (3 ) 259.6 265.5 (2 ) Information Solutions 129.7 113.6 14 255.3 231.0 11 Total $ 739.3 $ 666.7 11 $ 1,490.1 $ 1,323.6 13 Pharmaceutical Solutions 5.17 % 5.26 % (9 ) bp (2) 5.27 % 5.30 % (3 ) bp Medical-Surgical Solutions 18.72 19.36 (64 ) 18.99 19.53 (54 ) Information Solutions 47.08 47.87 (79 ) 48.18 47.78 40 Total 7.19 7.48 (29 ) 7.30 7.58 (28 )
(1) Excludes sales to customers’ warehouses.(2)
| (1) | Excludes sales to customers’ warehouses. | |
| (2) | Basis points (“bp”). |
As a percentage of revenues, excluding sales to customers’ warehouses, gross profit margin decreased, primarily reflecting a higher proportion of revenues attributable to our U.S. pharmaceutical distribution business, which has lower margins both relative to the other product lines within the segment as well as to other segments, partially offset by an improvement in gross margins from our Information Solutions segment. Pharmaceutical Solutions segment pro forma gross margin as a percentage of revenues decreased, reflecting reflecting:
| • | a $51.0 million provision for expected losses on five multi-year contracts within our Information Solutions’ international business, | ||
| • | a higher proportion of revenues attributable to our U.S. pharmaceutical distribution business, which has lower margins both relative to the other product lines within the Pharmaceutical Solutions segment as well as to other segments, and | ||
| • | a decline in the Pharmaceutical Solutions segment gross margin reflecting a decrease in selling margin to customers, offset in part by greater product sourcing profits on branded pharmaceuticals, the benefit of increased sales of generic drugs with higher margins, and growth in other higher margin products and services. |
We exclude sales to customers’ warehouses in analyzing our gross and operating profits and operating expenses as a percentage of revenues as these revenues from bulk shipments to warehouses have a significantly lower gross margin compared to traditional direct store delivery sales because of their low cost-to-serve model. These sales do, however, contribute positively to our cash flows due to favorable timing between the customer payment and ourthe payment to the supplier.
18
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)(Unaudited)
Operating Expenses, Other Income and Operating Profit:
Quarter Ended
September 30, Six Months Ended
September 30, (In millions) 2002 2001 Change 2002 2001 Change Pro Forma Operating Expenses Pharmaceutical Solutions $ 260.6 $ 250.2 4 % $ 538.8 $ 497.0 8 % Medical-Surgical Solutions 126.3 108.7 16 238.6 217.3 10 Information Solutions 106.6 99.5 7 214.1 206.8 4 Corporate 37.3 35.6 5 75.9 68.8 10 Total $ 530.8 $ 494.0 7 $ 1,067.4 $ 989.9 8 Pro Forma Other Income Pharmaceutical Solutions $ 6.3 $ 9.0 (30 )% $ 16.6 $ 19.7 (16 )% Medical-Surgical Solutions 0.1 0.2 (50 ) 0.3 0.6 (50 ) Information Solutions 1.1 (0.6 ) — 1.5 (0.1 ) — Corporate 1.4 (0.4 ) — 3.1 (2.0 ) — Total $ 8.9 $ 8.2 9 $ 21.5 $ 18.2 18 Pro Forma Operating Profit Pharmaceutical Solutions $ 227.2 $ 179.4 27 % $ 453.0 $ 349.8 30 % Medical-Surgical Solutions 1.9 24.0 (92 ) 21.3 48.8 (56 ) Information Solutions 24.2 13.5 79 42.7 24.1 77 Total 253.3 216.9 17 517.0 422.7 22 Corporate Expenses (35.9 ) (36.0 ) — (72.8 ) (70.8 ) 3 Interest Expense (29.7 ) (27.0 ) 10 (60.6 ) (54.0 ) 12 Pro forma income before income taxes $ 187.7 $ 153.9 22 $ 383.6 $ 297.9 29 Pro Forma Operating Expenses as a Pharmaceutical Solutions 2.80 % 3.13 % (33 )bp 2.91 % 3.18 % (27 )bp Medical-Surgical Solutions 18.46 15.88 258 17.45 15.98 147 Information Solutions 38.69 41.93 (324 ) 40.40 42.77 (237 ) Pharmaceutical Solutions 2.44 % 2.24 % 20 bp 2.45 % 2.24 % 21 bp Medical-Surgical Solutions 0.28 3.51 (323 ) 1.56 3.59 (203 ) Information Solutions 8.78 5.69 309 8.06 4.98 308 Total 2.46 2.43 3 2.53 2.42 11
(1) Excludes sales to customers’ warehouses.
Pro forma operating profit is computed as pro forma gross profit, less operating expenses, plus other income for our three business segments. Increases in pro forma operating profit were due to margin expansion in our Pharmaceutical Solutions and Information Solutions segments, partially offset by a decline in our Medical-Surgical Solutions segment.
Excluding sales to customers’ warehouses, Pharmaceutical Solutions segment pro forma operating profit as a percentage of revenues increased primarily reflecting expense leverage, offset in part by a decline in pro forma gross margins.
Medical-Surgical Solutions segment’s decrease in pro forma operating profit as a percentage of revenues resulted from duplicate operating expenses associated with the segment’s ongoing restructuring activities and replacement of information systems, $11 million of additional bad debt reserves and a decline in pro forma gross margins. Additional operating expenses include duplicate payroll, transportation and warehouse costs as the segment consolidates distribution centers. During the second quarter of 2003, we modified our distribution center network consolidation plan. The revised plan should be fully implemented by the fourth quarter of 2003 and we expect to begin to see the benefits in the next fiscal year.
19
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
(Unaudited)
Operating Expenses, Other Income and Operating Profit:
| Quarter Ended | Nine Months Ended | |||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||
| (In millions) | 2002 | 2001 | Change | 2002 | 2001 | Change | ||||||||||||||||||||
Operating Expenses (1) | ||||||||||||||||||||||||||
| Pharmaceutical Solutions | $ | 269.1 | $ | 246.8 | 9 | % | $ | 814.7 | $ | 743.6 | 10 | % | ||||||||||||||
| Medical-Surgical Solutions | 113.6 | 109.9 | 3 | 342.6 | 348.6 | (2 | ) | |||||||||||||||||||
| Information Solutions | 95.4 | 99.7 | (4 | ) | 308.8 | 327.1 | (6 | ) | ||||||||||||||||||
| Corporate | 39.7 | 40.6 | (2 | ) | 117.3 | 108.2 | 8 | |||||||||||||||||||
| Total | $ | 517.8 | $ | 497.0 | 4 | $ | 1,583.4 | $ | 1,527.5 | 4 | ||||||||||||||||
| Other Income | ||||||||||||||||||||||||||
| Pharmaceutical Solutions | $ | 22.5 | $ | 9.3 | 142 | $ | 39.1 | $ | 30.0 | 30 | ||||||||||||||||
| Medical-Surgical Solutions | 1.1 | 0.1 | 1,000 | 1.4 | 0.7 | 100 | ||||||||||||||||||||
| Information Solutions | 0.6 | 1.4 | (57 | ) | 2.1 | 1.3 | 62 | |||||||||||||||||||
| Corporate | (0.1 | ) | (1.4 | ) | (93 | ) | (4.4 | ) | (8.2 | ) | (46 | ) | ||||||||||||||
| Total | $ | 24.1 | $ | 9.4 | 156 | $ | 38.2 | $ | 23.8 | 61 | ||||||||||||||||
| Operating Profit | ||||||||||||||||||||||||||
| Pharmaceutical Solutions | $ | 241.0 | $ | 200.1 | 20 | $ | 687.2 | $ | 551.1 | 25 | ||||||||||||||||
| Medical-Surgical Solutions | 17.6 | 25.7 | (32 | ) | 48.5 | 48.3 | — | |||||||||||||||||||
| Information Solutions | 15.1 | 15.1 | — | 58.5 | 18.6 | 215 | ||||||||||||||||||||
| Total | 273.7 | 240.9 | 14 | 794.2 | 618.0 | 29 | ||||||||||||||||||||
| Corporate Expenses | (39.8 | ) | (42.0 | ) | (5 | ) | (121.7 | ) | (116.4 | ) | 5 | |||||||||||||||
| Interest Expense | (27.9 | ) | (27.2 | ) | 3 | (88.5 | ) | (81.2 | ) | 9 | ||||||||||||||||
| Income from continuing operations before income taxes and dividends on preferred securities of subsidiary trust | $ | 206.0 | $ | 171.7 | 20 | $ | 584.0 | $ | 420.4 | 39 | ||||||||||||||||
Operating Expenses as a Percentage of Revenues (1),(2) | ||||||||||||||||||||||||||
| Pharmaceutical Solutions | 2.71 | % | 2.84 | % | (13 | )bp | 2.86 | % | 3.06 | % | (20 | )bp | ||||||||||||||
| Medical-Surgical Solutions | 16.40 | 16.06 | 34 | 16.63 | 17.06 | (43 | ) | |||||||||||||||||||
| Information Solutions | 32.31 | 40.19 | (788 | ) | 37.42 | 44.71 | (729 | ) | ||||||||||||||||||
Operating Profit Margin (1),(2) | ||||||||||||||||||||||||||
| Pharmaceutical Solutions | 2.43 | % | 2.30 | % | 13 | bp | 2.42 | % | 2.27 | % | 15 | bp | ||||||||||||||
| Medical-Surgical Solutions | 2.54 | 3.76 | (122 | ) | 2.35 | 2.36 | (1 | ) | ||||||||||||||||||
| Information Solutions | 5.11 | 6.09 | (98 | ) | 7.09 | 2.54 | 455 | |||||||||||||||||||
| Total | 2.51 | 2.50 | 1 | 2.54 | 2.28 | 26 | ||||||||||||||||||||
| (1) | Results for the nine months ended December 31, 2001, include $18.4 million of loss on sales of businesses from our Information Solutions segment. | |
| (2) | Excludes sales to customers’ warehouses. |
Operating profit is computed as gross profit, less operating expenses, plus other income for our three business segments. Increases in operating profit for the quarter ended December 31, 2002 were primarily due to margin expansion in our Pharmaceutical Solutions segment, partially offset by a decline in our Medical-Surgical Solutions segment. Information Solutions segment’s pro formasegment operating profit dollars were flat for the quarter, however, their results included a $51.0 million loss on its international contracts for expected losses and a $22.3 million credit for the reversal of a portion of customer settlement reserves. On a year-to-date basis, increases in operating profit primarily reflect margin expansion in our Pharmaceutical Solutions segment and improvements in our Information Solutions segment.
Excluding sales to customers’ warehouses, Pharmaceutical Solutions segment operating profit as a percentage of revenues increased primarily reflecting improved customer support productivityexpense leverage, and better controlgains of expenses, partially$5.3 million and $4.5 million on sales of lease receivables and venture investments, offset in part by a decline in gross margins.
20
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
(Unaudited)
Medical-Surgical Solutions segment operating profit as a percentage of revenues primarily reflects a decline in gross margins attributabledue to the segment’s product mix.competitive environment. In addition, pro formathe segment continues to incur duplicate operating expenses associated with its ongoing restructuring activities and replacement of information systems. Additional operating expenses incurred include duplicate payroll, transportation and warehouse costs as the segment consolidates distribution centers.
For the nine months ended December 31, 2002, results for the Medical-Surgical Solutions segment also include $12.2 million in reversals of prior year’s accrued restructuring charges as a result of a modification to our distribution center network consolidation plan and $11.0 million of additional bad debt reserves. Results for the comparable prior year period include $24.3 million in restructuring charges associated with the original consolidation plan and $4.8 million of inventory impairments.
We expect to complete this segment’s distribution center consolidation program by the fourth quarter of 2003 and the information systems consolidation plan during the next fiscal year, and we expect to begin to realize the benefits of more efficient operations in 2004. Refer to Financial Note 6, “Restructuring and Related Asset Impairments,” for further discussions regarding our restructuring activities.
Information Solutions segment’s operating profit as a percentage of revenues decreased for the sixquarter and increased for the nine months ended September 30,December 31, 2002. Current period results for this segment reflect:
| • | a $51.0 million provision for expected losses on international contracts, | ||
| • | a $22.3 million credit for the reversal of a portion of customer settlement reserves. The reversal was the result of favorable settlements and continued negotiations with affected customers, | ||
| • | more efficient operations resulting from improved customer support activity and control of expenses, and | ||
| • | additional operating profit dollars and increases as a percentage of revenue from A.L.I. |
Results for the nine months ended December 31, 2001 included approximately $2for this segment include an $18.4 million in losses from a business that was sold earlier in that fiscal year.loss on the sale of two businesses.
Corporate expenses, net of other income, were flatdecreased 5% and increased 5% for the second quarter of 2003 and increased 3% on a year-to-date basis compared to the same periods a year ago. Highernine months ended December 31, 2002. Current period expenses reflect higher benefit and insurance costs, and lower pension income, were either fully or partially offset with the elimination of losses associated with our share of an investment in Health Nexis LLC and lower costs associated with the receivable sales program.additional impairments on equity investments. In the second quarter of 2003, we lowered our pension plan assets earnings assumption to 8.25% from 9.75%. Prior year expenses include the impact of losses associated with our investment in Health Nexis LLC and a $4.0 million litigation settlement related to the 1996 acquisition of a pharmaceutical distributor.
Interest Expense:Interest expense increased primarily due to higher average borrowings. Interest expense for 2003 reflects the issuance of $400.0 million 7.75% notes in the fourth quarter of 2002, partially offset by the retirementretirements of $175.0 million 6.875% notes which occurredalso in that quarter, and $125.0 million 6.55% notes in the fourth quarter of 2002.current quarter.
In order to hedge a portion of our fixed interest rate debt with variable interest rates, in the first quarter of 2003, we entered into two interest rate swap agreements.agreements in the first quarter of 2003. The first agreement exchanges a fixed interest rate of 8.91% per annum to LIBORthe London Inter Bank Offering Rate (“LIBOR”) plus 4.155%, on a notional amount of $100 million and matures in February 2005. The second agreement exchanges a fixed interest rate of 6.30% per annum to LIBOR plus 1.575%, on a notional amount of $150 million and matures in March 2005. These agreements are designated as fair value hedges and are intended to manage our ratio of variable to fixed interest rates.
Income Taxes:The effective income tax rate excluding special charges and credits for the sixnine months ended September 30,December 31, 2002 and 2001 was 34.0% and 36.5%28.7%. Income taxes for the nine months ended December 31, 2001 include a benefit of $30.0 million on a pre-tax gain of $0.2 million from the sale of a business; excluding this benefit, the effective income tax rate was approximately 36%. The reduction in our effective income tax rate, excluding the prior year benefit on the sale of a business, reflects the Company’sour estimated annualized rate for 2003 and is the result of a higher proportion of income being attributable to foreign countries that have lower income tax rates. A portion of this rate reduction occurred in the second quarter of 2003, resulting in an effective income tax rate of 33.0% for the current quarter compared to 36.5% for the same period a year ago.
21
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
(Unaudited)
Weighted Average Diluted Shares Outstanding:Diluted earnings per share were calculated based on an average number of diluted shares outstanding of 299.0298.0 million and 299.2 million for the secondthird quarters of 2003 and 2002 and 300.00299.3 million and 297.5299.0 million for the sixnine months ended September 30,December 31, 2002 and 2001.
Special Charges (Credits):
We incurred the following special charges (credits): Quarter Ended
September 30, Six Months Ended
September 30, (In millions) 2002 2001 2002 2001 Securities litigation costs incurred $ — $ 0.9 $ 0.1 $ 1.5 Loss on investments, net 4.8 2.5 7.4 4.8 Loss on sales of businesses, net — — — 18.4 Restructuring and related asset impairments (10.6 ) 21.2 (6.1 ) 20.3 Other (0.9 ) 1.0 4.2 4.2 Total pre-tax special charges (credits) (6.7 ) 25.6 5.6 49.2 Income tax expense (benefit) 2.4 (9.3 ) (1.9 ) (48.0 ) Total after-tax special charges (credits) $ (4.3 ) $ 16.3 $ 3.7 $ 1.2 Diluted loss (income) per share attributable to special charges (credits) $ (0.01 ) $ 0.05 $ 0.01 $ —
Securities litigation costs: We incurred expenses, net of estimated insurance recoveries, in connection with the securities litigation arising out of the 1999 restatement of our historical consolidated financial statements. The restatement was the result of improper accounting practices at HBO & Company (“HBOC”), which we acquired in a January 1999 pooling of interests transaction.
20
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)(Unaudited)
Loss on investments, net: We recorded other-than-temporary impairment losses on equity and venture capital investments as a result of declines in the market values of these investments. The loss on investments also includes a $1.0 million recovery from an investment for the quarter and six months ended September 30, 2001.
Loss on sales of businesses, net: During the first quarter of 2002, we sold two businesses from our Information Solutions segment for a net pre-tax loss of $18.4 million.
Restructuring charges (credits): During the quarter and six months ended September 30, 2002, we recorded net reductions in severance and exit-related accruals of $10.9 million and $7.4 million, and restructuring-related asset impairments of $0.3 million and $1.3 million.
In the first quarter of 2003, we incurred a $2.5 million charge pertaining to the planned closure of a distribution center (includes severance charges, exit costs and asset impairments) and a $2.0 million charge for additional facility closure costs, reflecting a change in estimated costs associated with a prior year restructuring plan. The distribution center is scheduled for closure in the third quarter of 2003, and approximately 65 employees were given termination notices. Both of these charges pertain to our Pharmaceutical Solutions segment.
Restructuring charges for the quarter ended September 30, 2002 include $5.1 million and $5.8 million reversals of severance and exit-related accruals pertaining to our 2002 Medical-Surgical Solutions segment distribution center network consolidation plan. The reversals were the result of our reevaluation of this segment’s distribution center strategy during the second quarter of 2003. The revised consolidation plan included a net reduction of 14 distribution centers, from 51, compared to a net reduction of 20 under the original consolidation plan. We anticipate completing the revised consolidation plan by the end of this fiscal year.
Restructuring charges for the quarter and six months ended September 30, 2001 primarily related to our Medical-Surgical Solutions segment distribution center network consolidation plan.
Refer to Financial Note 6, “Restructuring and Related Asset Impairments,” of the accompanying condensed consolidated financial statements for further discussions regarding our restructuring activities.
Other: Other special charges for the quarter and six months ended September 30, 2002 include charges incurred for reductions in workforce of $0.3 million and $5.4 million, a $0.7 million reversal of a previous year charge and a $0.5 million recovery from a third party vendor. In 2003, we entered into an agreement with a vendor that entitles us to a total $12.4 million credit against future purchases. We anticipate utilizing the remaining $11.9 million credit by the end of 2003 and will account for such recovery as a special credit, reducing operating expenses.
Other special charges for the quarter and six months ended September 30, 2001 include impairments of inventory of $4.8 million offset partially by recoveries of claims with third parties. In addition, other special charges for the six months ended September 30, 2001 include a $3.2 million write-off of purchased software.
Income taxes on special charges (credits): Income taxes on special charges and credits are generally recorded at our annual effective tax rate. For accounting purposes, a tax benefit on the net assets of one of the businesses written down in connection with the restructuring of a former business segment in 2001 was not recognized until the first quarter of 2002, when the sale of the business was completed.
Refer to Financial Notes 5 and 14, “Special Charges and Credits” and “Segment Information,” of the accompanying condensed consolidated financial statements for further discussions regarding our special charges and credits.
21
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)(Unaudited)
A reconciliation of pro forma operating profit to income from continuing operations as reported under U.S. GAAP is as follows:
Quarter Ended Six Months Ended September 30, September 30, (In millions) 2002 2001 2002 2001 Total Pro Forma Operating Profit $ 253.3 $ 216.9 $ 517.0 $ 422.7 Special (Charges) Credits 11.5 (24.9 ) 3.5 (45.6 ) Operating Profit – U.S. GAAP 264.8 192.0 520.5 377.1 Corporate Excluding Special Charges (35.9 ) (36.0 ) (72.8 ) (70.8 ) Special Charges (4.8 ) (0.7 ) (9.1 ) (3.6 ) Total Corporate Expenses (40.7 ) (36.7 ) (81.9 ) (74.4 ) Interest Expense (29.7 ) (27.0 ) (60.6 ) (54.0 ) Income From Continuing Operations Before Income Taxes and Dividends on Preferred Securities of Subsidiary Trust 194.4 128.3 378.0 248.7 Income Taxes Before Special Charges (62.0 ) (56.2 ) (130.6 ) (108.8 ) Special Charges (2.4 ) 9.3 1.9 48.0 Total Income Taxes (64.4 ) (46.9 ) (128.7 ) (60.8 ) Dividends on Preferred Securities of Subsidiary Trust, net of Tax Benefit (1.6 ) (1.6 ) (3.1 ) (3.1 ) Income From Continuing Operations – U.S. GAAP $ 128.4 $ 79.8 $ 246.2 $ 184.8
Acquisitions, Investments, Discontinued Operations and Divestitures
In July 2002, we acquired 98.4% of the outstanding stock of A.L.I. Technologies Inc. (“A.L.I.”), of Vancouver, British Columbia, Canada, by means of a cash tender offer. The remaining 1.6% of A.L.I.’s outstanding common stock was acquired mid-Septemberin September 2002. A.L.I. provides digital medical imaging solutions which are designed to streamline access to diagnostic information, automate clinical workflow and eliminate the need for film. The acquisition of A.L.I. complements our Horizon Clinicals offering by incorporating medical images into a computerized patient record. The aggregate purchase price for A.L.I. was $350.7 million and was financed through cash and short-term borrowings. The results of A.L.I.’s operations have been included in the condensed consolidated financial statements within our Information Solutions segment since the July acquisition date. The aggregate purchase price for A.L.I. was $349.2 million and was financed through cash and short-term borrowings.
OnIn May 16, 2002, the Company and Quintiles Transnational Corporation formed a joint venture, Verispan, L.L.C. (“Verispan”). Verispan is a provider of patient-level data delivered in near real time as well as a supplier of other healthcare information. We have an approximate 46%45% equity interest in the joint venture. The initial contribution to the joint venture of $12.1 million consisted of $7.7 million in net assets from a Pharmaceutical Solutions’ business and $4.4 million in cash, and is subject to adjustment. WeAdditional cash contributions of $1.3 million have alsobeen made subsequent to formation. As of December 31, 2002, we have committed to provide additional aggregate cash contributions of $9.4up to $9.1 million and to purchase a total of $15.0$12.8 million in services from the joint venture through 2007. No gain or loss was recognized as a result of this transaction. Financial results for this joint venture are recognized on the equity basis of accounting and are included in Other income, net in the condensed consolidated statements of operations, within our Pharmaceutical Solutions segment.
In September 2002, we sold the net assets of a marketing fulfillment business which was previously included in our Pharmaceutical Solutions segment. Net considerationproceeds from the sale of this business waswere $4.5 million. The disposition resulted in an after taxafter-tax loss of $3.7 million or $0.01 per diluted share. In accordance with Statement of Financial Accounting Standards No. 144, the net assets and results of operations of this business have been presented as a discontinued operation, and as a result, prior year amounts have been reclassified.
Refer to Financial Notes 3, and 4, “Acquisitions and Investments” and 4, “Discontinued Operations and Divestitures,” of the accompanying condensed consolidated financial statements for further discussions regarding these activities.
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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)(Unaudited)
Financial Condition, Liquidity, and Capital Resources
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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
(Unaudited)
million of proceeds from the sale of notes receivable. Financing activities providedused net cash of $287.9$111.6 million inand $21.4 million during the first sixnine months of 2003ended December 31, 2002 and used $16.9 million in the comparable prior year period. Second quarter2001. Fiscal 2003 financing activities reflect short-term borrowingsinclude the repayment of $282.0 million.
Selected Measures of Liquidity and Capital Resources
| December 31, | March 31, | |||||||
| (In millions) | 2002 | 2002 | ||||||
| Cash and equivalents and marketable securities | $ | 327.4 | $ | 562.9 | ||||
| Operating working capital | 3,552.9 | 3,287.3 | ||||||
| Debt net of cash and equivalents and marketable securities | 1,004.0 | 866.7 | ||||||
| Debt to capital ratio | 22.7 | % | 25.7 | % | ||||
| Ratio of net debt to net capital employed | 18.1 | % | 17.3 | % | ||||
| Return on committed capital | 22.3 | % | 22.0 | % | ||||
(In millions) September 30,
2002 March 31,
2002 Cash and equivalents and marketable securities $ 311.6 $ 562.9 Operating working capital 3,681.4 3,287.3 Debt net of cash and equivalents and marketable securities 1,407.4 866.7 Debt to capital ratio 28.1 % 25.7 % Ratio of net debt to net capital employed 24.3 % 17.3 % Return on committed capital 22.9 % 22.0 %
In 2001, the Company’s Board of Directors approved plans to repurchase up to $250.0 million of common stock. During the third quarter of 2003, we repurchased 0.9 million shares of the Company’s common stock for a total of $25.0 million. In 2001 and 2002, we repurchased 3.5 million shares of the Company’s common stock for a total of $109.8 million.
Credit Resources
We also have a committed revolving receivables sale facility aggregating $950.0 million, which expires in June 2003. This facility was renewed earlier in the fiscal year under terms that were substantially similar to those already in place and was increased by $100.0 million during the third quarter of 2003. As noted above, at December 31, 2002, $900.0 million was utilized under this facility and no amount was utilized at March 31, 2002.
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McKESSON CORPORATION
FINANCIAL REVIEW (Concluded)
(Unaudited)
New Accounting Pronouncements
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
| • | the resolution or outcome of pending shareholder litigation regarding the 1999 restatement of our historical financial statements; | |
| • | the changing U.S. healthcare environment, including potential mandated benefits, changes in private and governmental reimbursement or in the delivery systems for healthcare products and services; | |
| • | the ability to successfully market both new and existing products domestically and internationally; | |
| • | timing and amounts of ongoing customer settlements; | |
| • | changes in manufacturers’ pricing, sales or distribution policies; | |
| • | substantial defaults in payment | |
| • | material reduction in purchases or the loss of a large customer or supplier relationship; | |
| • | challenges in integrating or implementing our software products, or the slowing or deferral of demand for these products; | |
| • | the achievement of contract milestones and the use of estimates required under the percentage-of-completion method of accounting; | |
| • | the malfunction or failure of our segments’ information systems for any extended period of time; | |
| • | our ability to successfully identify, consummate and integrate acquired businesses; | |
| • | changes in generally accepted accounting principles; and | |
| • | general economic and market conditions. |
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McKESSON CORPORATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer (the “Senior Officers”), with the participation of other members of the Company’s management, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a – 14(c) and 15d – 14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”). Based on that evaluation, and subject to inherent limitations on the effectiveness of internal controls as described below, the Senior Officers have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s reports filed or submitted under the Exchange Act.
(b) Changes in Internal Controls
Since the Evaluation Date, there have not been any significant changes in the Company’s internal controls or in those factors that could significantly affect those controls.
(c) Inherent Limitations on the Effectiveness of Controls
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, a control system is subject to implementation based on the cost effectiveness of such controls. Further, because of the inherent limitations in all control systems, including faulty judgments in decision making or breakdowns resulting from simple errors or mistakes, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Additionally, controls can be circumvented by individual acts, collusion or by management override of the controls in place. Over time, controls may become inadequate because of changes in conditions, or deterioration of the degree of compliance with the policies or procedures. Because of the inherent limitation of control systems, misstatements due to error or fraud may occur and not be detected. Given such inherent limitations, the Senior Officers and other members of the Company’s management, do not expect our disclosure controls or procedures to prevent all possible instances of error and fraud.
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McKESSON CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
McKESSON CORPORATION
Item 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits | |
| Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| (b) | Reports on Form 8-K | |
| There were no reports on Form 8-K filed | ||
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SIGNATURES
| McKesson Corporation | ||||
| Dated: February 13, 2003 | By | /s/ William R. Graber | ||
| William R. Graber | ||||
Senior Vice President and Chief Financial Officer | ||||
| By | /s/ Nigel A. Rees | |||
Nigel A. Rees Vice President and Controller | ||||
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McKESSON CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John H. Hammergren, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of McKesson Corporation (the “Registrant”); | |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; | |
| 4. | The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a | |
| (a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
| (b) evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; | ||
| 5. | The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of Registrant’s board of directors: | |
| (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and | ||
| (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and | ||
| 6. | The Registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| Date: | /s/ John H. Hammergren | |||
| John H. Hammergren | ||||
Chairman and Chief Executive Officer |
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McKESSON CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.CU.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William R. Graber, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of McKesson Corporation (the “Registrant”); | |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; | |
| 4. | The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a | |
| (a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
| (b) evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; | ||
| 5. | The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of Registrant’s board of directors: | |
| (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and | ||
| (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and | ||
| 6. | The Registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| Date: | /s/ William R. Graber | |||
| William R. Graber | ||||
Senior Vice President and Chief Financial Officer | ||||
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