McKesson Reports Fiscal 2015 Second-Quarter Results

  • Revenues of $44.8 billion for the second quarter, up 36%.
  • Second-quarter GAAP earnings per diluted share from continuing operations of $2.05, up 13%.
  • Second-quarter Adjusted Earnings per diluted share from continuing operations of $2.79, up 21%.
  • Fiscal 2015 Outlook: Adjusted Earnings per diluted share of $10.50 to $10.90.

SAN FRANCISCO--()--McKesson Corporation (NYSE:MCK) today reported that revenues for the second quarter ended September 30, 2014 were $44.8 billion, up 36% compared to $33 billion a year ago. On the basis of U.S. generally accepted accounting principles (“GAAP”), second-quarter earnings per diluted share from continuing operations was $2.05 compared to $1.82 a year ago.

Second-quarter Adjusted Earnings per diluted share from continuing operations was $2.79, up 21% compared to $2.30 a year ago.

“McKesson delivered another quarter of solid results reflecting strong execution across our business. We are very pleased with our performance for the first half of Fiscal 2015,” said John H. Hammergren, chairman and chief executive officer. “We continue to expect Adjusted Earnings per diluted share from continuing operations of $10.50 to $10.90 for the fiscal year ending March 31, 2015.”

For the first half of the fiscal year, McKesson generated cash from operations of $165 million, and ended the quarter with cash and cash equivalents of $3.8 billion. During the first half of the fiscal year, McKesson paid $115 million in dividends, had internal capital spending of $272 million, and spent $31 million on acquisitions.

Segment Results

Distribution Solutions revenues were $44 billion, up 37% for the quarter on a reported and constant currency basis, mainly driven by the contribution from our acquisition of Celesio and market growth.

North America pharmaceutical distribution and services revenues, which include results from U.S. Pharmaceutical, McKesson Canada and McKesson Specialty Health, were up 14% as reported and 15% on a constant currency basis for the quarter, reflecting continued demand for two recently launched drugs for the treatment of Hepatitis C, market growth and our mix of business.

International pharmaceutical distribution and services revenues were $7.3 billion, an increase of 4% on the underlying results of Celesio on a constant currency basis.

Medical-Surgical distribution and services revenues were up 4% for the quarter, driven by market growth.

In the second quarter, Distribution Solutions GAAP operating profit was $793 million and GAAP operating margin was 1.80%. Second-quarter adjusted operating profit was $1,063 million and the adjusted operating margin was 2.42%.

Technology Solutions revenues were $770 million, down 6% in the second quarter compared to the prior year, driven by anticipated revenue softness from the Horizon clinical software platform and the planned elimination of a product line, partially offset by growth in other technology businesses. GAAP operating profit was $125 million for the second quarter and GAAP operating margin was 16.23%. Adjusted operating profit was $139 million for the second quarter and adjusted operating margin was 18.05%.

Fiscal Year 2015 Outlook

McKesson expects Adjusted Earnings per diluted share from continuing operations between $10.50 and $10.90 for the fiscal year ending March 31, 2015, based on an updated exchange rate of $1.31 per Euro, which excludes the following GAAP items:

  • Amortization of acquisition-related intangible assets of $1.32 per diluted share.
  • Acquisition expenses and related adjustments of 57 cents per diluted share.
  • LIFO inventory-related charges of 97 cents to $1.07 per diluted share.

Adjusted Earnings

McKesson separately reports financial results on the basis of Adjusted Earnings. Adjusted Earnings is a non-GAAP financial measure defined as GAAP income from continuing operations, excluding amortization of acquisition-related intangible assets, acquisition expenses and related adjustments, certain litigation reserve adjustments, and Last-In-First-Out (“LIFO”) inventory-related adjustments. A reconciliation of McKesson’s financial results determined in accordance with GAAP to Adjusted Earnings is provided in Schedules 2, 3 and 4 of the financial statement tables included with this release.

Risk Factors

Except for historical information contained in this press release, matters discussed may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. These statements may be identified by their use of forward-looking terminology such as “believes”, “expects”, “anticipates”, “may”, “will”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates” or the negative of these words or other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. It is not possible to predict or identify all such risks and uncertainties; however, the most significant of these risks and uncertainties are described in the company’s Form 10-K, Form 10-Q and Form 8-K reports filed with the Securities and Exchange Commission and include, but are not limited to: changes in the U.S. healthcare industry and regulatory environment; changes in the Canadian healthcare industry and regulatory environment; changes in the European regulatory environment with respect to privacy and data protection regulations; managing foreign expansion, including the related operating, economic, political and regulatory risks; the company’s ability to successfully identify, consummate, finance and integrate acquisitions; material adverse resolution of pending legal proceedings; exposure to European economic conditions, including recent austerity measures taken by certain European governments; competition; substantial defaults in payment or a material reduction in purchases by, or the loss of, a large customer or group purchasing organization; the loss of government contracts as a result of compliance or funding challenges; public health issues in the U.S. or abroad; malfunction, failure or breach of sophisticated internal information systems to perform as designed; the adequacy of insurance to cover property loss or liability claims; the company’s failure to attract and retain customers for its software products and solutions due to integration and implementation challenges, or due to an inability to keep pace with technological advances; the company’s proprietary products and services may not be adequately protected, and its products and solutions may be found to infringe on the rights of others; system errors or failure of our technology products and solutions to conform to specifications; disaster or other event causing interruption of customer access to data residing in our service centers; the delay or extension of our sales or implementation cycles for external software products; changes in circumstances that could impair our goodwill or intangible assets; new or revised tax legislation or challenges to our tax positions; general economic conditions, including changes in the financial markets that may affect the availability and cost of credit to the company, its customers or suppliers; changes in accounting principles generally accepted in the United States of America; and withdrawal from participation in multiemployer pension plans or if such plans are reported to have underfunded liabilities. The reader should not place undue reliance on forward-looking statements, which speak only as of the date they are first made. Except to the extent required by law, the company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

The company has scheduled a conference call for 5:00 PM ET. The dial-in number for individuals wishing to participate on the call is 719-234-7317. Erin Lampert, senior vice president, Investor Relations, is the leader of the call, and the password to join the call is ‘McKesson’. A replay of this conference call will be available for five calendar days. The dial-in number for individuals wishing to listen to the replay is 719-457-0820 and the pass code is 2208902. A webcast of the conference call will also be available live and archived on the company’s Investor Relations website at http://investor.mckesson.com.

Shareholders are encouraged to review SEC filings and more information about McKesson, which are located on the company’s website.

About McKesson

McKesson Corporation, currently ranked 15th on the FORTUNE 500, is a healthcare services and information technology company dedicated to making the business of healthcare run better. We partner with payers, hospitals, physician offices, pharmacies, pharmaceutical companies and others across the spectrum of care to build healthier organizations that deliver better care to patients in every setting. McKesson helps its customers improve their financial, operational, and clinical performance with solutions that include pharmaceutical and medical-surgical supply management, healthcare information technology, and business and clinical services. For more information, visit http://www.mckesson.com.

 

Schedule 1

McKESSON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - GAAP
(unaudited)
(in millions, except per share amounts)
 
  Quarter Ended September 30,     Six Months Ended September 30,
       
2014 2013 Change 2014 2013 Change
 
Revenues $ 44,758 $ 32,985 36 % $ 88,816 $ 65,224 36 %
Cost of sales (1) (2)   (41,835 )   (30,964 ) 35   (83,096 )   (61,273 ) 36
Gross profit 2,923 2,021 45 5,720 3,951 45
 
Operating expenses (2,135 ) (1,300 ) 64 (4,244 ) (2,560 ) 66
Litigation charges   -     (35 ) -   -     (50 ) -
Total operating expenses   (2,135 )   (1,335 ) 60   (4,244 )   (2,610 ) 63
Operating income 788 686 15 1,476 1,341 10
Other income, net 24 9 167 44 15 193
Interest expense   (99 )   (59 ) 68   (200 ) (118 ) 69
Income from continuing operations before income taxes 713

 

636 12

 

1,320 1,238 7
Income tax expense   (222 )   (213 ) 4   (404 )   (387 ) 4
Income from continuing operations after tax 491 423 16 916 851 8
Loss from discontinued operations, net of tax (3)   (14 )   (19 ) (26 )   (28 )   (23 ) 22
Net income 477 404 18 888 828 7
Net income attributable to noncontrolling interests (4)   (8 )   -   -   (16 )   -   -
Net income attributable to McKesson Corporation $ 469   $ 404   16 $ 872   $ 828   5
 
 
Earnings (loss) per common share attributable to McKesson Corporation (5)
Diluted
Continuing operations $ 2.05 $ 1.82 13 % $ 3.83 $ 3.66 5 %
Discontinued operations   (0.06 )   (0.08 ) (25 )   (0.12 )   (0.10 ) 20
Total $ 1.99   $ 1.74   14 $ 3.71   $ 3.56   4
 
 
Basic
Continuing operations $ 2.08 $ 1.85 12 % $ 3.89 $ 3.73 4 %
Discontinued operations   (0.06 )   (0.09 ) (33 )   (0.12 )   (0.10 ) 20
Total $ 2.02   $ 1.76   15 $ 3.77   $ 3.63   4
 
Weighted average common shares
Diluted 235 233 1 % 235 232 1 %
Basic 232 229 1 231 228 1
 
(1)   Technology Solutions segment results for the first six months of fiscal year 2015 reflect a non-cash pre-tax charge of $34 million ($27 million after-tax) primarily relating to depreciation and amortization expense due to the reclassification of the workforce business within our International Technology business from discontinued operations to continuing operations. The charge was primarily recorded in cost of sales.
(2) Cost of sales for the second quarter and first six months of fiscal year 2015 includes charges of $94 million and $192 million related to our last-in-first-out ("LIFO") method of accounting for inventories. Cost of sales for the second quarter and first six months of fiscal year 2014 includes $44 million of LIFO charges. The amounts were all recorded in our Distribution Solution segment.
(3) Primarily represents the software business within our International Technology business in our Technology Solutions segment, which was sold during the second quarter of fiscal year 2015. Fiscal year 2014 also reflects our Hospital Automation business in our Technology Solutions segment, which was sold in the third quarter of fiscal year 2014. The amounts are fully attributable to McKesson Corporation.
(4) Primarily represents the noncontrolling shareholders' portion of net income from Celesio, our majority-owned subsidiary, acquired in the fourth quarter of fiscal year 2014.
(5) Certain computations may reflect rounding adjustments.
 

Schedule 2A

McKESSON CORPORATION
RECONCILIATION OF GAAP OPERATING RESULTS TO ADJUSTED EARNINGS (NON-GAAP)
(unaudited)
(in millions, except per share amounts)
 

 

    Change
Quarter Ended September 30, 2014 Vs. Prior Quarter

As Reported
(GAAP)

 

Amortization
of Acquisition-
Related
Intangibles

 

Acquisition
Expenses and
Related
Adjustments

 

Litigation
Reserve
Adjustments

 

LIFO-Related
Adjustments

 

Adjusted
Earnings
(Non-GAAP)

As Reported
(GAAP)

   

Adjusted
Earnings
(Non-GAAP)

             
Revenues $ 44,758 $ - $ - $ - $ - $ 44,758 36 % 36 %
 
Gross profit $ 2,923 $ 3 $ - $ - $ 94 $ 3,020 45 46
Operating expenses (2,135 ) 129 62 - - (1,944 ) 60 59
Other income, net 24 (1 ) - - - 23 167 156
Interest expense   (99 )     -       -       -       -       (99 ) 68 68

Income from continuing operations before income taxes

713 131 62 - 94 1,000 12 25
Income tax expense   (222 )     (39 )     (22 )     -       (37 )     (320 ) 4 22
Income from continuing operations after tax 491 92 40 - 57 680 16 27

Income from continuing operations, net of tax, attributable to noncontrolling interests (1)

  (8 )     (12 )     (2 )     -       -       (22 ) - -

Income from continuing operations, net of tax, attributable to McKesson Corporation

$ 483     $ 80     $ 38     $ -     $ 57     $ 658   14 23

Diluted earnings per common share from continuing operations, net of tax, attributable to McKesson Corporation (2)

$ 2.05     $ 0.33     $ 0.16     $ -     $ 0.25     $ 2.79   13 % 21 %
Diluted weighted average common shares   235       235       235       -       235       235   1 % 1 %
 
 
Quarter Ended September 30, 2013

As Reported
(GAAP)

 

Amortization
of Acquisition-
Related
Intangibles

 

Acquisition
Expenses and
Related
Adjustments

 

Litigation
Reserve
Adjustments

 

LIFO-Related
Adjustments

 

Adjusted
Earnings
(Non-GAAP)

 
Revenues $ 32,985

 

$ - $ - $ - $ - $ 32,985
 
Gross profit $ 2,021

 

$ 5 $ -

 

$ - $ 44 $ 2,070
Operating expenses (1,335 ) 65 13 35 - (1,222 )
Other income, net 9 - - - - 9
Interest expense   (59 )     -       -       -       -       (59 )

 

Income from continuing operations before income taxes

636 70 13 35 44 798
Income tax expense   (213 )     (25 )     (5 )     (2 )     (17 )     (262 )
Income from continuing operations after tax 423 45 8 33 27 536

Income from continuing operations, net of tax, attributable to noncontrolling interests

  -       -       -       -       -       -  

Income from continuing operations, net of tax, attributable to McKesson Corporation

$ 423     $ 45     $ 8     $ 33     $ 27     $ 536  

Diluted earnings per common share from continuing operations, net of tax, attributable to McKesson Corporation (2)

$ 1.82     $ 0.19     $ 0.03     $ 0.14     $ 0.12     $ 2.30  
Diluted weighted average common shares   233       233       233       233       233       233  
 
(1) Primarily represents the noncontrolling shareholders' portion of income from continuing operations from Celesio, our majority-owned subsidiary, acquired in the fourth quarter of fiscal year 2014.
 
(2) Certain computations may reflect rounding adjustments.
 
Refer to the definitions related to Adjusted Earnings (Non-GAAP) financial information.
 

Schedule 2B

McKESSON CORPORATION
RECONCILIATION OF GAAP OPERATING RESULTS TO ADJUSTED EARNINGS (NON-GAAP)
(unaudited)
(in millions, except per share amounts)
 
    Change
Six Months Ended September 30, 2014 Vs. Prior Period

As Reported
(GAAP)

 

Amortization
of Acquisition-
Related
Intangibles

 

Acquisition
Expenses and
Related
Adjustments

 

Litigation
Reserve
Adjustments

 

LIFO-Related
Adjustments

 

Adjusted
Earnings
(Non-GAAP)

As Reported
(GAAP)

 

Adjusted
Earnings
(Non-GAAP)

               
Revenues $ 88,816 $ - $ - $ - $ - $ 88,816 36 % 36 %
 
Gross profit (1) $ 5,720 $ 5 $ - $ - $ 192 $ 5,917 45 48
Operating expenses (4,244 ) 256 111 - - (3,877 ) 63 61
Other income, net 44 - - - - 44 193 193
Interest expense   (200 )       -         -         -         -         (200 ) 69 69

Income from continuing operations before income taxes

1,320 261 111 - 192 1,884 7 26
Income tax expense   (404 )       (80 )       (37 )       -         (75 )       (596 ) 4 26
Income from continuing operations after tax 916 181 74 - 117 1,288 8 26

Income from continuing operations, net of tax, attributable to noncontrolling interests (2)

  (16 )       (23 )       (6 )       -         -         (45 ) - -

Income from continuing operations, net of tax, attributable to McKesson Corporation

$ 900       $ 158       $ 68       $ -       $ 117       $ 1,243   6 21

Diluted earnings per common share from continuing operations, net of tax, attributable to McKesson Corporation (3)

$ 3.83       $ 0.66       $ 0.30       $ -       $ 0.50       $ 5.29   5 % 20 %
Diluted weighted average common shares   235         235         235         -         235         235   1 % 1 %
 
 
Six Months Ended September 30, 2013

As Reported
(GAAP)

 

Amortization
of Acquisition-
Related
Intangibles

 

Acquisition
Expenses and
Related
Adjustments

 

Litigation
Reserve
Adjustments

 

LIFO-Related
Adjustments

 

Adjusted
Earnings
(Non-GAAP)

 
Revenues $ 65,224

 

$ - $ - $ - $ - $ 65,224
 
Gross profit $ 3,951

 

$ 11 $ -

 

$ - $ 44 $ 4,006
Operating expenses (2,610 ) 130 26 50 - (2,404 )
Other income, net 15 - - - - 15
Interest expense   (118 )       -         -         -         -         (118 )

Income from continuing operations before income taxes

1,238 141 26 50 44 1,499
Income tax expense   (387 )       (52 )       (10 )       (8 )       (17 )       (474 )
Income from continuing operations after tax 851 89 16 42 27 1,025

Income from continuing operations, net of tax, attributable to noncontrolling interests

- - - - - -

 

                             

Income from continuing operations, net of tax, attributable to McKesson Corporation

$ 851       $ 89       $ 16       $ 42       $ 27       $ 1,025  

Diluted earnings per common share from continuing operations, net of tax, attributable to McKesson Corporation (3)

$ 3.66       $ 0.38       $ 0.07       $ 0.18       $ 0.12       $ 4.41  
Diluted weighted average common shares   232         232         232         232         232         232  
 
(1)   Technology Solutions segment results for the first six months of fiscal year 2015 reflect a non-cash pre-tax charge of $34 million ($27 million after-tax) primarily relating to depreciation and amortization expense due to the reclassification of the workforce business within our International Technology business from discontinued operations to continuing operations. The charge was primarily recorded in cost of sales.
(2) Primarily represents the noncontrolling shareholders' portion of income from continuing operations from Celesio, our majority-owned subsidiary, acquired in the fourth quarter of fiscal year 2014.
(3) Certain computations may reflect rounding adjustments.
 
Refer to the definitions related to Adjusted Earnings (Non-GAAP) financial information.
 

Schedule 3A

McKESSON CORPORATION
RECONCILIATION OF GAAP SEGMENT FINANCIAL RESULTS TO ADJUSTED EARNINGS (NON-GAAP)
(unaudited)
(in millions)
 
 
 

Quarter Ended September 30, 2014

 

Quarter Ended September 30, 2013

 

Change

As Reported
(GAAP)

  Adjustments  

Adjusted
Earnings
(Non-GAAP)

As Reported
(GAAP)

  Adjustments  

Adjusted
Earnings
(Non-GAAP)

As Reported
(GAAP)

 

Adjusted
Earnings
(Non-GAAP)

REVENUES        
Distribution Solutions

North America pharmaceutical distribution & services

$ 35,148 $ - $ 35,148 $ 30,702 $ - $ 30,702 14 % 14 %

International pharmaceutical distribution & services

7,312 - 7,312 - - - - -

Medical-Surgical distribution & services

  1,528         -         1,528     1,467         -       1,467   4 4
Total Distribution Solutions   43,988         -         43,988     32,169         -       32,169   37 37
 

Technology Solutions - Products and Services

  770         -         770     816         -       816   (6 ) (6 )
Revenues $ 44,758       $ -       $ 44,758   $ 32,985       $ -     $ 32,985   36 36
 
GROSS PROFIT

 

Distribution Solutions $ 2,540 $ 94 $ 2,634 $ 1,624 $ 44 $ 1,668 56 58
Technology Solutions   383         3         386     397         5       402   (4 ) (4 )
Gross profit $ 2,923       $ 97       $ 3,020   $ 2,021       $ 49     $ 2,070   45 46
 
OPERATING EXPENSES
Distribution Solutions $ (1,766 ) $ 177 $ (1,589 ) $ (945 ) $ 98 $ (847 ) 87 88
Technology Solutions (260 ) 11 (249 ) (277 ) 14 (263 ) (6 ) (5 )
Corporate   (109 )       3         (106 )   (113 )       1       (112 ) (4 ) (5 )
Operating expenses $ (2,135 )     $ 191       $ (1,944 ) $ (1,335 )     $ 113     $ (1,222 ) 60 59
 
OTHER INCOME, NET
Distribution Solutions $ 19 $ (1 ) $ 18 $ 6 $ - $ 6 217 200
Technology Solutions 2 - 2 - - - - -
Corporate   3         -         3     3         -       3   - -
Other income, net $ 24       $ (1 )     $ 23   $ 9       $ -     $ 9   167 156
 
 
OPERATING PROFIT
Distribution Solutions $ 793 $ 270 $ 1,063 $ 685 $ 142 $ 827 16 29
Technology Solutions   125         14         139     120         19       139   4 -
Operating profit 918 284 1,202 805 161 966 14 24
Corporate (106 ) 3 (103 ) (110 ) 1 (109 ) (4 ) (6 )
Interest Expense   (99 )       -         (99 )   (59 )       -       (59 ) 68 68

Income from continuing operations before income taxes (1)

$ 713       $ 287       $ 1,000   $ 636       $ 162     $ 798   12 25
 
STATISTICS
Operating profit as a % of revenues
Distribution Solutions 1.80 % 2.42 % 2.13 % 2.57 % (33 )

bp

(15 ) bp
Technology Solutions 16.23 18.05 14.71 17.03 152 102
 
(1)   For the fiscal year 2015, the amount is prior to attributing income from continuing operations from Celesio to the shareholders of noncontrolling interests.
 
Refer to the definitions related to Adjusted Earnings (Non-GAAP) financial information.
 

Schedule 3B

McKESSON CORPORATION
RECONCILIATION OF GAAP SEGMENT FINANCIAL RESULTS TO ADJUSTED EARNINGS (NON-GAAP)
(unaudited)
(in millions)
 
 
  Six Months Ended September 30, 2014   Six Months Ended September 30, 2013   Change

As Reported
(GAAP)

  Adjustments  

Adjusted
Earnings
(Non-GAAP)

As Reported
(GAAP)

  Adjustments  

Adjusted
Earnings
(Non-GAAP)

As Reported
(GAAP)

 

Adjusted
Earnings
(Non-GAAP)

REVENUES        
Distribution Solutions

 

North America pharmaceutical distribution & services

$ 69,452 $

-

$ 69,452 $ 60,748 $ - $ 60,748 14 % 14 %

International pharmaceutical distribution & services

14,919 - 14,919 - - - - -

Medical-Surgical distribution & services

  2,907         -       2,907     2,824         -       2,824   3 3
Total Distribution Solutions 87,278 - 87,278 63,572 - 63,572 37 37
 

Technology Solutions - Products and Services

  1,538         -       1,538     1,652         -       1,652   (7 ) (7 )
Revenues $ 88,816       $ -     $ 88,816   $ 65,224       $ -     $ 65,224   36 36
 
GROSS PROFIT

 

Distribution Solutions $ 4,998 $ 192 $ 5,190 $ 3,144 $ 44 $ 3,188 59 63
Technology Solutions (1)   722         5       727     807         11       818   (11 ) (11 )
Gross profit $ 5,720       $ 197     $ 5,917   $ 3,951       $ 55     $ 4,006   45 48
 
OPERATING EXPENSES
Distribution Solutions $ (3,494 ) $ 336 $ (3,158 ) $ (1,850 ) $ 179 $ (1,671 ) 89 89
Technology Solutions (531 ) 21 (510 ) (560 ) 26 (534 ) (5 ) (4 )
Corporate   (219 )       10       (209 )   (200 )       1       (199 ) 10 5
Operating expenses $ (4,244 )     $ 367     $ (3,877 ) $ (2,610 )     $ 206     $ (2,404 ) 63 61
 
OTHER INCOME, NET
Distribution Solutions $ 37 $ - $ 37 $ 10 $ - $ 10 270 270
Technology Solutions 2 - 2 - - - - -
Corporate   5         -       5     5         -       5   - -
Other income, net $ 44       $ -     $ 44   $ 15       $ -     $ 15   193 193
 
OPERATING PROFIT
Distribution Solutions $ 1,541 $ 528 $ 2,069 $ 1,304 $ 223 $ 1,527 18 35
Technology Solutions   193         26       219     247         37       284   (22 ) (23 )
Operating profit 1,734 554 2,288 1,551 260 1,811 12 26
Corporate (214 ) 10 (204 ) (195 ) 1 (194 ) 10 5
Interest Expense   (200 )       -       (200 )   (118 )       -       (118 ) 69 69

Income from continuing operations before income taxes (2)

$ 1,320       $ 564     $ 1,884   $ 1,238       $ 261     $ 1,499   7 26
 
STATISTICS
Operating profit as a % of revenues

Distribution Solutions

1.77 % 2.37 % 2.05 % 2.40 % (28 ) bp (3 ) bp

Technology Solutions

12.55 14.24 14.95 17.19 (240 ) (295 )
(1)   Technology Solutions segment results for the first six months of fiscal year 2015 reflect a non-cash pre-tax charge of $34 million ($27 million after-tax) primarily relating to depreciation and amortization expense due to the reclassification of the workforce business within our International Technology business from discontinued operations to continuing operations. The charge was primarily recorded in cost of sales.
(2) For the fiscal year 2015, the amount is prior to attributing income from continuing operations from Celesio to the shareholders of noncontrolling interests.
 
Refer to the definitions related to Adjusted Earnings (Non-GAAP) financial information.
 

Schedule 4A

McKESSON CORPORATION
RECONCILIATION OF GAAP SEGMENT FINANCIAL RESULTS TO ADJUSTED EARNINGS (NON-GAAP) - BY ADJUSTMENT TYPE
(unaudited)
(in millions)
 
 
  Quarter Ended September 30, 2014     Quarter Ended September 30, 2013

Distribution
Solutions

 

Technology
Solutions

 

Corporate &
Interest
Expense

  Total

Distribution
Solutions

 

Technology
Solutions

 

Corporate &
Interest
Expense

  Total

As Reported (GAAP):

           
Revenues $ 43,988 $ 770 $ - $ 44,758 $ 32,169 $ 816 $ - $ 32,985

 

Gross profit $ 2,540 $ 383 $ - $ 2,923 $ 1,624 $ 397 $ - $ 2,021
Operating expenses (1,766 ) (260 ) (109 ) (2,135 ) (945 ) (277 ) (113 ) (1,335 )
Other income, net   19         2         3         24     6         -         3         9  

Income from continuing operations before interest expenses and income taxes

793 125 (106 ) 812 685 120 (110 ) 695
Interest expense   -         -         (99 )       (99 )   -         -         (59 )       (59 )

Income from continuing operations before income taxes (1)

$ 793       $ 125       $ (205 )     $ 713   $ 685       $ 120       $ (169 )     $ 636  
 

Pre-Tax Adjustments:

Gross profit $ - $ 3 $ - $ 3 $ - $ 5 $ - $ 5
Operating expenses 119 10 - 129 53 12 - 65
Other income, net   (1 )       -         -         (1 )   -         -         -         -  
Amortization of acquisition-related intangibles 118 13 - 131 53 17 - 70
 
Gross profit - - - - - - - -
Operating expenses 58 1 3 62 10 2 1 13
Other income, net - - - - - - - -
Interest expense   -         -         -         -     -         -         -         -  
Acquisition expenses and related adjustments 58 1 3 62 10 2 1 13
 

Operating expenses - Litigation reserve adjustments

- - - - 35 - - 35
 
Gross profit - LIFO-related adjustments 94 - - 94 44 - - 44
                                       
Total pre-tax adjustments $ 270       $ 14       $ 3       $ 287   $ 142       $ 19       $ 1       $ 162  
 
 

Adjusted Earnings (Non-GAAP):

Revenues $ 43,988 $ 770 $ - $ 44,758 $ 32,169 $ 816 $ - $ 32,985
 
Gross profit $ 2,634 $ 386 $ - $ 3,020 $ 1,668 $ 402 $ - $ 2,070
Operating expenses (1,589 ) (249 ) (106 ) (1,944 ) (847 ) (263 ) (112 ) (1,222 )
Other income, net   18         2         3         23     6         -         3         9  

Income from continuing operations before interest expenses and income taxes

1,063 139 (103 ) 1,099 827 139 (109 ) 857
Interest expense   -         -         (99 )       (99 )   -         -         (59 )       (59 )

Income from continuing operations before income taxes (1)

$ 1,063       $ 139       $ (202 )     $ 1,000   $ 827       $ 139       $ (168 )     $ 798  
 
(1) For the fiscal year 2015, the amount is prior to attributing income from continuing operations from Celesio to the shareholders of noncontrolling interests.
 
Refer to the definitions related to Adjusted Earnings (Non-GAAP) financial information.
 

Schedule 4B

McKESSON CORPORATION
RECONCILIATION OF GAAP SEGMENT FINANCIAL RESULTS TO ADJUSTED EARNINGS (NON-GAAP) - BY ADJUSTMENT TYPE
(unaudited)
(in millions)
 
 
  Six Months Ended September 30, 2014     Six Months Ended September 30, 2013

Distribution
Solutions

 

Technology
Solutions

 

Corporate &
Interest
Expense

  Total

Distribution
Solutions

 

Technology
Solutions

 

Corporate &
Interest
Expense

  Total

As Reported (GAAP):

           
Revenues $ 87,278 $ 1,538 $ - $ 88,816 $ 63,572 $ 1,652 $ - $ 65,224
 
Gross profit (1) $ 4,998 $ 722 $ - $ 5,720 $ 3,144 $ 807 $ - $ 3,951
Operating expenses (3,494 ) (531 ) (219 ) (4,244 ) (1,850 ) (560 ) (200 ) (2,610 )
Other income, net   37       2       5       44     10       -       5       15  

Income from continuing operations before interest expense and income taxes

1,541 193 (214 ) 1,520 1,304 247 (195 ) 1,356
Interest expense   -       -       (200 )     (200 )   -       -       (118 )     (118 )

Income from continuing operations before income taxes (2)

$ 1,541     $ 193     $ (414 )   $ 1,320   $ 1,304     $ 247     $ (313 )   $ 1,238  
 

Pre-Tax Adjustments:

Gross profit $ - $ 5 $ - $ 5 $ - $ 11 $ - $ 11
Operating expenses 236 20 - 256 107 23 - 130
Other income, net   -       -       -       -     -       -       -       -  
Amortization of acquisition-related intangibles 236 25 - 261 107 34 - 141
 
Gross profit - - - - - - - -
Operating expenses 100 1 10 111 22 3 1 26
Other income, net - - - - - - - -
Interest expense   -       -       -       -     -       -       -       -  
Acquisition expenses and related adjustments 100 1 10 111 22 3 1 26
 

Operating expenses - Litigation reserve adjustments

- - - - 50 - - 50
 
Gross profit - LIFO-related adjustments 192 - - 192 44 - - 44
                           
Total pre-tax adjustments $ 528     $ 26     $ 10     $ 564   $ 223     $ 37     $ 1     $ 261  
 
 

Adjusted Earnings (Non-GAAP):

Revenues $ 87,278 $ 1,538 $ - $ 88,816 $ 63,572 $ 1,652 $ - $ 65,224
 
Gross profit (1) $ 5,190 $ 727 $ - $ 5,917 $ 3,188 $ 818 $ - $ 4,006

Operating expenses

(3,158 ) (510 ) (209 ) (3,877 ) (1,671 ) (534 ) (199 ) (2,404 )
Other income, net   37       2       5       44     10       -       5       15  

Income from continuing operations before interest expense and income taxes

2,069 219 (204 ) 2,084 1,527 284 (194 ) 1,617
Interest expense   -       -       (200 )     (200 )   -       -       (118 )     (118 )

Income from continuing operations before income taxes (2)

$ 2,069     $ 219     $ (404 )   $ 1,884   $ 1,527     $ 284     $ (312 )   $ 1,499  
 
(1) Technology Solutions segment results for the first six months of fiscal year 2015 reflect a non-cash pre-tax charge of $34 million ($27 million after-tax) primarily relating to depreciation and amortization expense due to the reclassification of the workforce business within our International Technology business from discontinued operations to continuing operations. The charge was primarily recorded in cost of sales.
(2) For the fiscal year 2015, the amount is prior to attributing income from continuing operations from Celesio to the shareholders of noncontrolling interests.
 
Refer to the definitions related to Adjusted Earnings (Non-GAAP) financial information.
 

Schedule 5

McKESSON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions)
 
 
  September 30,     March 31,

2014

2014

 
ASSETS
Current Assets
Cash and cash equivalents $ 3,804 $ 4,193
Receivables, net 15,391 14,193
Inventories, net 14,063 13,308
Prepaid expenses and other   621   879

Total Current Assets

33,879 32,573
Property, Plant and Equipment, Net 2,174 2,222
Goodwill 10,095 9,927
Intangible Assets, Net 4,099 5,022
Other Assets   1,985   2,015
Total Assets $ 52,232 $ 51,759
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Drafts and accounts payable $ 22,656 $ 21,429
Short-term borrowings 525 346
Deferred revenue 1,003 1,236
Deferred tax liabilities 1,734 1,588
Current portion of long-term debt 427 1,424
Other accrued liabilities   2,992   3,478
Total Current Liabilities 29,337 29,501
Long-Term Debt 9,620 8,949
Other Noncurrent Liabilities 2,749 2,991
 
McKesson Corporation Stockholders' Equity

8,931

8,522
Noncontrolling Interests  

1,595

  1,796
Total Equity   10,526   10,318
Total Liabilities and Equity $ 52,232 $ 51,759
 

Schedule 6

McKESSON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
 
 

Six Months Ended September 30,

2014

   

2013

 
 
OPERATING ACTIVITIES
Net income $ 888 $ 828
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 543 332
Deferred taxes 110 151
Share-based compensation expense 82 73
LIFO charges 192 44
Other non-cash items 18 18
Changes in operating assets and liabilities, net of acquisitions:
Receivables (1,535 ) (393 )
Inventories (1,161 ) (235 )
Drafts and accounts payable 1,502 344
Deferred revenue (251 ) (232 )
Taxes

(66

) 3
Litigation charges - 50
Litigation settlement payments - (20 )
Other  

(157

)   (150 )
Net cash provided by operating activities   165     813  
 
INVESTING ACTIVITIES
Property acquisitions (191 ) (133 )
Capitalized software expenditures (81 ) (66 )
Acquisitions, less cash and cash equivalents acquired (31 ) (116 )
Other   (4 )   41  
Net cash used in investing activities   (307 )   (274 )
 
FINANCING ACTIVITIES
Proceeds from short-term borrowings 1,790 150
Repayments of short-term borrowings (1,572 ) (150 )
Proceeds from issuances of long-term debt 7 -
Repayments of long-term debt (233 ) -
Common stock transactions:
Issuances 66 119
Share repurchases, including shares surrendered for tax withholding (105 ) (128 )
Dividends paid (115 ) (99 )
Other  

(6

)   71  
Net cash used in financing activities  

(168

)   (37 )
Effect of exchange rate changes on cash and cash equivalents  

(79

)   2  
Net increase (decrease) in cash and cash equivalents (389 ) 504
Cash and cash equivalents at beginning of period   4,193     2,456  
Cash and cash equivalents at end of period $ 3,804   $ 2,960  
 

Definitions related to Adjusted Earnings (Non-GAAP) Financial Information

 
Adjusted Earnings represents income from continuing operations, excluding the effects of the following items from the Company’s GAAP financial results, including the related income tax effects:
 

Amortization of acquisition-related intangibles - Amortization expense of acquired intangible assets purchased in connection with acquisitions by the Company.

Acquisition expenses and related adjustments - Transaction and integration expenses that are directly related to acquisitions by the Company. Examples include transaction closing costs, professional service fees, restructuring or severance charges, retention payments, employee relocation expenses, facility or other exit-related expenses, recoveries of acquisition-related expenses or post-closing expenses, bridge loan fees, gains or losses related to foreign currency contracts, and gains or losses on business combinations.

Litigation reserve adjustments - Adjustments to the Company’s reserves, including accrued interest, for estimated probable losses for its Average Wholesale Price litigation matter, as such term is defined in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014.

LIFO-related adjustments - Last-In-First-Out ("LIFO") inventory-related adjustments.

 
Income taxes on Adjusted Earnings are calculated in accordance with Accounting Standards Codification ("ASC") 740, “Income Taxes,” which is the same accounting principle used by the Company when presenting its GAAP financial results.
 
The Company believes the presentation of non-GAAP measures such as Adjusted Earnings provides useful supplemental information to investors with regard to its core operating performance, as well as assists with the comparison of its past financial performance to the Company’s future financial results. Moreover, the Company believes that the presentation of Adjusted Earnings assists investors’ ability to compare its financial results to those of other companies in the same industry. However, the Company's Adjusted Earnings measure may be defined and calculated differently by other companies in the same industry.
 
The Company internally uses non-GAAP financial measures such as Adjusted Earnings in connection with its own financial planning and reporting processes. Specifically, Adjusted Earnings serves as one of the measures management utilizes when allocating resources, deploying capital and assessing business performance and employee incentive compensation. Nonetheless, non-GAAP financial results and related measures disclosed by the Company should not be considered a substitute for, nor superior to, financial results and measures as determined or calculated in accordance with GAAP.

Contacts

McKesson Corporation
Erin Lampert, 415-983-8391 (Investors and Financial Media)
Erin.Lampert@McKesson.com
Kris Fortner, 415-983-8352 (General and Business Media)
Kris.Fortner@McKesson.com

Contacts

McKesson Corporation
Erin Lampert, 415-983-8391 (Investors and Financial Media)
Erin.Lampert@McKesson.com
Kris Fortner, 415-983-8352 (General and Business Media)
Kris.Fortner@McKesson.com