MCK McKesson Corporation

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 8-K

 

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): October 28, 2014

 

 

McKesson Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		1-13252		94-3207296
(State or other jurisdiction of incorporation)		(Commission File Number)		(I.R.S. Employer Identification No.)

 

One Post Street, San Francisco, California		94104
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (415) 983-8300

Not Applicable

(Former name or former address, if changed since last report.)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

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Item 2.02

Results of Operations and Financial Condition.

On October 28, 2014, McKesson Corporation (the “Company”) announced via press release the Company’s preliminary results for the second quarter ended on September 30, 2014. A copy of the Company’s press release is attached hereto as Exhibit 99.1.

The information contained in this Form 8-K, including Exhibit 99.1, is furnished to the Securities and Exchange Commission (the “Commission”), but shall not be deemed “filed” with the Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act except as shall be expressly set forth by specific reference in such a filing.

 

Item 9.01

Financial Statements and Exhibits.

(d) Exhibits.

 

Exhibit No.		Description
99.1		Press release issued by the Company dated October 28, 2014.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: October 28, 2014

 

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EXHIBIT INDEX

 

Exhibit No.		Description
99.1		Press release issued by the Company dated October 28, 2014.

Exhibit 99.1

 

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, October 28, 2014 – 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.

 

1

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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.

 

2

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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.

 

3

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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.

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Contact:

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

 

4

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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.

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Schedule 2A

McKESSON CORPORATION

RECONCILIATION OF GAAP OPERATING RESULTS TO ADJUSTED EARNINGS (NON-GAAP)

(unaudited)

(in millions, except per share amounts)

 

		Quarter Ended September 30, 2014																								Change 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.

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Schedule 2B

McKESSON CORPORATION

RECONCILIATION OF GAAP OPERATING RESULTS TO ADJUSTED EARNINGS (NON-GAAP)

(unaudited)

(in millions, except per share amounts)

 

		Six Months Ended September 30, 2014																								Change 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.

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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.

 

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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.

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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.

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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.

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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

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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

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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.