McKesson Corporation (NYSE:MCK) today reported that revenues for the third quarter ended December 31, 2013 were $34.3 billion, up 10% compared to $31.1 billion a year ago. On the basis of U.S. generally accepted accounting principles ("GAAP"), third-quarter earnings per diluted share from continuing operations was $0.67 compared to $1.27 a year ago. Third-quarter GAAP earnings per diluted share from continuing operations includes charges of $142 million, or 37 cents per share, related to LIFO adjustments, $122 million, or 52 cents per share, related to an ongoing dispute with the Canada Revenue Agency and $42 million, or 18 cents per share, in the Technology Solutions segment from restructuring actions in the Horizon Clinicals software platform. Third-quarter GAAP earnings per diluted share was $0.28 which includes a 39 cent loss from discontinued operations.

Third-quarter Adjusted Earnings per diluted share from continuing operations was $1.45 compared to $1.44 a year ago. Third-quarter Adjusted Earnings per share includes charges of $122 million, or 52 cents per share, related to the Canadian dispute and $42 million, or 18 cents per share, in the Technology Solutions segment.

"We are extremely pleased by the third-quarter performance of our Distribution Solutions segment where adjusted operating profit grew by 37% and our full-year view of the performance in Distribution Solutions is better than our previous expectations," said John H. Hammergren, chairman and chief executive officer. "This operating strength is offset by an increase in our tax reserves due to a dispute with the Canadian tax authorities and a charge in our Technology Solutions segment as we continue to align our Horizon Clinicals software platform development efforts and size the organization appropriately given regulatory delays. As a result, we are updating our previous outlook and now expect Adjusted Earnings per diluted share of $8.05 to $8.20 for the fiscal year ending March 31, 2014."

For the first nine months of the fiscal year, McKesson generated cash from operations of $472 million, and ended the quarter with cash and cash equivalents of $2.4 billion. During the first nine months of the fiscal year, McKesson paid $154 million in dividends, had internal capital spending of $296 million, and spent $116 million on acquisitions.

Segment Results

Distribution Solutions revenues were up 10% in the third quarter, driven mainly by strong growth in U.S. pharmaceutical direct distribution and services revenues due to market growth and our mix of business.

Canadian revenues, on a constant currency basis, increased 12% for the third quarter primarily due to market growth and new customer wins. Including an unfavorable currency impact of 6%, Canadian revenues increased 6% for the third quarter.

Medical-Surgical distribution and services revenues were up 67% for the third quarter driven primarily by the acquisition of PSS World Medical and market growth.

In the third quarter, Distribution Solutions GAAP operating profit was $552 million and GAAP operating margin was 1.65%. Third-quarter adjusted operating profit was $783 million and the adjusted operating margin was 2.34%.

Technology Solutions revenues were up 6% in the third quarter compared to the prior year driven primarily by acquisitions completed in the prior year. GAAP operating profit was $37 million for the third quarter and GAAP operating margin was 4.72%. Adjusted operating profit was $67 million for the third quarter and adjusted operating margin was 8.55%. Technology Solutions third-quarter segment results include a charge of $42 million driven by restructuring actions in the Horizon Clinicals software platform.

Fiscal Year 2014 Outlook

McKesson expects Adjusted Earnings per diluted share from continuing operations between $8.05 and $8.20 for the fiscal year ending March 31, 2014, which excludes the following GAAP items:

  • Amortization of acquisition-related intangible assets of 76 cents per diluted share, based on acquisitions closed to date.
  • Acquisition expenses and related adjustments of 55 cents per diluted share.
  • Litigation reserve adjustments of approximately 23 cents per diluted share.
  • LIFO inventory-related charges of 71 to 77 cents 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: material adverse resolution of pending legal proceedings; changes in the U.S. healthcare industry and regulatory environment; changes in the Canadian healthcare industry and regulatory environment; 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; foreign currency fluctuations or disruptions to our foreign operations; new or revised tax legislation or challenges to our tax positions; the company's ability to successfully identify, consummate, finance and integrate strategic acquisitions; 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; and changes in accounting principles generally accepted in the United States of America. 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 5:00PM 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 888-203-1112 (from the U.S. and Canada) or 719-457-0820 (from all other countries) and the pass code is 8657683. 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 14th 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

December 31,

Nine Months Ended

December 31,

2013 2012 Change 2013 2012 Change
 
Revenues $ 34,306 $ 31,099 10 % $ 99,468 $ 91,553 9 %
Cost of sales (1) (2)   (32,466 )   (29,454 ) 10   (93,699 )   (86,664 ) 8
Gross profit 1,840 1,645 12 5,769 4,889 18
 
Operating expenses (2) (3) (1,337 ) (1,147 ) 17 (3,890 ) (3,230 ) 20
Litigation charges (4) (18 ) - - (68 ) (60 ) 13
Gain on business combination (5)   -     -   -   -     81   -
Total operating expenses   (1,355 )   (1,147 ) 18   (3,958 )   (3,209 ) 23
Operating income 485 498 (3 ) 1,811 1,680 8
Other income (loss), net (8 ) 10 - 7 28 (75 )
Interest expense   (69 )   (59 ) 17   (187 ) (170 ) 10
Income from continuing operations before income taxes 408 449 (9 ) 1,631 1,538 6
Income tax expense (6)   (252 )   (143 ) 76   (639 )   (454 ) 41
Income from continuing operations 156 306 (49 ) 992 1,084 (8 )
Loss from discontinued operations, net of tax (7)   (92 )   (8 ) -   (100 )   (5 ) -
Net income $ 64   $ 298   (79 ) $ 892   $ 1,079   (17 )
 
Earnings (loss) per common share (8)
Diluted
Continuing operations $ 0.67 $ 1.27 (47 ) % $ 4.26 $ 4.51 (6 ) %
Discontinued operations   (0.39 )   (0.03 ) -   (0.43 )   (0.02 ) -
Total $ 0.28   $ 1.24   (77 ) $ 3.83   $ 4.49   (15 )
 
Basic
Continuing operations $ 0.68 $ 1.30 (48 ) % $ 4.34 $ 4.60 (6 ) %
Discontinued operations   (0.40 )   (0.03 ) -   (0.44 )   (0.02 ) -
Total $ 0.28   $ 1.27   (78 ) $ 3.90   $ 4.58   (15 )
 
Weighted average common shares
Diluted 234 240 (3 ) % 233 240 (3 ) %
Basic 230 235 (2 ) 229 236 (3 )
(1)   Cost of sales for the third quarter and first nine months of fiscal year 2014 includes charges of $142 million and $186 million and, for the third quarter and first nine months of fiscal year 2013 includes charges of $2 million and $5 million, which were recorded in our Distribution Solutions segment related to our last-in-first-out ("LIFO") method of accounting for inventories.
 
(2) Technology Solutions segment results for fiscal year 2014, as reported under GAAP, include pre-tax charges of $57 million, of which $34 million was recorded in cost of sales and $23 million was recorded in operating expenses. These charges, as reported under GAAP, primarily consist of $35 million of product alignment charges, $15 million of integration-related expenses and $7 million of reduction-in-workforce severance charges.
 
(3) Distribution Solutions segment operating expenses for the third quarter and first nine months of fiscal year 2013 include a $40 million charge for a legal dispute in our Canadian business.
 
(4) Represent charges for the Average Wholesale Price ("AWP") litigation.
 
(5) For the first nine months of fiscal year 2013, operating expenses include an $81 million pre-tax ($51 million after-tax) gain on business combination related to the acquisition of the remaining 50% ownership interest in our corporate headquarters building.
 
(6) Income tax expense includes a charge of $122 million for fiscal year 2014 relating to our litigation with the Canadian Revenue Agency.
 
(7) Represents our International Technology and Hospital Automation businesses in our Technology Solutions segment and a small business in our Distribution Solutions segment. For the third quarter and first nine months of fiscal year 2014, loss from discontinued operations, net, includes an $80 million pre-tax and after-tax impairment charge related to our International Technology business.
 
(8) 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 December 31, 2013 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 $ 34,306 $ - $ - $ - $ - $ 34,306 10 % 10 %
 
Gross profit (1) $ 1,840 $ 4 $ 3 $ - $ 142 $ 1,989 12 21
Operating expenses (1) (1,355 ) 66 40 18 - (1,231 ) 18 13
Other income (loss), net (8 ) - 13 - - 5 - (50 )
Interest expense   (69 )     -       10       -       -       (59 ) 17 2
Income from continuing operations before income taxes 408 70 66 18 142 704 (9 ) 37
Income tax expense (2)   (252 )     (27 )     (23 )     (7 )     (56 )     (365 ) 76 120
Income from continuing operations $ 156     $ 43     $ 43     $ 11     $ 86     $ 339   (49 ) (3 )
 

Diluted earnings per common share from continuing operations (4)

 $ 0.67     $ 0.19     $ 0.17     $ 0.05     $ 0.37     $ 1.45   (47 ) % 1 %
Diluted weighted average common shares   234       234       234       234       234       234   (3 ) % (3 ) %
 
 
Quarter Ended December 31, 2012

As Reported
(GAAP)

 

Amortization
of Acquisition-
Related
Intangibles

 

Acquisition
Expenses and
Related
Adjustments

 

Litigation
Reserve
Adjustments

 

LIFO-Related
Adjustments

 

Adjusted
Earnings
(Non-GAAP)

 
Revenues $ 31,099

 

$ - $ - $ - $ - $ 31,099
 
Gross profit $ 1,645

 

$ 3 $ - $ - $ 2 $ 1,650
Operating expenses (3) (1,147 ) 49 10 - - (1,088 )
Other income, net 10 - - - - 10
Interest expense   (59 )     -       1       -       -       (58 )

Income from continuing operations before income taxes

449 52 11 - 2 514
Income tax expense   (143 )     (20 )     (2 )     -       (1 )     (166 )
Income from continuing operations $ 306     $ 32     $ 9     $ -     $ 1     $ 348  
 

Diluted earnings per common share from continuing operations (4)

 $ 1.27     $ 0.14     $ 0.03     $ -     $ -     $ 1.44  
Diluted weighted average common shares   240       240       240       -       240       240  
(1)   Technology Solutions segment results for fiscal year 2014, as reported under GAAP, include pre-tax charges of $57 million, of which $34 million was recorded in cost of sales and $23 million was recorded in operating expenses; as reported under an Adjusted Earnings basis (Non-GAAP), pre-tax charges were $42 million, of which $31 million was recorded in cost of sales and $11 million was recorded in operating expenses. These charges, as reported under an Adjusted Earnings basis (Non-GAAP), primarily consist of $35 million of product alignment charges and $7 million of reduction-in-workforce severance charges.
 
(2) Income tax expense includes a charge of $122 million for fiscal year 2014 relating to our litigation with the Canadian Revenue Agency.
 
(3) Distribution Solutions segment operating expenses for the third quarter of fiscal year 2013 include a $40 million charge for a legal dispute in our Canadian business.
 
(4) Certain computations may reflect rounding adjustments.
 

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 related expenses - 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 was defined in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

 

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

 
Income taxes on Adjusted Earnings are calculated in accordance with Accounting Standards Codification 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.
 

Schedule 2B

                   
McKESSON CORPORATION
RECONCILIATION OF GAAP OPERATING RESULTS TO ADJUSTED EARNINGS (NON-GAAP)
(unaudited)
(in millions, except per share amounts)
 
Change
Nine Months Ended December 31, 2013 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 $ 99,468 $ - $ - $ - $ - $ 99,468 9 % 9 %
 
Gross profit (1) $ 5,769 $ 15 $ 3 $ - $ 186 $ 5,973 18 22
Operating expenses (1) (3,958 ) 196 66 68 - (3,628 ) 23 18
Other income, net 7 - 13 - - 20 (75 ) (29 )
Interest expense   (187 )     -       10       -       -       (177 ) 10 5
Income from continuing operations before income taxes 1,631 211 92 68 186 2,188 6 30
Income tax expense (2)   (639 )     (79 )     (33 )     (15 )     (73 )     (839 ) 41 65
Income from continuing operations $ 992     $ 132     $ 59     $ 53     $ 113     $ 1,349   (8 ) 15
 

Diluted earnings per common share from continuing operations (5)

 $ 4.26     $ 0.57     $ 0.24     $ 0.23     $ 0.49     $ 5.79   (6 ) % 18 %
Diluted weighted average common shares   233       233       233       233       233       233   (3 ) % (3 ) %
 
 
Nine Months Ended December 31, 2012

As Reported
(GAAP)

 

Amortization
of Acquisition-
Related
Intangibles

 

Acquisition
Expenses and
Related
Adjustments

 

Litigation
Reserve
Adjustments

 

LIFO-Related
Adjustments

 

Adjusted
Earnings
(Non-GAAP)

 
Revenues $ 91,553

 

$ - $ - $ - $ - $ 91,553
 
Gross profit $ 4,889

 

$ 9 $ - $ - $ 5 $ 4,903
Operating expenses (3) (4) (3,209 ) 138 (67 ) 60 - (3,078 )
Other income, net 28 - - - - 28
Interest expense   (170 )     -       1       -       -       (169 )
Income from continuing operations before income taxes 1,538 147 (66 ) 60 5 1,684
Income tax expense   (454 )     (55 )     27       (23 )     (2 )     (507 )
Income from continuing operations $ 1,084     $ 92     $ (39 )   $ 37     $ 3     $ 1,177  
 

Diluted earnings per common share from continuing operations (5)

 $ 4.51     $ 0.38     $ (0.16 )   $ 0.15     $ 0.01     $ 4.89  
Diluted weighted average common shares   240       240       240       240       240       240  
(1)   Technology Solutions segment results for fiscal year 2014, as reported under GAAP, include pre-tax charges of $57 million, of which $34 million was recorded in cost of sales and $23 million was recorded in operating expenses; as reported under an Adjusted Earnings basis (Non-GAAP), pre-tax charges were $42 million, of which $31 million was recorded in cost of sales and $11 million was recorded in operating expenses. These charges, as reported under an Adjusted Earnings basis (Non-GAAP), primarily consist of $35 million of product alignment charges and $7 million of reduction-in-workforce severance charges.
 
(2) Income tax expense includes a charge of $122 million for fiscal year 2014 relating to our litigation with the Canadian Revenue Agency.
 
(3) Distribution Solutions segment operating expenses for the first nine months of fiscal year 2013 include a $40 million charge for a legal dispute in our Canadian business.
 
(4) For the first nine months of fiscal year 2013, operating expenses, as reported under GAAP, include an $81 million pre-tax ($51 million after-tax) gain on business combination related to the acquisition of the remaining 50% ownership interest in our corporate headquarters building.
 
(5) Certain computations may reflect rounding adjustments.
 

Schedule 3A

           
McKESSON CORPORATION
RECONCILIATION OF GAAP SEGMENT FINANCIAL RESULTS TO ADJUSTED EARNINGS (NON-GAAP)
(unaudited)
(in millions)
 
 
Quarter Ended December 31, 2013 Quarter Ended December 31, 2012 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
Direct distribution & services $ 24,859 $ - $ 24,859 $ 22,386 $ - $ 22,386 11 % 11 %
Sales to customers' warehouses   4,416       -     4,416     4,468       -     4,468   (1 ) (1 )

Total U.S. pharmaceutical distribution & services

29,275 - 29,275 26,854 - 26,854 9 9
Canada pharmaceutical distribution & services 2,785 - 2,785 2,633 - 2,633 6 6
Medical-Surgical distribution & services   1,462       -     1,462     874       -     874   67 67
Total Distribution Solutions   33,522       -     33,522     30,361       -     30,361   10 10
 
Technology Solutions
Services 658 - 658 598 - 598 10 10
Software 107 - 107 120 - 120 (11 ) (11 )
Hardware   19       -     19     20       -     20   (5 ) (5 )
Total Technology Solutions   784       -     784     738       -     738   6 6
Revenues $ 34,306     $ -   $ 34,306   $ 31,099     $ -   $ 31,099   10 10
 
GROSS PROFIT
Distribution Solutions (1) $ 1,499 $ 142 $ 1,641 $ 1,287 $ 2 $ 1,289 16 27
Technology Solutions (2)   341       7     348     358       3     361   (5 ) (4 )
Gross profit $ 1,840     $ 149   $ 1,989   $ 1,645     $ 5   $ 1,650   12 21
 
OPERATING EXPENSES
Distribution Solutions (3) $ (950 ) $ 89 $ (861 ) $ (769 ) $ 44 $ (725 ) 24 19
Technology Solutions (2) (303 ) 23 (280 ) (266 ) 15 (251 ) 14 12
Corporate   (102 )     12     (90 )   (112 )     -     (112 ) (9 ) (20 )
Operating expenses $ (1,355 )   $ 124   $ (1,231 ) $ (1,147 )   $ 59   $ (1,088 ) 18 13
 
OTHER INCOME (LOSS), NET
Distribution Solutions $ 3 $ - $ 3 $ 7 $ - $ 7 (57 ) (57 )
Technology Solutions (1 ) - (1 ) - - - - -
Corporate   (10 )     13     3     3       -     3   - -
Other income (loss), net $ (8 )   $ 13   $ 5   $ 10     $ -   $ 10   - (50 )
 
OPERATING PROFIT
Distribution Solutions (1) (3) $ 552 $ 231 $ 783 $ 525 $ 46 $ 571 5 37
Technology Solutions (2)   37       30     67     92       18     110   (60 ) (39 )
Operating profit 589 261 850 617 64 681 (5 ) 25
Corporate   (112 )     25     (87 )   (109 )     -     (109 ) 3 (20 )

Income from continuing operations before interest expense and income taxes

$ 477     $ 286   $ 763   $ 508     $ 64   $ 572   (6 ) 33
 
STATISTICS
Operating profit as a % of revenues
Distribution Solutions (1) (3) 1.65 % 2.34 % 1.73 % 1.88 % (8 ) bp 46 bp
Technology Solutions (2) 4.72 8.55 12.47 14.91 (775 ) (636 )
(1)   For the third quarters of fiscal years 2014 and 2013, results, as reported under GAAP, include LIFO charges of $142 million and $2 million.
 
(2) Technology Solutions segment results for fiscal year 2014, as reported under GAAP, include pre-tax charges of $57 million, of which $34 million was recorded in cost of sales and $23 million was recorded in operating expenses; as reported under an Adjusted Earnings basis (Non-GAAP), pre-tax charges were $42 million, of which $31 million was recorded in cost of sales and $11 million was recorded in operating expenses.
 
(3) Results for the third quarter of fiscal year 2014, as reported under GAAP, include AWP litigation charges of $18 million. Results for the third quarter of fiscal year 2013 include a $40 million charge for a legal dispute in our Canadian business.
 

Schedule 3B

           
McKESSON CORPORATION
RECONCILIATION OF GAAP SEGMENT FINANCIAL RESULTS TO ADJUSTED EARNINGS (NON-GAAP)
(unaudited)
(in millions)
 
 
Nine Months Ended December 31, 2013 Nine Months Ended December 31, 2012 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
Direct distribution & services $ 71,620 $ - $ 71,620 $ 64,625 $ - $ 64,625 11 % 11 %
Sales to customers' warehouses   13,204       -     13,204     14,621       -       14,621   (10 ) (10 )

Total U.S. pharmaceutical distribution & services

84,824 - 84,824 79,246 - 79,246 7 7
Canada pharmaceutical distribution & services 7,984 - 7,984 7,559 - 7,559 6 6
Medical-Surgical distribution & services   4,286       -     4,286     2,542       -       2,542   69 69
Total Distribution Solutions   97,094       -     97,094     89,347       -       89,347   9 9
 
Technology Solutions
Services 1,975 - 1,975 1,777 - 1,777 11 11
Software 338 - 338 357 - 357 (5 ) (5 )
Hardware   61       -     61     72       -       72   (15 ) (15 )
Total Technology Solutions   2,374       -     2,374     2,206       -       2,206   8 8
Revenues $ 99,468     $ -   $ 99,468   $ 91,553     $ -     $ 91,553   9 9
 
GROSS PROFIT
Distribution Solutions (1) $ 4,642 $ 187 $ 4,829 $ 3,841 $ 7 $ 3,848 21 25
Technology Solutions (2)   1,127       17     1,144     1,048       7       1,055   8 8
Gross profit $ 5,769     $ 204   $ 5,973   $ 4,889     $ 14     $ 4,903   18 22
 
OPERATING EXPENSES
Distribution Solutions (3) $ (2,799 ) $ 267 $ (2,532 ) $ (2,212 ) $ 173 $ (2,039 ) 27 24
Technology Solutions (2) (857 ) 50 (807 ) (777 ) 39 (738 ) 10 9
Corporate (4)   (302 )     13     (289 )   (220 )     (81 )     (301 ) 37 (4 )
Operating expenses $ (3,958 )   $ 330   $ (3,628 ) $ (3,209 )   $ 131     $ (3,078 ) 23 18
 
OTHER INCOME (LOSS), NET
Distribution Solutions $ 13 $ - $ 13 $ 17 $ - $ 17 (24 ) (24 )
Technology Solutions (1 ) - (1 ) 3 - 3 - -
Corporate   (5 )     13     8     8       -       8   - -
Other income (loss), net $ 7     $ 13   $ 20   $ 28     $ -     $ 28   (75 ) (29 )
 
OPERATING PROFIT
Distribution Solutions (1) (3) $ 1,856 $ 454 $ 2,310 $ 1,646 $ 180 $ 1,826 13 27
Technology Solutions (2)   269       67     336     274       46       320   (2 ) 5
Operating profit 2,125 521 2,646 1,920 226 2,146 11 23
Corporate   (307 )     26     (281 )   (212 )     (81 )     (293 ) 45 (4 )

Income from continuing operations before interest expense and income taxes

$ 1,818     $ 547   $ 2,365   $ 1,708     $ 145     $ 1,853   6 28
 
STATISTICS
Operating profit as a % of revenues
Distribution Solutions (1) (3) 1.91 % 2.38 % 1.84 % 2.04 % 7

bp

34 bp
Technology Solutions (2) 11.33 14.15 12.42 14.51 (109 ) (36 )
(1)   For the first nine months of fiscal years 2014 and 2013, results, as reported under GAAP, include LIFO charges of $186 million and $5 million.
 
(2) Technology Solutions segment results for fiscal year 2014, as reported under GAAP, include pre-tax charges of $57 million, of which $34 million was recorded in cost of sales and $23 million was recorded in operating expenses; as reported under an Adjusted Earnings basis (Non-GAAP), pre-tax charges were $42 million, of which $31 million was recorded in cost of sales and $11 million was recorded in operating expenses.
 
(3) Results for the first nine months of fiscal years 2014 and 2013, as reported under GAAP, include AWP litigation charges of $68 million and $60 million. Results for the first nine months of fiscal year 2013 include a $40 million charge for a legal dispute in our Canadian business.
 
(4) For the first nine months of fiscal year 2013, operating expenses, as reported under GAAP, include an $81 million pre-tax gain on business combination related to the acquisition of the remaining 50% ownership interest in our corporate headquarters building.
 

Schedule 4A

                   
McKESSON CORPORATION
RECONCILIATION OF GAAP SEGMENT FINANCIAL RESULTS TO ADJUSTED EARNINGS (NON-GAAP) - BY ADJUSTMENT TYPE
(unaudited)
(in millions)
 
 
Quarter Ended December 31, 2013 Quarter Ended December 31, 2012

Distribution
Solutions

 

Technology
Solutions

 

Corporate &
Interest
Expense

  Total

Distribution
Solutions

 

Technology
Solutions

 

Corporate &
Interest
Expense

  Total

As Reported (GAAP):

Revenues $ 33,522 $ 784 $ - $ 34,306 $ 30,361 $ 738 $ - $ 31,099
 
Gross profit (1) $ 1,499 $ 341 $ - $ 1,840 $ 1,287 $ 358 $ - $ 1,645
Operating expenses (1) (2) (950 ) (303 ) (102 ) (1,355 ) (769 ) (266 ) (112 ) (1,147 )
Other income (loss), net   3       (1 )     (10 )     (8 )   7       -       3       10  

Income from continuing operations before interest expense and income taxes

552 37 (112 ) 477 525 92 (109 ) 508
Interest expense   -       -       (69 )     (69 )   -       -       (59 )     (59 )
Income from continuing operations before income taxes $ 552     $ 37     $ (181 )   $ 408   $ 525     $ 92     $ (168 )   $ 449  
 
 

Pre-Tax Adjustments:

Gross profit $ - $ 4 $ - $ 4 $ - $ 3 $ - $ 3
Operating expenses   55       11       -       66     37       12       -       49  

Amortization of acquisition-related intangibles

55 15 - 70 37 15 - 52
 

Gross profit

-

3

-

3

-

-

-

-

Operating expenses

16

12

12

40

7

3

-

10

Other income, net

-

-

13

13

-

-

-

-

Interest expense   -       -       10       10     -       -       1       1  
Acquisition expenses and related adjustments 16 15 35 66 7 3 1 11
 
Operating expenses - Litigation reserve adjustments 18 - - 18 - - - -
 
Gross profit - LIFO-related adjustments 142 - - 142 2 - - 2
                           
Total pre-tax adjustments $ 231     $ 30     $ 35     $ 296   $ 46     $ 18     $ 1     $ 65  
 
 

Adjusted Earnings (Non-GAAP):

Revenues $ 33,522 $ 784 $ - $ 34,306 $ 30,361 $ 738 $ - $ 31,099
 
Gross profit (1) $ 1,641 $ 348 $ - $ 1,989 $ 1,289 $ 361 $ - $ 1,650
Operating expenses (1) (2) (861 ) (280 ) (90 ) (1,231 ) (725 ) (251 ) (112 ) (1,088 )
Other income, net   3       (1 )     3       5     7       -       3       10  

Income from continuing operations before interest expense and income taxes

783 67 (87 ) 763 571 110 (109 ) 572
Interest expense   -       -       (59 )     (59 )   -       -       (58 )     (58 )
Income from continuing operations before income taxes $ 783     $ 67     $ (146 )   $ 704   $ 571     $ 110     $ (167 )   $ 514  
(1)   Technology Solutions segment results for fiscal year 2014, as reported under GAAP, include pre-tax charges of $57 million, of which $34 million was recorded in cost of sales and $23 million was recorded in operating expenses; as reported under an Adjusted Earnings basis (Non-GAAP), pre-tax charges were $42 million, of which $31 million was recorded in cost of sales and $11 million was recorded in operating expenses.
 
(2) Distribution Solutions segment operating expenses for the third quarter of fiscal year 2013 include a $40 million charge for a legal dispute in our Canadian business.
 

Schedule 4B

                   
McKESSON CORPORATION
RECONCILIATION OF GAAP SEGMENT FINANCIAL RESULTS TO ADJUSTED EARNINGS (NON-GAAP) - BY ADJUSTMENT TYPE
(unaudited)
(in millions)
 
 
Nine Months Ended December 31, 2013 Nine Months Ended December 31, 2012

Distribution
Solutions

 

Technology
Solutions

 

Corporate &
Interest
Expense

  Total

Distribution
Solutions

 

Technology
Solutions

 

Corporate &
Interest
Expense

  Total

As Reported (GAAP):

Revenues $ 97,094 $ 2,374 $ - $ 99,468 $ 89,347 $ 2,206 $ - $ 91,553
 
Gross profit (1) $ 4,642 $ 1,127 $ - $ 5,769 $ 3,841 $ 1,048 $ - $ 4,889
Operating expenses (1) (2) (3) (2,799 ) (857 ) (302 ) (3,958 ) (2,212 ) (777 ) (220 ) (3,209 )
Other income, net   13       (1 )     (5 )     7     17       3       8       28  

Income from continuing operations before interest expense and income taxes

1,856 269 (307 ) 1,818 1,646 274 (212 ) 1,708
Interest expense   -       -       (187 )     (187 )   -       -       (170 )     (170 )
Income from continuing operations before income taxes $ 1,856     $ 269     $ (494 )   $ 1,631   $ 1,646     $ 274     $ (382 )   $ 1,538  
 
 

Pre-Tax Adjustments:

Gross profit $ 1 $ 14 $ - $ 15 $ 2 $ 7 $ - $ 9
Operating expenses   161       35       -       196     103       35       -       138  
Amortization of acquisition-related intangibles 162 49 - 211 105 42 - 147
 

Gross profit

-

3

-

3

-

-

-

-

Operating expenses

38

15

13

66

10

4

(81

)

(67

)

Other income, net

-

-

13

13

-

-

-

-

Interest expense   -       -       10       10     -       -       1       1  
Acquisition expenses and related adjustments 38 18 36 92 10 4 (80 ) (66 )
 
Operating expenses - Litigation reserve adjustments 68 - - 68 60 - - 60
 
Gross profit - LIFO-related adjustments 186 - - 186 5 - - 5
                           
Total pre-tax adjustments $ 454     $ 67     $ 36     $ 557   $ 180     $ 46     $ (80 )   $ 146  
 
 

Adjusted Earnings (Non-GAAP):

Revenues $ 97,094 $ 2,374 $ - $ 99,468 $ 89,347 $ 2,206 $ - $ 91,553
 
Gross profit (1) $ 4,829 $ 1,144 $ - $ 5,973 $ 3,848 $ 1,055 $ - $ 4,903
Operating expenses (1) (2) (3) (2,532 ) (807 ) (289 ) (3,628 ) (2,039 ) (738 ) (301 ) (3,078 )
Other income, net   13       (1 )     8       20     17       3       8       28  

Income from continuing operations before interest expense and income taxes

2,310 336 (281 ) 2,365 1,826 320 (293 ) 1,853
Interest expense   -       -       (177 )     (177 )   -       -       (169 )     (169 )
Income from continuing operations before income taxes $ 2,310     $ 336     $ (458 )   $ 2,188   $ 1,826     $ 320     $ (462 )   $ 1,684  
(1)   Technology Solutions segment results for fiscal year 2014, as reported under GAAP, include pre-tax charges of $57 million, of which $34 million was recorded in cost of sales and $23 million was recorded in operating expenses; as reported under an Adjusted Earnings basis (Non-GAAP), pre-tax charges were $42 million, of which $31 million was recorded in cost of sales and $11 million was recorded in operating expenses.
 
(2) Distribution Solutions segment operating expenses for the first nine months of fiscal year 2013 include a $40 million charge for a legal dispute in our Canadian business.
 
(3) For the first nine months of fiscal year 2013, operating expenses include an $81 million pre-tax gain on business combination related to the acquisition of the remaining 50% ownership interest in our corporate headquarters building.
 

Schedule 5

McKESSON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(unaudited)
       
December 31, March 31,
2013 2013
 
 
ASSETS
Current Assets
Cash and cash equivalents $ 2,431 $ 2,456
Receivables, net 10,750 9,975
Inventories, net 11,462 10,335
Prepaid expenses and other   591   404
Total Current Assets 25,234 23,170
Property, Plant and Equipment, Net 1,359 1,321
Goodwill 6,300 6,405
Intangible Assets, Net 2,066 2,270
Other Assets   1,520   1,620
Total Assets $ 36,479 $ 34,786
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Drafts and accounts payable $ 16,638 $ 16,108
Deferred revenue 1,286 1,359
Deferred tax liabilities 1,519 1,626
Current portion of long-term debt 353 352
Other accrued liabilities   2,108   1,912
Total Current Liabilities 21,904 21,357
Long-Term Debt 4,521 4,521
Other Noncurrent Liabilities 2,027 1,838
Stockholders' Equity   8,027   7,070
Total Liabilities and Stockholders' Equity $ 36,479 $ 34,786
 

Schedule 6

       
McKESSON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
 
Nine Months Ended December 31,
2013 2012
 
 
OPERATING ACTIVITIES
Net income $ 892 $ 1,079
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 475 383
Deferred taxes 86 499
Share-based compensation expense 115 123
Gain on business combination - (81 )
LIFO charges

 

186

5

Other non-cash items 83 49
Changes in operating assets and liabilities, net of acquisitions:
Receivables (865 ) 67
Inventories (1,387 ) (313 )
Drafts and accounts payable 584 (1,078 )
Deferred revenue 20 72
Taxes 154 (90 )
Litigation charges 68 60
Litigation settlement payments (86 ) (470 )
Other   147     (29 )
Net cash provided by operating activities   472     276  
 
INVESTING ACTIVITIES
Property acquisitions (188 ) (145 )
Capitalized software expenditures (108 ) (111 )
Acquisitions, less cash and cash equivalents acquired (116 ) (577 )
Proceeds from sale of business 55 -
Other   (65 )   49  
Net cash used in investing activities   (422 )   (784 )
 
FINANCING ACTIVITIES
Proceeds from short-term borrowings 150 1,125
Repayments of short-term borrowings (150 ) (1,525 )
Proceeds from issuances of long-term debt - 892
Common stock transactions:
Issuances 150 112
Share repurchases, including shares surrendered for tax withholding (128 ) (413 )
Dividends paid (154 ) (147 )
Other   59     38  
Net cash provided by (used in) financing activities   (73 )   82  
Effect of exchange rate changes on cash and cash equivalents   (2 )   3  
Net decrease in cash and cash equivalents (25 ) (423 )
Cash and cash equivalents at beginning of period   2,456     3,149  
Cash and cash equivalents at end of period $ 2,431   $ 2,726  

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