MCK

McKesson Corporation 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for McKesson Corporation for the quarter and six months ended September 30, 2002. The Company operates in three primary segments: Pharmaceutical Solutions, Medical-Surgical Solutions, and Information Solutions. The fiscal year begins April 1 and ends March 31.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 13% for the quarter and 15% for the six-month period compared to the prior year, driven primarily by the Pharmaceutical Solutions segment (13% and 16% growth, respectively).
• Profitability: Net income increased 58% for the quarter and 31% for the six-month period. Diluted EPS rose from $0.27 to $0.42 for the quarter and from $0.63 to $0.82 for the six-month period.
• Segment Performance:
  • Pharmaceutical Solutions: Operating profit increased 27% (quarter) and 30% (six months) on a pro forma basis.
  • Medical-Surgical Solutions: Operating profit declined significantly (92% drop in quarter) due to restructuring costs and competitive pressures.
  • Information Solutions: Operating profit increased 79% (quarter) and 77% (six months), aided by the acquisition of A.L.I. Technologies.
• Cash Flow: Operating activities used $36.5 million in cash for the six months ended September 30, 2002, compared to providing $3.9 million in the prior year. This shift was due to a significant increase in accounts receivable ($438.0 million) driven by revenue growth and new business implementation.

Guidance, Outlook, and Risks

• Acquisitions: The Company acquired A.L.I. Technologies Inc. for $349.2 million in July 2002 to enhance its digital medical imaging capabilities. A joint venture, Verispan, L.L.C., was formed with Quintiles Transnational Corporation.
• Restructuring: The Company recorded net special credits of $6.7 million for the quarter and $5.6 million for the six months, largely due to reversals of severance and exit-related accruals following a reevaluation of the Medical-Surgical Solutions distribution center consolidation plan. The revised plan reduces the number of closures from 20 to 14.
• Discontinued Operations: A marketing fulfillment business was sold in September 2002, resulting in an after-tax loss of $3.7 million. Results are now classified as discontinued operations.
• Litigation Risks: Significant ongoing litigation exists regarding the 1999 restatement of financial statements (HBOC accounting improprieties). The Company states it is not feasible to predict the outcome or estimate potential losses, which could be material. Additionally, asbestos-related claims from a former division are being defended by an indemnitor (Univar USA, Inc.).
• Liquidity: The Company maintains $1.1 billion in committed credit facilities ($550M short-term, $550M three-year, and $850M receivables sale facility). The debt-to-capital ratio was 28.1% at September 30, 2002, well below the 56.5% covenant limit.

Investor Verification Checklist

• Working Capital Build-up: Verify the sustainability of the $438 million increase in receivables and its impact on future cash flow generation.
• Restructuring Reversals: Confirm the accuracy of the $10.9 million reversal of severance/exit accruals and the timeline for the revised distribution center consolidation plan.
• Litigation Exposure: Monitor developments in the HBOC accounting litigation and the status of the indemnification agreement regarding asbestos claims.
• Margin Trends: Analyze the pro forma gross margin decline in the Pharmaceutical Solutions segment (down 9 basis points) and Medical-Surgical segment (down 64 basis points) to assess pricing power and cost pressures.
• Debt Covenants: Ensure continued compliance with the 56.5% debt-to-capital ratio covenant, especially given the increase in short-term borrowings to $282 million.