Business Context and Reporting Period
Company: McKesson Corporation (MCK)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended March 31, 2007
Business Overview: A Fortune 18 corporation providing supply, information, and care management products and services to the healthcare industry. Operations are conducted through three primary segments: Pharmaceutical Solutions (95% of revenue), Medical-Surgical Solutions, and Provider Technologies.
Key Financial Metrics
| Metric (in millions) | 2007 | 2006 | 2005 |
|---|---|---|---|
| Revenues | $92,977 | $86,983 | $79,096 |
| Gross Profit | $4,332 | $3,777 | $3,342 |
| Gross Margin | 4.66% | 4.34% | 4.23% |
| Operating Income | $1,264 | $1,126 | ($216) |
| Net Income | $913 | $751 | ($157) |
| Diluted EPS | $2.99 | $2.38 | ($0.53) |
| Cash Flow from Operations | $1,539 | $2,738 | $1,543 |
| Total Debt | $1,958 | $991 | $1,211 |
| Working Capital | $2,730 | $3,527 | $3,658 |
| Cash and Equivalents | $1,954 | $2,139 | $1,800 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 7% to $93.0 billion, driven primarily by the Pharmaceutical Solutions segment and the acquisition of D&K Healthcare Resources in 2006.
- Profitability: Net income rose 22% to $913 million. Gross profit margin improved by 32 basis points to 4.66%, aided by higher buy-side margins and generic drug sales.
- Securities Litigation: The company recorded a net pre-tax credit of $6 million in 2007, compared to a $45 million charge in 2006 and a $1.2 billion charge in 2005. A significant $83 million tax credit was recorded in 2007 following an IRS ruling confirming the tax deductibility of the $960 million settlement payment.
- Discontinued Operations: The company sold its Acute Care business in Q2 2007, resulting in an after-tax loss of $66 million, including a $79 million goodwill write-off.
- Acquisitions: Major 2007 acquisitions included Per-Se Technologies ($1.8 billion), RelayHealth, and Sterling Medical Services, increasing goodwill significantly.
- Debt: Total debt increased to $1.958 billion, primarily due to $1.0 billion in new long-term debt issued to fund the Per-Se acquisition.
Guidance, Outlook, and Risks
- Segment Restructuring: Beginning in Q1 2008, the company will report operations under two new segments: McKesson Distribution Solutions (combining Pharmaceutical and Medical-Surgical) and McKesson Technology Solutions (Provider Technologies plus Payor group).
- Capital Allocation: The Board approved a new $1.0 billion share repurchase plan in April 2007. The company completed previous $1.0 billion repurchase plans during the fiscal year.
- Key Risks:
- Customer Concentration: The ten largest customers accounted for 51% of total revenues; the largest customer (Caremark RX) accounted for 11%.
- Regulatory Environment: Risks related to healthcare fraud, pedigree tracking laws, and changes in government reimbursement rates.
- Securities Litigation: While a $983 million accrual remains, the company believes it is adequate, though ultimate costs could vary.
- Goodwill Impairment: Significant goodwill assets ($2.975 billion) are subject to annual impairment testing.
Investor Verification Checklist
- Verify the status of the remaining Securities Litigation accrual ($983 million) and any new developments in pending state or federal actions.
- Monitor the integration progress and financial performance of the Per-Se Technologies acquisition ($1.8 billion).
- Assess the impact of the new segment reporting structure on future financial analysis and comparability.
- Review the concentration risk associated with the top 10 customers, particularly Caremark RX, and any changes in their purchasing patterns.
- Confirm the company's compliance with debt covenants, specifically the debt-to-capital ratio (currently 23.8% vs. 56.5% limit).
- Track the adoption impact of FIN No. 48 (Accounting for Uncertainty in Income Taxes) expected in Q1 2008, which may reduce shareholders' equity by up to $100 million.