MCK

McKesson HBOC, Inc. 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for McKesson HBOC, Inc. for the three-month period ended June 30, 2000. The company operates primarily in health care supply management (pharmaceutical and medical/surgical distribution) and health care information technology. During this period, the company formed a new reportable segment, iMcKesson, consolidating assets from previous segments to focus on internet-based healthcare solutions.

Key Financial Metrics

Note: Net cash from operating activities improved significantly year-over-year despite a net outflow, driven by working capital initiatives and the timing of tax payments related to a prior asset sale.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 13.1% year-over-year, driven primarily by the Health Care Supply Management segment, which grew 14.2% to $9.46 billion.
• Profitability Decline: Net income decreased 9.3% to $63.6 million. This decline is largely due to a 79.2% drop in operating profit within the Health Care Information Technology (HCIT) segment and an operating loss in the new iMcKesson segment.
• Segment Performance:
  • Health Care Supply Management: Operating profit rose 18.9% to $149.1 million, with margins improving due to productivity gains.
  • HCIT: Operating profit fell to $8.2 million from $39.4 million, attributed to lower service revenues and increased expenses for customer support.
  • iMcKesson: Reported an operating loss of $6.0 million compared to a profit of $16.7 million in the prior year, impacted by the acquisition of Abaton.com and organizational costs.
• Discontinued Operations: The prior year included $7.2 million in income from the Water Products business, which was sold in February 2000. No such income was recorded in the current quarter.

Outlook, Risks, and Unusual Items

• Restructuring: The company continued restructuring plans, closing two pharmaceutical distribution centers and terminating approximately 65 employees in that segment. Additional severance costs were incurred in the HCIT segment. Total restructuring reserves stood at $17.9 million as of June 30, 2000.
• Legal Proceedings: Significant litigation remains pending regarding accounting improprieties discovered at the acquired HBOC unit in 1999. The company faces a consolidated securities class action and ongoing investigations by the SEC and the U.S. Attorney's Office. The company states it cannot estimate the potential loss, which could be material.
• Share Repurchase: On July 27, 2000, the company announced a program to repurchase up to $250 million of its common stock.
• Acquisitions: The company completed the acquisition of MediVation, Inc. on July 17, 2000, to be included in the iMcKesson segment.
• Accounting Changes: The company is evaluating the impact of new accounting standards (SFAS 133 and SAB 101) on its financial statements, with implementation dates deferred.

Investor Verification Checklist

• Legal Exposure: Verify the status of the consolidated securities litigation and SEC investigations regarding the HBOC accounting restatement, as potential settlements could materially impact financial position.
• HCIT Turnaround: Assess the sustainability of the Health Care Information Technology segment's revenue decline and the effectiveness of cost-cutting measures to restore margins.
• iMcKesson Viability: Monitor the new iMcKesson segment's ability to transition from an operating loss to profitability given the integration costs and market competition.
• Working Capital: Review the cash flow statement to ensure the improvement in operating cash flow is sustainable and not solely due to one-time tax payment timing.
• Debt Covenants: Confirm that the net debt-to-capital ratio of 17% remains within acceptable limits relative to credit agreements, especially given the planned $250 million share repurchase.