Business Context and Reporting Period
Company: McKesson HBOC, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2000 (Second Quarter of Fiscal 2001)
Business Overview: The Company operates primarily through three segments: Health Care Supply Management (pharmaceutical and medical/surgical distribution), Health Care Information Technology (software, services, hardware), and iMcKesson (internet-based healthcare solutions). The Health Care Supply Management segment accounted for 97% of consolidated revenues.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2000 |
Three Months Ended Sep 30, 1999 |
Six Months Ended Sep 30, 2000 |
Six Months Ended Sep 30, 1999 |
|---|---|---|---|---|
| Revenues | $9,874.8 | $8,939.4 | $19,603.3 | $17,538.2 |
| Net Income | $61.9 | $59.3 | $125.5 | $129.4 |
| Diluted EPS | $0.22 | $0.21 | $0.44 | $0.46 |
| Operating Profit | $154.3 | $156.9 | $305.6 | $338.4 |
| Cash & Equivalents (Balance Sheet) |
$176.4 | $548.9 | $176.4 | $233.7 |
| Long-Term Debt | $1,224.3 | $1,243.8 | $1,224.3 | $1,243.8 |
| Net Debt-to-Capital | 21% | 15% | 21% | 15% |
Note: Prior year Net Income included $10.0 million (quarter) and $17.2 million (six months) from discontinued operations (Water Products business), which was sold in February 2000.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 10.5% in the quarter and 11.8% for the six-month period compared to the prior year. The Health Care Supply Management segment drove this growth with a 12.1% increase in pharmaceutical distribution revenues.
- Profitability: While Net Income increased slightly on a quarterly basis ($61.9M vs $59.3M), it decreased for the six-month period ($125.5M vs $129.4M). This decline is largely due to the absence of discontinued operations income in the current year and higher unusual items in the prior year.
- Segment Performance:
- Health Care Supply Management: Operating profit increased to $150.7M (quarter) and $299.8M (six months), driven by margin expansion in U.S. pharmaceutical distribution.
- Health Care Information Technology: Revenues declined 17% and operating profit dropped significantly to $10.3M (quarter) and $18.5M (six months) due to lower services and hardware sales.
- iMcKesson: Reported an operating loss of $6.7M (quarter) and $12.7M (six months), compared to profits in the prior year, due to acquisition costs (MediVation, Abaton.com) and lower revenues.
- Liquidity: Cash and cash equivalents decreased by $372.5 million to $176.4 million, primarily due to tax payments related to the prior year sale of the Water Products business and working capital changes.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Current Period: Included a $7.8M pre-tax gain on investment liquidation, offset by $2.1M in write-offs for in-process technology (MediVation acquisition) and severance costs. Legal fees of $0.7M were incurred regarding prior accounting restatements.
- Prior Period: Included significant charges ($15.0M for six months) for legal/accounting fees and severance related to the HBOC accounting restatement and litigation.
- Restructuring: The Company recorded $2.8M in restructuring charges for the quarter, including severance for 139 employees and facility closing costs. A remaining reserve of $17.1M exists for future restructuring payments.
- Legal Proceedings: Significant securities litigation remains pending regarding the 1999 accounting restatement. While some claims were dismissed, others remain active. The Company cannot estimate the potential loss, which could be material. Additionally, a former officer pleaded guilty to securities fraud, and others were indicted.
- Outlook: Management expects to continue distribution center closures and workforce reductions in the Health Care Supply Management segment through fiscal 2002. The Company renewed its $825 million revolving credit facility in October 2000.
Investor Verification Checklist
- Legal Exposure: Verify the status of the consolidated securities litigation and potential settlement ranges, as the Company states outcomes are unpredictable and could be material.
- Segment Margins: Monitor the Health Care Information Technology and iMcKesson segments, which are currently operating at lower margins or losses compared to the core distribution business.
- Liquidity Position: Confirm the sustainability of the cash position ($176.4M) given the significant decrease from the prior year-end and ongoing restructuring costs.
- Acquisition Integration: Assess the integration progress and financial impact of the MediVation and Abaton.com acquisitions on the iMcKesson segment's profitability.
- Restructuring Reserves: Track the utilization of the $17.1M restructuring reserve to ensure adequate funding for planned closures and severance payments through fiscal 2002.