Business Context and Reporting Period
Company: McKesson Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: March 31, 2003
Business Overview: A Fortune 20 corporation providing supply, information, and care management products and services to the healthcare industry. Operations are conducted through three segments: Pharmaceutical Solutions (93% of revenue), Medical-Surgical Solutions (5%), and Information Solutions (2%).
Key Financial Metrics
| Metric | Fiscal 2003 | Fiscal 2002 | Fiscal 2001 |
|---|---|---|---|
| Total Revenues | $57,120.8 million | $49,988.1 million | $42,000.1 million |
| Gross Profit | $3,102.5 million | $2,788.5 million | $2,417.0 million |
| Net Income | $555.4 million | $418.6 million | ($48.3 million) |
| Diluted EPS | $1.88 | $1.43 | ($0.17) |
| Operating Cash Flow | $695.5 million | $326.2 million | $325.2 million |
| Total Debt | $1,300.9 million | $1,430.0 million | $1,230.0 million |
| Working Capital | $3,279.2 million | $3,112.8 million | $2,611.5 million |
| Debt to Capital Ratio | 21.6% | 25.7% | 25.0% |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 14.3% to $57.1 billion, driven primarily by the Pharmaceutical Solutions segment (up 15% excluding sales to customers' warehouses). Growth was attributed to market expansion, new customers, and increased sales of generic drugs.
- Profitability: Net income rose 32.7% to $555.4 million. Segment operating profit increased to $1.15 billion, up from $888.7 million in 2002.
- Restructuring Credits: The company recorded a net credit of $27.1 million in 2003 related to restructuring activities, primarily due to the reversal of $22.3 million in customer settlement reserves within the Information Solutions segment and reversals of severance/exit costs in the Medical-Surgical segment.
- Discontinued Operations: A marketing fulfillment business was sold in 2002; results are presented as discontinued operations, resulting in a net loss of $6.7 million for the year.
Guidance, Outlook, Risks, and Contingencies
- Accounting Litigation: As of April 29, 2003, 91 lawsuits remain pending regarding the 1999 restatement of financial statements related to the former HBOC segment. The company states it is not feasible to predict the outcome or estimate potential losses, though a material adverse impact is possible.
- Customer Concentration: Sales to the ten largest customers accounted for approximately 50% of total revenues in 2003. The largest customer, Rite Aid Corporation, represented 12% of revenues. Default or reduced purchases by these customers pose a significant risk.
- Regulatory Environment: The company faces risks related to changes in U.S. healthcare reimbursement, privacy regulations (HIPAA), and potential FDA regulation of software products as medical devices.
- Environmental Liabilities: Estimated remediation costs for five former chemical sites are approximately $12 million, with an additional $1.3 million liability for Superfund sites.
- Stock-Based Compensation: The company noted that if it had adopted SFAS No. 123 (fair value method) for stock options, 2003 net income would have been lower ($399.1 million vs. $555.4 million reported).
Investor Verification Checklist
- Customer Concentration Risk: Verify the stability of relationships with the top 10 customers, specifically Rite Aid, which accounts for 12% of revenue.
- Litigation Exposure: Monitor the status of the 91 pending lawsuits regarding the 1999 accounting restatement and the potential for material settlements.
- Information Solutions Reserves: Review the remaining $86.9 million in customer settlement allowances and the progress of ongoing negotiations.
- Debt Covenants: Confirm continued compliance with the debt-to-capital ratio covenant (limit 56.5%; current 21.6%) to avoid acceleration of debt.
- Goodwill Impairment: Assess the annual goodwill impairment testing results, particularly given the significant goodwill balance of $1.35 billion.