McKesson Corporation: Q3 Fiscal 2002 Summary (Ended Dec 31, 2001)
Business Context and Reporting Period
This Form 10-Q covers the quarter and nine months ended December 31, 2001 (Fiscal 2002). McKesson Corporation operates primarily through two segments: Supply Solutions (pharmaceutical and medical-surgical distribution) and Information Solutions (healthcare software and services). The reporting period reflects the adoption of SFAS No. 142, which discontinued the amortization of goodwill effective April 1, 2001.
Key Financial Metrics
| Metric (in millions) | Q3 2001 | Q3 2000 | 9 Months 2001 | 9 Months 2000 |
|---|---|---|---|---|
| Revenues | $13,196.7 | $11,017.8 | $37,009.9 | $30,600.9 |
| Gross Profit | $685.4 | $601.5 | $2,012.9 | $1,740.0 |
| Operating Income | $187.7 | $130.3 | $494.8 | $370.6 |
| Net Income | $108.8 | $1.7 | $293.2 | $127.2 |
| Diluted EPS | $0.37 | $0.01 | $1.00 | $0.45 |
| Cash from Operations (9mo) | $81.2 million (vs $44.8 million prior year) | |||
| Total Debt (Long-term + Current) | $1,211.8 million (Dec 31, 2001) | |||
| Cash and Equivalents | $284.9 million (Dec 31, 2001) |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 20% in the quarter and 21% year-to-date, driven primarily by the Supply Solutions segment (98% of total revenue). Growth was fueled by new distribution agreements, increased sales to customer warehouses, and an extra selling day in the quarter.
- Profitability Surge: Net income increased significantly, largely due to the elimination of goodwill amortization charges ($12.0 million after-tax in Q3 2000; $34.0 million after-tax for 9 months 2000) and a reduction in special charges compared to the prior year.
- Special Charges: Total pre-tax special charges dropped to $4.5 million in Q3 2001 from $101.7 million in Q3 2000. The prior year included a $98.9 million impairment of WebMD warrants. Current period charges included $4.0 million for a legal settlement and $16.9 million for restructuring.
- Working Capital: Cash flow from operations was impacted by a $1.15 billion increase in inventories and a $323 million increase in receivables, attributed to new distribution agreements and purchasing opportunities.
Guidance, Outlook, and Risks
- Restructuring: The company is executing a plan to close 23 and open 4 new distribution centers in the Medical-Surgical business, with completion expected by the end of fiscal 2003. Accrued restructuring liabilities stand at $56.1 million.
- Legal Proceedings: Significant litigation remains regarding the 1999 financial restatement of the former HBOC unit. As of January 2002, 87 lawsuits are pending. While the SEC investigation into McKesson was terminated, the company cannot predict the outcome or potential loss range of the remaining shareholder litigation.
- Antitrust: The company is a defendant in numerous antitrust actions regarding pharmaceutical pricing. While summary judgment was granted in federal individual actions, plaintiffs have appealed.
- Subsequent Events: In January 2002, the company issued $400 million in 7.75% notes due 2012 and acquired a national specialty pharmacy business for approximately $62 million.
Investor Verification Checklist
- Goodwill Accounting: Verify the impact of SFAS No. 142 on comparability with prior years; the discontinuation of goodwill amortization significantly boosts reported net income.
- Working Capital Trends: Monitor the sustainability of the $1.15 billion inventory build-up and its effect on future cash flows.
- Legal Exposure: Assess the potential financial impact of the 87 pending shareholder lawsuits related to the HBOC restatement, as the company states the loss range is indeterminable.
- Segment Performance: Confirm the margin expansion in the Supply Solutions segment (operating profit margin excluding warehouse sales rose to 2.39%) is sustainable.
- Debt Covenants: Review compliance with restrictive covenants regarding debt-to-capitalization ratios, especially given the recent $400 million debt issuance.