01—Abstract
Summary
Summary of the 10-K filed June 1, 2001. Cited figures are marked; the original filing is the authoritative source.
McKesson HBOC's fiscal 2001 10-K (year ended March 31, 2001) shows a company whose core distribution business grew strongly while earnings were hit hard by unusual charges.
Revenue rose 14.5% to $42.0 billiona, driven by the Health Care Supply Management segment (98% of sales), which grew operating profit about 16% excluding unusual items and benefited from margin initiatives and higher sales to retail chains and institutions. Reported results were weak: the company posted a net loss of $48.3 million, or $(0.17) per share, versus net income of $723.7 million in fiscal 2000 (which included a large one-time gain on the Water Products sale). Pre-tax unusual items of $458.3 million, including restructuring of the former iMcKesson unit, $161.1 million in customer settlements in Health Care Information Technology, and $105.6 million in investment impairments, drove the loss.
Income from continuing operations before unusual items rose 7% to $283.0 millionb. The Health Care Information Technology segment deteriorated sharply, with revenue down 9% to $930 million and operating profit nearly eliminated ($0.5 million). Balance sheet and liquidity were stable but strained: total debt was $1.23 billion, stockholders' equity was $3.49 billion, and the net debt-to-capital ratio rose to 17.5% from 14.8%.
Credit ratings (BBB/Baa2) were on negative outlook. The most significant risk for investors is the accounting litigation stemming from the 1999 HBOC restatement: 85 lawsuits are pending, along with government investigations, and management says it cannot estimate the potential loss, which could be material. Customer concentration is also high, with the top ten customers at about 57%c of revenue and Rite Aid alone at about 16%.
02—Key points
Key Highlights
- Revenue grew 14.5% to $42.0 billion, led by the Health Care Supply Management segment, which accounts for about 98% of sales
- Reported net loss of $48.3 million ($0.17 per share) versus $723.7 million net income in fiscal 2000, which included a $515.9 million after-tax gain on the Water Products sale
- Pre-tax unusual items of $458.3 million, including $161.1 million in customer settlements, $116.2 million in goodwill write-downs tied to iMcKesson restructuring, and $105.6 million in investment impairments
- Income from continuing operations before unusual items rose 7% to $283.0 million, or about $1.00 per diluted share
- Health Care Information Technology segment revenue fell 9% to $930 million and operating profit fell to $0.5 million from $82.0 million
- Accounting litigation from the 1999 HBOC restatement includes 85 lawsuits and ongoing SEC and U.S. Attorney investigations; management cannot estimate potential losses, which could be material
- High customer concentration: ten largest customers were about 57% of revenue, and Rite Aid alone was about 16%; credit ratings are BBB/Baa2 on negative outlook
03—Questions
Frequently Asked Questions
Why did McKesson report a net loss in fiscal 2001 after a strong fiscal 2000?
Fiscal 2000 net income of $723.7 million included a one-time $515.9 million after-tax gain from selling the McKesson Water Products business. Fiscal 2001 had $458.3 million in pre-tax unusual charges, mainly restructuring and asset impairments tied to the iMcKesson unit, $161.1 million in Health Care Information Technology customer settlements, and investment write-downs. These resulted in a net loss of $48.3 million, or $(0.17) per share. Excluding these items, income from continuing operations rose 7%.
How is the core distribution business performing?
The Health Care Supply Management segment performed well. Revenue rose about 15% to $41.1 billion, and operating profit rose about 20% to $686.2 million before unusual items, supported by gross margin initiatives and productivity gains in U.S. pharmaceutical distribution, and growth in Canada. Growth was concentrated in retail chain and institutional customers, though sales growth to customers' warehouses added to revenue volatility and the medical management business weakened.
What is the biggest risk to investors from the litigation?
The accounting litigation is the largest uncertainty. Eighty-five lawsuits have been filed over the 1999 restatement of HBOC results, including a consolidated federal securities class action, state actions, and ERISA and derivative claims. Government investigations by the U.S. Attorney and the SEC are continuing, with one former officer having pleaded guilty and others indicted. Management says it cannot predict the outcome or estimate potential losses, and the range of possible outcomes could include substantial payments that could have a material adverse effect.
How is the company's financial position and liquidity?
Liquidity is adequate but leverage increased. Total debt was $1.23 billion, roughly flat with the prior year, and stockholders' equity was $3.49 billion. The net debt-to-net-capital ratio rose to 17.5% from 14.8%, mainly to fund internal growth. The company had $1.225 billion in available committed credit, no commercial paper outstanding, and was in compliance with its debt covenants. Its senior debt ratings are BBB, BBB and Baa2 and are on negative outlook. The company also repurchased $65.6 million of stock during the year.
What does the Health Care Information Technology segment's decline mean for the company?
The IT segment is a drag on results. Revenue fell 9% to $930 million, and operating profit collapsed to $0.5 million from $82.0 million, with an operating margin of about 0.1%. Drivers included the percentage-of-completion accounting that delays software revenue recognition, lower service and hardware sales, and higher customer-support spending. The company recorded a $161.1 million charge for customer settlements tied to pre-July 1999 contracts. Management has restructured the former iMcKesson business, but the segment's recovery path is unclear.
04—Continue