10-QPeriod: Q1 FY2002

MCKESSON CORP Quarterly Report for Q1 Ended Jun 30, 2001

Filed August 10, 2001For Securities:MCK

Summary

McKesson Corporation reported a strong quarter ending June 30, 2001, with revenues increasing by 20% year-over-year to $11.65 billion. Net income saw a significant jump to $105.4 million from $63.6 million in the prior year, translating to diluted earnings per share of $0.36, up from $0.22. This growth was primarily driven by the Supply Solutions segment, which represents the vast majority of the company's revenue and saw a 20% increase in top-line performance. The Information Solutions segment also demonstrated robust growth with an 8% revenue increase and a substantial improvement in operating profit, driven by higher-margin software sales. Despite the positive revenue and profit growth, the company experienced a substantial decrease in cash and equivalents, falling to $230.3 million from $433.7 million at the end of the previous quarter. This was largely due to a significant increase in inventories, driven by the implementation of new pharmaceutical distribution agreements and product sourcing activities, which consumed $397.6 million in operating cash flow. The company also increased its short-term borrowings to manage this working capital build-up, leading to a rise in the net debt-to-capital ratio. Investors should monitor inventory levels and cash flow generation closely.

Key Highlights

  • 1Revenues surged 20% to $11.65 billion for the quarter ended June 30, 2001.
  • 2Net income increased to $105.4 million, or $0.36 per diluted share, from $63.6 million, or $0.22 per diluted share, in the prior year.
  • 3Supply Solutions segment, comprising 98% of revenue, saw a 20% revenue increase, with pharmaceutical distribution growing 22%.
  • 4Information Solutions segment revenue grew 8%, with a significant improvement in operating profit margin due to higher-margin software sales.
  • 5Cash and equivalents decreased significantly to $230.3 million, primarily due to a large build-up in inventories.
  • 6The company adopted SFAS No. 142, discontinuing goodwill amortization effective April 1, 2001, impacting prior year comparable figures.
  • 7Short-term borrowings increased to $244.9 million to fund increased inventories.

Frequently Asked Questions

The primary driver of McKesson's revenue growth was the Supply Solutions segment, which accounted for 98% of consolidated revenues. This segment experienced a 20% increase, largely fueled by the Pharmaceutical Distribution & Services business, which grew by 22%.

The decrease in cash and equivalents was mainly due to a substantial build-up of inventory, which increased by $0.8 billion to $5.9 billion. This inventory increase was associated with the implementation of new pharmaceutical distribution agreements and product sourcing activities, which consumed significant operating cash flow.

McKesson adopted SFAS No. 142, which requires the discontinuation of goodwill amortization. This change was effective April 1, 2001. As a result, goodwill amortization, which was $11.1 million (pre-tax) in the prior year's comparable quarter, is no longer an expense, leading to higher reported net income and earnings per share compared to prior periods adjusted for this accounting change.

McKesson is involved in significant 'Accounting Litigation' stemming from improprieties at its subsidiary, HBOC. Several class-action lawsuits are ongoing, alleging breaches of fiduciary duties and securities law violations. The company is actively responding to these complaints and motions, but it deems it infeasible to predict the outcome or estimate potential losses, which could materially impact its financial position.