10-QPeriod: Q3 FY2002

MCKESSON CORP Quarterly Report for Q3 Ended Dec 31, 2001

Filed February 14, 2002For Securities:MCK

Summary

McKesson Corporation's (MCK) 10-Q filing for the period ending December 30, 2001, reveals a strong quarter with significant revenue growth and improved profitability, primarily driven by its Supply Solutions segment. The company reported a substantial increase in net income and earnings per share compared to the prior year, partly due to the adoption of SFAS No. 142 which eliminated goodwill amortization. While revenue growth was robust across both segments, the Supply Solutions segment, representing the vast majority of the company's revenue, showed particularly strong performance, driven by increased sales and improved operating margins. The Information Solutions segment also saw revenue growth, bolstered by new contract wins. Despite positive operational performance, investors should note the ongoing legal proceedings related to historical accounting irregularities, which, while not currently quantifiable in terms of potential loss, represent a significant contingent liability. The company also incurred restructuring charges related to optimizing its distribution network. Overall, the financial results indicate a company on a positive trajectory, characterized by expanding revenues and profitability, though the lingering effects of past accounting issues and ongoing restructuring efforts warrant continued monitoring.

Key Highlights

  • 1Revenues increased by 20% year-over-year to $13.2 billion for the quarter and 21% to $37.0 billion for the nine-month period, primarily driven by the Supply Solutions segment.
  • 2Net income significantly improved to $108.8 million ($0.37/share diluted) for the quarter and $293.2 million ($1.00/share diluted) for the nine months, compared to $1.7 million and $127.2 million respectively in the prior year.
  • 3The adoption of SFAS No. 142, discontinuing goodwill amortization, positively impacted reported earnings.
  • 4Supply Solutions segment operating profit increased 32% year-over-year, with operating margin expanding by 21 basis points.
  • 5Information Solutions segment revenue grew 10% year-over-year, with a significant increase in backlog driven by new contracts, including a large National Health Service of England and Wales contract.
  • 6The company incurred $4.5 million in pre-tax special charges during the quarter, a significant reduction from $101.7 million in the prior year's quarter, mainly related to restructuring expenses and a legal settlement.
  • 7McKesson completed a public offering of $400 million in unsecured notes in January 2002 to repay debt and for general corporate purposes.

Frequently Asked Questions

The primary driver of McKesson's revenue growth is its Supply Solutions segment, which accounts for approximately 98% of consolidated revenues. This segment experienced strong performance due to increased sales, particularly in Pharmaceutical Distribution & Services, driven by new distribution agreements, growth with major retail drug customers, and international expansion.

The adoption of SFAS No. 142, which requires the discontinuance of goodwill amortization, has had a positive impact on McKesson's reported net income and earnings per share. For the quarter and nine months ended December 31, 2001, the company no longer recorded goodwill amortization, which was $12.0 million and $34.0 million after-tax, respectively, in the prior year period. This significantly boosted reported profitability compared to the prior year.

McKesson continues to be involved in numerous lawsuits stemming from the accounting irregularities at its former HBOC subsidiary. While the company is actively defending itself and some claims have been dismissed, the SEC investigation into McKesson has been terminated. However, the company states it is not feasible to predict the outcome or estimate potential losses for these ongoing proceedings, and they could have a material adverse impact on financial position, results of operations, or cash flows.

The company incurred $4.5 million in pre-tax special charges during the quarter, a substantial decrease from $101.7 million in the prior year's quarter. These charges were primarily related to restructuring expenses for the Medical-Surgical business (including severance and facility closure costs), a legal settlement, and minor investment losses. The significant reduction in special charges compared to the prior year has contributed to improved profitability.