10-QPeriod: Q2 FY2005

MCKESSON CORP Quarterly Report for Q2 Ended Sep 30, 2004

Filed November 2, 2004For Securities:MCK

Summary

McKesson Corporation reported a significant increase in revenue for the quarter and six months ended September 30, 2004, driven primarily by its Pharmaceutical Solutions segment, which accounted for over 94% of consolidated revenues. This growth was fueled by market expansion, new institutional customers, and a significant contract with the Department of Veterans Affairs. However, net income and diluted earnings per share saw a considerable decline compared to the prior year. This decrease is largely attributed to lower operating profit in the Pharmaceutical Solutions segment, stemming from a reduction in volume-weighted price increases for U.S. pharmaceutical products and changes in vendor product incentives. The company also highlighted progress in its Medical-Surgical Solutions segment, partly due to the acquisition of Moore Medical Corp., and a slight revenue decline in Provider Technologies. McKesson continues to manage its financial resources actively, with improved cash flow from operations and the establishment of a new $1.3 billion revolving credit facility. Despite revenue growth, investors should note the pressure on gross margins, particularly in the Pharmaceutical Solutions segment, and the ongoing efforts to restructure distribution agreements towards a fee-for-service model.

Key Highlights

  • 1Revenue increased by 19% year-over-year for the quarter ($19.9B) and 17% for the six months ($39.1B), primarily driven by the Pharmaceutical Solutions segment.
  • 2Net income decreased by 45% for the quarter ($86.1M) and 20% for the six months ($249.7M) compared to the prior year.
  • 3Diluted Earnings Per Share (EPS) decreased by 45% for the quarter ($0.29) and 20% for the six months ($0.84).
  • 4Gross profit margin declined significantly, particularly in the Pharmaceutical Solutions segment, due to lower manufacturer price increases and changes in vendor incentives.
  • 5McKesson entered into a new $1.3 billion five-year senior unsecured revolving credit facility in September 2004, terminating previous facilities.
  • 6The company acquired Moore Medical Corp. for approximately $37 million in April 2004, contributing to the Medical-Surgical Solutions segment.
  • 7Operating expenses as a percentage of revenue decreased due to leveraging fixed costs and productivity improvements, despite an overall increase in dollar amount.

Frequently Asked Questions

McKesson's revenue growth is primarily driven by its Pharmaceutical Solutions segment, which benefits from market growth, new institutional customers, and a significant contract with the Department of Veterans Affairs. The segment accounted for over 94% of consolidated revenues.

The decrease in net income and EPS is mainly due to lower operating profit in the Pharmaceutical Solutions segment. This was caused by factors such as reduced volume-weighted price increases for U.S. pharmaceutical products and shifts in vendor product incentives, which negatively impacted gross margins.

McKesson has improved its liquidity by generating positive cash flow from operations in the first half of 2005, compared to a cash usage in the prior year. Additionally, the company established a new, larger $1.3 billion revolving credit facility in September 2004, enhancing its financial flexibility. No amounts were outstanding under its credit facilities as of September 30, 2004.

The acquisition of Moore Medical Corp. for approximately $37 million in April 2004 has contributed to the revenue growth of the Medical-Surgical Solutions segment. This acquisition is part of McKesson's strategy to expand its presence in non-hospital provider settings.