10-QPeriod: Q3 FY2005

MCKESSON CORP Quarterly Report for Q3 Ended Dec 31, 2004

Filed February 1, 2005For Securities:MCK

Summary

McKesson Corporation (MCK) reported a significant net loss of $665.4 million for the third quarter of fiscal year 2005, a substantial turnaround from the $120.2 million net income reported in the prior year's quarter. This loss was heavily influenced by a $1.2 billion pre-tax charge related to the settlement of securities litigation stemming from past accounting improprieties. Excluding this charge, operating expenses as a percentage of revenue decreased due to operational efficiencies and leveraging of infrastructure, particularly within the Pharmaceutical Solutions segment. Despite the headline net loss, the company's revenue grew by 14% to $20.8 billion in the quarter, driven by strong performance in its Pharmaceutical Solutions segment, which accounts for the vast majority of its sales. The company also saw improvements in cash flow from operations, providing $534.1 million in the nine months ended December 31, 2004, compared to a cash outflow in the prior year, indicating better working capital management and improved collections. Investors should note the substantial impact of litigation costs, while also recognizing the underlying revenue growth and operational improvements in its core distribution business.

Key Highlights

  • 1Reported a significant net loss of $665.4 million for the quarter ended December 31, 2004, a sharp decline from a net income of $120.2 million in the prior year's quarter.
  • 2Incurred a substantial $1.2 billion pre-tax charge related to the settlement of securities litigation, significantly impacting the quarter's profitability.
  • 3Quarterly revenues increased by 14% to $20.8 billion, driven by growth in the Pharmaceutical Solutions segment.
  • 4Operating expenses, excluding the securities litigation charge, decreased as a percentage of revenue, indicating improved operational efficiency.
  • 5Cash flow from operating activities improved significantly, generating $534.1 million for the nine months ended December 31, 2004, compared to a use of $242.1 million in the prior year.
  • 6The company entered into a new $1.3 billion senior unsecured revolving credit facility, enhancing its liquidity and financial flexibility.
  • 7The company is undergoing segment realignments, reporting three operating segments: Pharmaceutical Solutions, Medical-Surgical Solutions, and Provider Technologies.

Frequently Asked Questions

The primary driver of the substantial net loss of $665.4 million in the quarter ended December 31, 2004, was a significant pre-tax charge of $1.2 billion related to the settlement of securities litigation stemming from accounting improprieties announced in 1999.

McKesson Corporation reported a 14% increase in revenue for the quarter ended December 31, 2004, reaching $20.8 billion. This growth was largely fueled by its Pharmaceutical Solutions segment, which constitutes over 94% of consolidated revenues.

McKesson announced an agreement to settle the 'In re McKesson HBOC, Inc. Securities Litigation' for $960 million in cash. An additional reserve of $240 million was established for other related securities litigation. While the settlement is subject to court approval, the company has recorded the charges associated with these settlements.

McKesson demonstrated a significant improvement in its cash flow from operations, generating $534.1 million in the nine months ended December 31, 2004, a substantial increase from the $242.1 million outflow in the comparable prior-year period. This improvement is attributed to better receivables management, inventory control, and extended payment terms from manufacturers.