McKesson 2005 Annual Report Download - page 26

McKESSON CORPORATION
FINANCIAL REVIEW
Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition
GENERAL
Management’s discussion and analysis of results of operations and financial condition, referred to as the Financial Review, is intended to
assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position
of the Company together with its subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial
statements and accompanying financial notes. The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all
references in this document to a particular year shall mean the Company’s fiscal year.
We conduct our business through three operating segments: Pharmaceutical Solutions, Medical-Surgical Solutions and Provider
Technologies. See Financial Note 1 to the accompanying consolidated financial statements, “Significant Accounting Policies,” for a description
of these segments.
RESULTS OF OPERATIONS
Overview:
Revenues increased 16% to $80.5 billion in 2005 and 22% to $69.5 billion in 2004 primarily reflecting growth in our Pharmaceutical
Solutions segment which is attributable to market growth rates as well as new customers and expanded business with certain existing
customers.
Gross profit increased 7% to $3.5 billion and 5% to $3.2 billion in 2005 and 2004. As a percentage of revenues, gross profit declined 37 and
76 basis points in 2005 and 2004. Declines in our gross profit margins primarily reflect declines in our sell margin due to a shift in customer
mix and competitive pressures. Additionally, declines in our gross profit margin in 2004 were also due to a higher proportion of our revenue
derived from our Pharmaceutical Solutions segment, which has lower margins relative to our other segments. The Pharmaceutical Solutions
segment’s gross profit margin was impacted by declines in our sell margin due to the competitive environment in which we operate, as well as
pressure on its buy side margin and, for 2004, by a higher proportion of sales to customers’ warehouses which have lower margins. In addition,
gross profit was impacted by a number of significant items, which are discussed in further detail, including a $51.0 million provision for
expected losses on five multi-year contracts in our Provider Technologies segment’s international business in 2003.
Operating expenses were $3.7 billion, $2.3 billion and $2.2 billion in 2005, 2004 and 2003. Operating expenses for 2005 include a
$1.2 billion pre-tax charge relating to our Securities Litigation as disclosed on page 33 of this Financial Review. As a percentage of revenues,
operating expenses were 4.54% (3.05% without the Securities Litigation charge), 3.26% and 3.80% in 2005, 2004 and 2003. Excluding the
Securities Litigation charge, operating expenses as a percentage of revenues have declined over the last two years, mainly due to leveraging of
our fixed cost infrastructure and productivity improvements in back-office and field operations, as well as in 2004, due to a higher proportion
of sales to customers’ warehouses which have lower operating expense margins. Increases in operating expense dollars were primarily due to
the Securities Litigation charge as well as additional expenses incurred to support our sales volume growth. Operating expenses were also
impacted by a number of significant items which are discussed in further detail, including a $66.4 million credit pertaining to the reversal of a
portion of customer settlement reserves within our Provider Technologies segment in 2004.
Income (loss) before income taxes was ($239.8) million, $911.4 million and $851.4 million in 2005, 2004 and 2003, reflecting the above
noted factors. On an operating segment basis, results for 2005 primarily reflect revenue growth and a decline in gross profit margins in our
Pharmaceutical Solutions segment as well as a decrease in the Provider Technologies segment operating profit. Results for 2004 reflect
revenue growth and a decrease in gross
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Years Ended March 31,
(In millions, except per share data) 2005 2004 2003
Revenues $80,514.6 $69,506.1 $57,120.8
Income (Loss) from Continuing Operations Before Income Taxes (239.8) 911.4 851.4
Net Income (Loss) (156.7) 646.5 555.4
Diluted Earnings (Loss) Per Share $ (0.53) $ 2.19 $ 1.88