McKesson 2005 Annual Report Download - page 41

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Net cash flow from operating activities was $1,538.4 million in 2005, compared with $595.2 million in 2004 and $773.4 million in 2003.
Net cash flow from operating activities in 2005 includes an $810.0 million non-cash after-tax charge for the Securities Litigation. We
anticipate paying this liability commencing in mid-2006. Net cash flow from operating activities improved in 2005 reflecting greater earnings,
excluding the Securities Litigation charge, as well as the evolving nature of our U.S. pharmaceutical distribution business. Notably, purchases
from certain of our suppliers are better aligned with customer demand and as a result, net financial inventory (inventory net of accounts
payable) has decreased. In addition, working capital levels benefited from favorable receivable terms on our new contract with the Department
of Veterans Affairs and improved accounts receivable management. Partially offsetting this working capital decrease is increased working
capital associated with revenue growth, including our new contract with the Department of Veterans Affairs. Included in our 2005 net cash
flow from operating activities is $40.0 million of cash provided to a customer in exchange for a note receivable as well as a cancellation of a
credit facility guarantee and other guarantee in favor of this customer. 2004 and 2003 net cash flow from operations primarily reflects greater
earnings, offset in part by net increases in working capital required to support our revenue growth.
Net cash used in investing activities was $355.3 million in 2005, compared with $299.7 million in 2004 and $664.0 million in 2003. The
increased use of cash in 2005 includes $108.9 million of business acquisition expenditures, primarily for the acquisition of MMC and the
increased investment in Nadro. Business acquisition expenditures in 2003 include $347.0 million paid for the acquisition of A.L.I. Capitalized
software expenditures decreased in 2005 compared to prior years primarily due to the completion of certain technology related initiatives. This
decrease was partially offset by a higher level of property acquisitions which primarily reflect improvements to our warehouse distribution and
information technology networks.
Financing activities utilized cash of $91.1 million, $109.5 million and $145.2 million in 2005, 2004 and 2003. Financing activities for 2005
include repayment of $268.3 million of long-term debt and an incremental $130.7 million from common stock issuances primarily resulting
from an increase in employees’ exercises of stock options. Financing activities for 2004 include $156.8 million of stock repurchases and the
receipt of $32.8 million pertaining to the collection of employee loans. 2003 financing activities include the repayment of $125.0 million of
term debt that had matured and $25.0 million of stock repurchases.
In 2004 and 2003, we repurchased 3.9 million and 0.9 million shares of our common stock for $115.1 million and $25.0 million. In 2004,
we effectively completed a $250.0 million repurchase program initiated in 2001, which resulted in the repurchase of a total of 8.3 million
shares of our common stock. Also in 2004, the Company’s Board of Directors approved a new program to repurchase up to $250.0 million of
additional common stock of the Company. Under this new program, we repurchased 1.4 million shares for $41.5 million in 2004. The
Company made no stock repurchases in 2005. Stock repurchases may be made in open market or private transactions.
Selected Measures of Liquidity and Capital Resources:
Working capital primarily includes receivables and inventories, net of drafts and accounts payable and deferred revenue. Our
Pharmaceutical Solutions segment requires a substantial investment in working capital that is susceptible to large variations during the year as
a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity, new customer build-up
requirements, the desired level of
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March 31,
(Dollars in millions) 2005 2004 2003
Cash, cash equivalents and marketable securities $1,809.3 $ 717.8 $533.5
Working capital 3,539.7 3,587.9 3,278.4
Debt net of cash, cash equivalents and marketable securities (598.8) 766.8 973.6
Debt to capital ratio (1) 18.7% 22.3% 25.0%
Net debt to net capital employed (2) (12.8)% 12.9%17.7%
Return on stockholders’ equity (3) (3.0)% 13.4% 13.2%
(1) Ratio is computed as total debt divided by total debt and stockholders’ equity.
(2) Ratio is computed as total debt, net of cash, cash equivalents and marketable securities (“net debt”), divided by net debt and
stockholders’ equity (“net capital employed”).
(3) Ratio is computed as net income (loss), divided by a five-quarter average of stockholders’ equity.