McKesson Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended June 30, 2014; comparisons are with the quarter ended June 30, 2013. All amounts are in U.S. dollars unless noted. The quarter’s results include Celesio, acquired in February 2014, so year-over-year comparisons reflect a major change in company scope.
Financial performance
| Metric | Quarter ended June 30, 2014 | Prior-year quarter |
|---|---|---|
| Revenue | $44.058 billion | $32.239 billion |
| Gross profit / margin | $2.797 billion / 6.35% | $1.930 billion / 5.99% |
| Operating income | $688 million | $655 million |
| Income from continuing operations | $425 million | $428 million |
| Net income attributable to McKesson | $403 million | $424 million |
| Diluted earnings per share | $1.72 | $1.83 |
| Cash from operating activities | $182 million | $716 million |
Revenue rose 37%, primarily from Celesio and market growth. Gross profit increased 45%, with gross margin up 36 basis points; management cited Celesio and North American distribution growth. The quarter included a $98 million LIFO inventory charge, compared with none a year earlier. Higher operating and interest expenses largely offset higher gross profit: interest expense rose to $101 million from $59 million, mainly because of Celesio-related debt. Continuing-operations income was nearly flat; net income attributable to McKesson fell 5%, and diluted EPS fell 6%.
- Segments: Distribution Solutions revenue was $43.290 billion, including $7.607 billion from international pharmaceutical distribution, principally Celesio. North American pharmaceutical distribution revenue increased 14%. Technology Solutions revenue decreased 8% to $768 million; segment operating profit decreased to $68 million from $127 million.
- Cash flow and investment: Operating cash flow was $182 million, down from $716 million, with working-capital movements including cash outflows from receivables and inventory. Investing activities used $112 million; financing activities used $167 million. Cash declined by $88 million to $4.105 billion.
- Balance sheet and liquidity: At June 30, cash was $4.105 billion, working capital $4.728 billion, and debt net of cash $6.568 billion. Reported debt-to-capital was 54.3%, versus 55.7% at March 31. Current assets were $33.973 billion and current liabilities $29.245 billion. The company reported covenant compliance and said available cash, operating cash flow and credit sources should meet expected requirements.
- Returns to shareholders: Quarterly dividend declared was $0.24 per share. No shares were repurchased under the announced program during the quarter; $340 million remained authorized.
Material changes and significant items
- Celesio acquisition drove much of the revenue, debt, expense and international expansion. McKesson owned approximately 75.9% of Celesio at June 30. A domination and profit-and-loss transfer agreement was approved by Celesio shareholders on July 15, after quarter-end; it remained subject to registration, and McKesson anticipated effectiveness by year-end. Under the agreement, McKesson would receive Celesio’s annual profits and compensate annual losses, and minority shareholders would receive specified compensation and put rights.
- Acquisition-related expenses and adjustments were $49 million, versus $13 million. Acquired-intangible amortization was $130 million, up from $71 million.
- A $34 million noncash pretax charge ($27 million after tax) related primarily to depreciation and amortization for the retained UK workforce business, which the company planned to wind down in 2016. The International Technology software business was sold July 1, 2014; no material gain or loss was anticipated.
- Loss from discontinued operations was $14 million after tax, versus $4 million. A $15 million pretax discontinued-operations loss included a $1 million tax benefit.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management expected liquidity sources to be sufficient for foreseeable requirements and anticipated renewing its $1.35 billion accounts-receivable sales facility before its November 2014 expiration. The filing cautions that results are subject to risks including acquisition integration, healthcare regulation, competition, customer or supplier disruption, foreign-market conditions, technology and cybersecurity issues, tax matters, litigation, and access to credit markets.
Contingencies include a $261 million Canadian tax reassessment related to transfer pricing for 2003–2010, which McKesson was appealing; the company stated that ultimate resolution could increase or decrease tax expense. Unrecognized tax benefits totaled $582 million, and up to $158 million could potentially be reduced within the next 12 months through audit resolutions or statute expirations. The filing also describes controlled-substance distribution investigations and other litigation; for unresolved matters, the company generally could not estimate a reasonably possible loss range. The company stated that disclosure controls were effective and that no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- How much of reported growth and profitability reflects Celesio versus underlying comparable operations, and how integration costs and acquired-intangible amortization evolve.
- Whether working-capital cash demands normalize and whether the accounts-receivable facility is renewed before expiration.
- The timing and financial implications of the Celesio agreement, including loss-compensation obligations and minority-shareholder put rights.
- Developments in the Canadian tax appeals, controlled-substance investigations and other legal proceedings, including any changes in estimated exposure.
- Whether Technology Solutions performance, the UK workforce wind-down and discontinued-business disposals differ from management’s expectations.