McKesson Corporation: Q3 2009 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for McKesson Corporation for the quarter and nine months ended December 31, 2008 (Fiscal Q3 2009). McKesson operates in two primary segments: Distribution Solutions (pharmaceutical, medical-surgical, and health/beauty distribution) and Technology Solutions (software and services for healthcare providers). The company is a large accelerated filer incorporated in Delaware.
Key Financial Metrics
| Metric | Q3 2009 (9 mos) | Q3 2008 (9 mos) |
|---|---|---|
| Revenues | $27.13 billion ($80.41 billion) | $26.49 billion ($75.47 billion) |
| Net Income (Loss) | $(20) million ($542 million) | $201 million ($683 million) |
| Diluted EPS | $(0.07) ($1.94) | $0.68 ($2.28) |
| Gross Profit Margin | 4.95% (4.87%) | 4.54% (4.72%) |
| Operating Cash Flow | N/A ($734 million) | N/A ($(47) million) |
| Cash and Equivalents | $1.175 billion | $1.362 billion |
| Long-Term Debt | $1.795 billion | $1.795 billion |
| Working Capital | $2.315 billion | $2.438 billion |
Note: Nine-month figures are in parentheses.
Material Changes vs. Prior Period
- Net Loss in Q3: The company reported a net loss of $20 million for the quarter, a reversal from the $201 million net income in the prior year quarter. This was primarily driven by a $493 million pre-tax litigation charge related to the Average Wholesale Price (AWP) settlement.
- Revenue Growth: Revenues increased 2% in the quarter and 7% for the nine-month period, driven by growth in the Distribution Solutions segment, acquisitions (McQueary Brothers and OTN), and market growth.
- Operating Expenses: Total operating expenses increased 52% in the quarter and 25% for the nine months, largely due to the AWP litigation charge and costs associated with business acquisitions.
- Cash Flow: Operating cash flow for the nine months improved significantly to $734 million compared to a utilization of $47 million in the prior year, aided by the acceleration of receivables sales and the absence of the prior year's $962 million securities litigation settlement payment.
Guidance, Outlook, and Risks
- AWP Litigation: McKesson settled private party AWP claims for $350 million and established a $143 million reserve for pending public entity claims. Management does not expect financing difficulties for these payments but notes that ultimate costs could vary.
- Goodwill Impairment Risk: Due to a significant decline in stock price and market capitalization, management noted that while no impairment was identified as of December 31, 2008, there is a possibility that fair value estimates in the fourth quarter could result in a non-cash impairment charge.
- Capital Markets: The company highlighted risks associated with global capital market volatility, which could affect the cost and availability of credit for the company, its customers, and suppliers.
- Dividends: The Board increased the quarterly dividend to $0.12 per share in April 2008.
- Share Repurchases: The company repurchased 6 million shares for $334 million in the first nine months of 2009. As of December 31, 2008, $980 million remained available under the April 2008 repurchase plan.
Investor Verification Checklist
- AWP Settlement Finality: Verify the status of court approvals for the $350 million private party settlement and monitor developments in the public entity actions for which a $143 million reserve was set.
- Goodwill Valuation: Monitor the fourth-quarter annual impairment testing results given the decline in market capitalization relative to book value.
- Liquidity Position: Confirm the utilization of the $1.0 billion accounts receivable sales facility and the $1.3 billion revolving credit facility in light of credit market disruptions.
- Segment Margins: Track the sustainability of the improved gross profit margins in the Distribution Solutions segment, noting the impact of generic drug sales and LIFO credits.
- Acquisition Integration: Assess the financial integration and synergy realization of the McQueary Brothers and Oncology Therapeutics Network (OTN) acquisitions.