McKesson Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended March 31, 2013. The filing also reports fourth-quarter results; this is not a standalone calendar 2012 Q4 filing. McKesson operates Distribution Solutions, primarily pharmaceutical and medical-surgical distribution, and Technology Solutions, healthcare software and services.
Financial results and position
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $122.455 billion | $122.734 billion | Down 0.2% |
| Gross profit / margin | $6.984 billion / 5.70% | $6.567 billion / 5.35% | Up 6%; margin up 35 bps |
| Operating income | $2.315 billion | $2.149 billion | Up 8% |
| Income before tax | $1.919 billion | $1.919 billion | Flat |
| Net income | $1.338 billion | $1.403 billion | Down 5% |
| Diluted EPS | $5.59 | $5.59 | Flat |
| Operating cash flow | $2.483 billion | $2.950 billion | Down $467 million |
Gross margin improved mainly on higher generic-drug income, acquisitions, higher buy margin, antitrust settlement receipts, and a lower share of lower-margin warehouse sales; lower sell margin partly offset those gains. Net income declined despite higher gross profit, with a $191 million Nadro investment impairment, higher operating costs, and a 30.3% effective tax rate among the factors. Reduced diluted shares from repurchases helped support EPS.
Distribution Solutions generated $119.054 billion of revenue, essentially flat year over year, and $2.197 billion of segment operating profit, down 1%. Technology Solutions revenue rose 3% to $3.401 billion, while segment operating profit fell 18% to $297 million, reflecting higher expenses, product mix, and $46 million in software-related impairment charges.
At year-end, cash and equivalents were $2.456 billion, working capital $1.813 billion, total debt including capital leases $4.873 billion, and net debt $2.417 billion. Debt-to-capital was 40.8%, versus 36.8% a year earlier. Cash fell by $693 million. Investing used $2.209 billion, including $1.873 billion for acquisitions; financing used $956 million, including $1.214 billion for repurchases and $194 million for dividends. Management said operating cash flow and available credit sources were expected to meet foreseeable funding needs. The $1.35 billion receivables facility was due to expire in May 2013; renewal was anticipated, but not assured.
Material changes and unusual items
- Acquired PSS World Medical on February 22, 2013, for approximately $1.9 billion including assumed debt; the acquisition expanded Medical-Surgical distribution. Results since acquisition were not material to consolidated results.
- Recorded a $191 million pre-tax impairment on the 49% Nadro investment and committed to a plan to sell it, citing weaker market position and outlook.
- Recorded $46 million of Technology Solutions impairments: $36 million goodwill and $10 million capitalized software, following lower estimated revenue for a software product.
- Recorded a $40 million charge for the Quebec RAMQ matter; an April 19, 2013 settlement provided for payment of $40 million and release of RAMQ claims.
- Paid $483 million for AWP litigation settlements in FY2013; AWP litigation charges were $72 million, and the year-end reserve was $42 million.
- Recognized an $81 million pre-tax non-cash gain after acquiring the remaining interest in the corporate headquarters building.
- In April 2013, committed to sell International Technology and Hospital Automation; the filing says those businesses would be reported as discontinued operations beginning in FY2014.
Fourth-quarter FY2013 revenue was $30.620 billion, gross profit $1.996 billion, net income $259 million, and diluted EPS $1.10. The quarter included the Nadro and software impairment charges.
Outlook, commentary, and risks
The filing refers readers to a May 7, 2013 Form 8-K for the FY2014 outlook, but does not provide the outlook figures in the supplied text. Management expected modest pharmaceutical inventory inflation to continue, potentially increasing net LIFO expense in FY2014, and anticipated fewer branded-to-generic conversions than in recent years.
Key risks include substantial customer and receivables concentration (the ten largest customers represented about 51% of revenue; CVS about 17%), reimbursement and regulatory changes, generic-drug pricing and availability, competitive pressure, cybersecurity or systems disruption, and acquisition integration. Significant legal proceedings remain, and the company said it could not estimate reasonably possible losses for certain unresolved matters. Tax disputes include IRS assessments of $98 million and Canadian tax assessments totaling $199 million, primarily related to transfer pricing. The company was in compliance with its debt covenants at year-end.
Deloitte & Touche issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective as of March 31, 2013.
Important facts for investors to verify
- Review the May 7, 2013 Form 8-K for FY2014 guidance and assumptions.
- Track PSS World Medical integration, acquisition-related costs, and the resulting debt and cash-flow effects.
- Confirm the final sale terms and proceeds for Nadro, and the timing and financial impact of the planned Technology Solutions divestitures.
- Monitor remaining AWP claims, the $42 million reserve, and the resolution of the RAMQ settlement and other legal matters.
- Assess renewal of the receivables sales facility, customer concentration, and changes in working capital and net debt.