McKesson Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2009. McKesson’s fiscal year runs April 1–March 31, so this is fiscal 2010 Q2. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $27,130; +2% year over year | $53,787; +1% |
| Gross profit / margin | $1,335 / 4.92%, versus $1,302 / 4.90% | $2,638 / 4.90%, versus $2,570 / 4.82% |
| Operating income | $467, versus $381 | $926, versus $752 |
| Income before taxes | $424, +12% | $845, +15% |
| Net income | $301, versus $327 | $589, versus $562 |
| Diluted EPS | $1.11, versus $1.17 | $2.17, versus $2.00 |
| Operating cash flow | Not reported by quarter | $1,533, versus $548 |
Distribution Solutions generated over 97% of revenue. Its quarterly revenue increased 2%, while segment operating profit rose 2% to $415. Technology Solutions revenue grew 4% and operating profit rose 63% to $116; the segment benefited from improved margins and lower operating expenses. Consolidated operating expenses fell 6% in both the quarter and six-month period. The filing does not present a consolidated operating-margin measure.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $3,215, versus $2,109 at March 31; working capital was $3,510, versus $3,065.
- Current and long-term debt totaled approximately $2,511. Cash exceeded debt by $703, compared with net debt of $403 at March 31. Debt-to-capital was 27.2%, below the 56.5% covenant limit; the company reported compliance with its financial covenants.
- Six-month investing cash outflow was $192, including $189 of property and software expenditures. Financing cash outflow was $267, including $322 of share repurchases and $66 of dividends paid.
- Operating cash flow increased substantially, primarily from improved management of drafts and accounts payable and inventory. The company cautioned that operating cash flows can vary with the timing of customer receipts and vendor payments.
- The $1.1 billion accounts-receivable sales facility was renewed through May 2010; availability may be reduced by eligibility and concentration limits. The $1.3 billion revolving credit facility, expiring June 2012, had no borrowings outstanding. No commercial paper was outstanding at period end.
Material changes and unusual items
- Quarterly net income and diluted EPS declined despite higher pretax income. The prior-year quarter included $76 of tax benefits from the resolution of uncertain tax positions, including $65 that was noncash. The reported tax rate was 29.0% in the current quarter versus 13.7% a year earlier.
- Current-period operating results included a $20 litigation-reserve reversal credit. Prior-year other income included a $24 pretax gain from selling the Verispan investment, contributing to lower other income in the current period.
- Share repurchases reduced weighted-average diluted shares 3% year over year for both the quarter and six months. The company repurchased 8 million shares for $299 during the first six months and had $531 remaining under its $1.0 billion authorization.
- McQueary Brothers Drug Company was acquired for approximately $190 in fiscal 2009; about $126 of the purchase-price allocation was assigned to goodwill.
Outlook, risks and contingencies
- Management said operating cash generation and existing liquidity sources should be sufficient for capital expenditures, working capital and other cash needs, while noting that disruption in capital and credit markets could impair liquidity or raise borrowing costs.
- The filing refers to an updated fiscal 2010 outlook announced separately on October 27, 2009, but does not provide its numerical guidance.
- The expanded CDC H1N1 vaccine-distribution effort could involve as many as 150,000 sites. Pricing terms, vaccine supply and shipment volumes were unresolved; management warned results and financial condition could vary considerably. H1N1-related operating disruption was added as a risk factor.
- McKesson paid $295 into escrow on October 9 for the final installment of a $350 settlement of private-payor AWP litigation. Appeals challenging aspects of the settlement were pending. Public-payor AWP actions and other litigation remained unresolved; possible losses in those proceedings could not be estimated.
- Unrecognized tax benefits were $597 at September 30, of which $358 would reduce tax expense if recognized. Canadian transfer-pricing assessments totaled $55 and were being contested.
- Customer inventory-repurchase guarantees had a maximum stated amount of $110 and other customer guarantees $12; neither amount was accrued. Certain other guarantee commitments could not reasonably be estimated.
Key facts for investors to verify
- Review the separately filed October 27, 2009 outlook and its assumptions, particularly for the H1N1 program.
- Track cash conversion and working-capital movements, especially the effect of accounts payable and inventory on operating cash flow.
- Assess whether segment profit growth and Technology Solutions’ margin improvement are sustainable, including the effect of previously deferred revenue recognition.
- Monitor the AWP settlement appeals and remaining public-payor and other litigation, including any change in management’s ability to estimate exposure.
- Follow tax-audit developments, the Canadian assessments, debt covenants, and renewal or availability of the receivables facility.