McKesson Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2012 (the second quarter and first half of McKesson’s fiscal 2013). Amounts are in millions, except per-share data.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $29,850, down 1% year over year | $60,648, up 1% |
| Gross profit / gross margin | $1,720 / 5.76% (5.45% prior year) | $3,320 / 5.47% (5.24% prior year) |
| Operating income | $611, versus $478 | $1,190, versus $950 |
| Net income | $401, versus $296 | $781, versus $582 |
| Diluted EPS | $1.67, versus $1.18 | $3.25, versus $2.31 |
| Operating cash flow | $459 for six months, versus $1,395 |
Distribution Solutions drove gross-profit growth. Its segment operating profit was $621 for the quarter, up 30%, and $1,121 for six months, up 18%. Technology Solutions operating profit declined 10% for the quarter and 9% for six months. Technology Solutions gross margin also fell year over year.
Cash, debt and liquidity
- Cash and cash equivalents were $2,831 at September 30, down from $3,149 at March 31. Working capital was $2,341, up from $1,917.
- Total debt was approximately $3,581, comprising $508 current and $3,073 long-term debt. Debt net of cash was $750; the reported debt-to-capital ratio was 31.7%.
- Investing activities used $351, including acquisitions, property acquisitions and capitalized software. Financing activities used $433; operating, investing and financing cash flows together reduced cash by $318.
- Operating cash flow included $438 of AWP litigation settlement payments. The company said operating cash, financial assets and available credit sources were expected to meet foreseeable funding needs. Its $1.3 billion revolving credit facility had no outstanding borrowings; the $1.35 billion receivables facility also had no balance at period-end.
Changes, unusual items and management commentary
- Revenue was broadly flat: pharmaceutical distribution faced brand-to-generic price deflation, customer losses and fewer sales days, partly offset by market growth, higher utilization, price increases and expanded or new business. Canadian revenue was also affected by currency movements and provincial generic-drug price reductions.
- Lower AWP litigation charges supported earnings: $44 in the quarter and $60 for six months, versus $118 in each comparable prior-year period. The six-month cash settlement payments were substantially higher than the charges recorded.
- Six-month results included an $81 pretax, $51 after-tax noncash gain from acquiring the remaining interest in the company headquarters building. Results also benefited from a $19 share of drug-manufacturer antitrust settlements recorded as a reduction to cost of sales. Share repurchases reduced diluted weighted-average shares to 240 million from 250 million for the quarter and 252 million for six months.
- McKesson completed its $1.2 billion accelerated share repurchase program, receiving 13.5 million shares at an average $89.10 per share, and had $1.0 billion of repurchase authorization remaining at September 30. Dividends declared were $0.20 per share for the quarter.
- On October 25, 2012, the company agreed to acquire PSS World Medical for $29 per share in cash; the transaction, including assumed debt, was valued at approximately $2.1 billion and remained subject to customary conditions, regulatory clearances and shareholder approval.
Risks, contingencies and outlook
- The AWP reserve was $75 at September 30, after $60 of charges and $438 of payments during the first half. The company said ultimate costs could exceed or fall below the reserve and it could not estimate a range of reasonably possible losses for many unresolved matters. Litigation includes state claims and other proceedings; some settlements and dismissals occurred, while other cases remained pending.
- Tax authorities had assessed $98 relating to IRS transfer-pricing matters and $169 relating to Canadian transfer pricing. McKesson disputed substantial portions; final resolution could increase or decrease tax expense. Unrecognized tax benefits were $523, and accrued interest on them was $121.
- Management provided no specific earnings or revenue guidance in the supplied filing text. It cautioned that interim results are not necessarily indicative of full-year results. Key stated risks include litigation outcomes, healthcare regulation, competition, customer or government-contract losses, technology and cybersecurity disruptions, foreign exchange, tax challenges, acquisition integration and access to credit markets.
Important facts for investors to verify
- Progress and ultimate cost of AWP claims, including whether the $75 reserve remains adequate and the cash impact of further settlements.
- Completion, regulatory approval, financing and integration of the proposed PSS World Medical acquisition.
- Underlying earnings after accounting for the headquarters gain, antitrust settlement proceeds, AWP charges and share repurchases.
- Cash-generation trends and working-capital movements, given the sharp year-over-year decline in first-half operating cash flow.
- Outcomes of the IRS and Canadian transfer-pricing disputes and any resulting tax expense or cash payments.