McKesson Corporation — Form 10-Q Summary
Business context and reporting period. This filing covers the quarter ended June 30, 2010, McKesson’s first quarter of fiscal 2011. McKesson operates through Distribution Solutions and Technology Solutions. The prior-year comparison is the quarter ended June 30, 2009. Unless otherwise noted, amounts are in millions of dollars.
Financial performance
| Metric | Quarter ended June 30, 2010 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $27,450 | $26,657 | +3% |
| Gross profit | $1,392 | $1,303 | +7% |
| Operating income | $474 | $459 | +$15 |
| Income before tax | $440 | $421 | +5% |
| Net income | $298 | $288 | +3% |
| Diluted EPS | $1.10 | $1.06 | +4% |
| Operating cash flow | $528 | $907 | −$379 |
- Gross margin increased to 5.07% from 4.89%. Distribution Solutions gross profit rose 12% to $1,067, while Technology Solutions gross profit declined 7% to $325.
- Distribution Solutions operating profit increased 17% to $505; Technology Solutions operating profit fell 38% to $64. Corporate expenses, net, increased to $86 from $64.
- Operating expenses rose 9% to $918, increasing to 3.34% of revenue from 3.17%. The reported tax rate was 32.3%, compared with 31.6%.
- Revenue growth was attributed mainly to market growth. U.S. pharmaceutical distribution revenue rose 2%; Canadian pharmaceutical distribution revenue rose 20%, or 5% on a constant-currency basis. Technology Solutions revenue rose 2%.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $3,265, versus $3,731 at March 31. Working capital was $3,901, down from $4,492.
- Long-term debt was $2,278, versus $2,293 at March 31. The filing reports debt net of cash of negative $987, indicating cash exceeded debt; the debt-to-capital ratio was 24.9%, up from 23.4%.
- Operating cash flow was $528, compared with $907 a year earlier. Investing activities used $79; financing activities used $903, including $1,016 of cash for share repurchases. Cash declined by $466 during the quarter.
- The company said operating cash, the receivables facility, revolving credit facility, and commercial paper were expected to fund working capital, capital expenditures, and other requirements. Its $1.3 billion revolving credit facility had no borrowings outstanding; the $1.35 billion receivables facility expires in May 2011 and also had no balance outstanding at quarter-end.
Material changes, outlook, and risks
- Unusual income item: Distribution Solutions results included $51 of proceeds from an antitrust class-action settlement, recorded as a reduction to cost of sales. Management said this contributed to higher gross margin and segment profit.
- Shareholder returns: McKesson repurchased 12.7 million shares for $1 billion under an accelerated repurchase program during the quarter; the program was completed in July, bringing total repurchases to 14.6 million shares at an average $68.66 per share. The quarterly dividend was raised from $0.12 to $0.18 per share. Future dividends remain at the Board’s discretion.
- Management outlook: Management expected PSIP expense of approximately $60 for fiscal 2011. No specific revenue or earnings guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Subsequent event: In July, McKesson sold McKesson Asia Pacific for approximately $116 cash, subject to working-capital adjustment. It anticipated a pretax gain of about $94 ($72 after tax), to be recorded as a discontinued operation in fiscal 2011’s second quarter.
- Legal and tax exposures: The company said it had adequate provisions but could not estimate possible losses in unresolved litigation; adverse outcomes could require substantial payments or operational changes. Matters include drug-pricing benchmark litigation and a government False Claims Act case. A California medical-information case was dismissed in July, with plaintiffs given time to amend. Canadian tax authorities had assessed $111, including interest, in a transfer-pricing dispute. Unrecognized tax benefits totaled $629, including $403 that would reduce tax expense if recognized.
- Other risks: Customer defaults or loss, healthcare regulation, drug pricing and generic deflation, technology implementation and security, competition, foreign exchange, tax disputes, litigation, and credit-market disruption were among the risks identified. The filing stated there were no material changes to previously disclosed risk factors or market-risk exposure.
- Adoption of new transfer-of-financial-assets guidance changed future receivables-facility transactions from sale accounting to secured-borrowing accounting; no facility balance was outstanding at quarter-end.
Important facts for investors to verify
- How much of the quarter’s Distribution Solutions margin and profit improvement depended on the nonrecurring $51 settlement, and how underlying margins trend thereafter.
- Whether weaker Technology Solutions profitability reflects planned investment or persistent pressure, including costs associated with the Horizon revenue-management solution.
- Drivers of the $379 year-over-year decline in operating cash flow and the working-capital and cash effects of the $1 billion repurchase and higher dividend.
- Developments in the AWP, False Claims Act, privacy, and Canadian tax matters, including potential financial exposure not estimable in the filing.
- Completion and final proceeds from the Asia Pacific sale, and the timing and reported impact of the anticipated gain.