Business Context and Reporting Period
Company: McKesson Corporation (MCK)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended March 31, 2008
Business Overview: McKesson is a Fortune 18 corporation providing supply, information, and care management products and services to the healthcare industry. Operations are organized into two segments: Distribution Solutions (pharmaceutical and medical-surgical distribution) and Technology Solutions (healthcare software, automation, and services). The company operates primarily in North America with significant international presence in Canada, Europe, and Asia Pacific.
Key Financial Metrics
| Metric (in millions, except per share) | 2008 | 2007 | 2006 |
|---|---|---|---|
| Revenues | $101,703 | $92,977 | $86,983 |
| Gross Profit | $5,009 | $4,332 | $3,777 |
| Gross Margin | 4.93% | 4.66% | 4.34% |
| Net Income | $990 | $913 | $751 |
| Diluted EPS | $3.32 | $2.99 | $2.38 |
| Operating Cash Flow | $869 | $1,539 | $2,738 |
| Total Debt | $1,797 | $1,958 | $991 |
| Cash and Cash Equivalents | $1,362 | $1,954 | $2,139 |
| Working Capital | $2,438 | $2,730 | $3,527 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 9.4% to $101.7 billion, driven primarily by market growth in the Distribution Solutions segment (97% of total revenue) and the acquisition of Oncology Therapeutics Network (OTN) in late 2007.
- Profitability: Net income rose 8.4% to $990 million. Gross profit margin improved by 27 basis points to 4.93%, aided by a higher proportion of Technology Solutions products and improved margins in Distribution Solutions.
- Operating Expenses: Increased 15% to $3.5 billion, reflecting costs to support sales growth, business acquisitions, and higher share-based compensation ($91 million in 2008 vs. $60 million in 2007).
- Discontinued Operations: The company sold its Acute Care medical-surgical business in 2007, resulting in a $66 million after-tax loss in that year. In 2008, discontinued operations contributed a nominal $1 million profit.
- Cash Flow: Operating cash flow decreased significantly to $869 million (from $1.5 billion in 2007) primarily due to a $962 million release of restricted cash related to the settlement of the Consolidated Securities Litigation Action.
Guidance, Outlook, and Risks
- Dividend Policy: In April 2008, the Board increased the quarterly dividend from $0.06 to $0.12 per share.
- Share Repurchases: The company repurchased 28 million shares for $1.69 billion in 2008, fully utilizing a $1 billion plan and leaving $314 million remaining on a second plan. A new $1 billion repurchase plan was approved in April 2008.
- Acquisitions: In April 2008, McKesson agreed to acquire McQueary Brothers Drug Company for approximately $190 million, expected to close in Q1 2009.
- Legal and Regulatory Risks:
- Securities Litigation: The major Consolidated Securities Litigation Action was settled in 2006/2007. Remaining state actions (Green and Hall Family Investments) are on appeal.
- AWP Litigation: Class actions regarding Average Wholesale Price manipulation are ongoing, with a trial date set for January 2009 for one class.
- Government Investigations: The company is responding to various subpoenas and investigations regarding controlled substance reporting and billing practices.
- Market Risks: Exposure to inflation in branded pharmaceutical prices and deflation in generic prices. Significant concentration of credit risk with top 10 customers (53% of revenue).
Investor Verification Checklist
- Customer Concentration: Verify the financial stability of top customers (CVS Caremark and Rite Aid represent 27% of total revenue combined).
- Legal Reserves: Monitor the status of the Average Wholesale Price (AWP) litigation and potential impact on future earnings.
- Working Capital Trends: Analyze the decline in working capital and the impact of inventory management on future cash flows.
- Acquisition Integration: Assess the integration progress and financial contribution of recent acquisitions (OTN, Per-Se, McQueary Brothers).
- Dividend Sustainability: Confirm that the doubled dividend rate is sustainable given the company's capital allocation priorities and cash flow generation.