McKesson Corporation 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for McKesson Corporation for the quarter and nine months ended December 31, 2006. The Company operates in three primary segments: Pharmaceutical Solutions, Medical-Surgical Solutions, and Provider Technologies. The fiscal year ends March 31.
Key Financial Metrics
| Metric (in millions) | Quarter Ended Dec 31, 2006 | Nine Months Ended Dec 31, 2006 |
|---|---|---|
| Revenues | $23,111 | $68,812 |
| Gross Profit | $1,061 | $3,081 |
| Operating Income | $318 | $896 |
| Net Income | $243 | $656 |
| Diluted EPS | $0.80 | $2.15 |
| Cash from Operating Activities | N/A | $555 |
| Cash and Cash Equivalents | $2,013 | $2,013 |
| Working Capital | $3,578 | $3,578 |
| Total Debt (Current + Long-Term) | $982 | $982 |
Margins: Gross profit margin was 4.59% for the quarter and 4.48% for the nine-month period. Operating margin was approximately 1.38% for the quarter and 1.30% for the nine-month period.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 4% for the quarter and 7% for the nine months compared to the prior year, driven primarily by the Pharmaceutical Solutions segment (95% of total revenue).
- Profitability: Net income increased 26% for the quarter and 24% for the nine months. Diluted EPS increased 31% and 27%, respectively.
- Discontinued Operations: The nine-month period included a $55 million after-tax loss from discontinued operations, primarily due to the disposition of the Acute Care business (a $61 million after-tax loss including a $79 million goodwill write-off).
- Securities Litigation: The nine-month period included a net pre-tax credit of $6 million related to securities litigation, compared to a $53 million charge in the prior year. This was largely due to an $83 million income tax credit received in Q2 2007 regarding the deductibility of the $960 million settlement payment.
- Share-Based Compensation: Adoption of SFAS No. 123(R) resulted in increased operating expenses. Pre-tax share-based compensation expense was $15 million for the quarter and $39 million for the nine months.
Guidance, Outlook, and Risks
- Acquisitions: The Company acquired Per-Se Technologies (Jan 2007, ~$1.8 billion), Sterling Medical Services, HealthCom Partners, and RelayHealth in Q1 2007. It also invested in Parata Systems, LLC.
- Divestitures: Sold the Acute Care business to Owens & Minor for ~$160 million net cash proceeds and Pharmaceutical Buyers Inc. for $10 million.
- Capital Allocation: The Company repurchased 15 million shares for $753 million during the nine-month period. $247 million remains available under current repurchase plans.
- Liquidity: The Company maintains a $1.3 billion revolving credit facility and a $700 million accounts receivable sales facility. A new $1.8 billion interim credit facility was established for the Per-Se acquisition.
- Risks: Key risks include the resolution of pending securities litigation, changes in healthcare regulations, competition, and the integration of acquisitions. The Company notes that the ultimate cost of litigation could impact earnings.
Investor Verification Checklist
- Verify the impact of the $79 million non-tax deductible goodwill write-off on the Acute Care divestiture.
- Confirm the status of the $984 million securities litigation accrual and the timing of remaining distributions from the escrow account.
- Monitor the integration and financial contribution of the Per-Se Technologies acquisition.
- Review the Company's ability to maintain gross profit margins given the shift in product mix (e.g., generic drugs vs. branded) and customer mix.
- Assess the cash flow impact of increased inventory levels required to support growth versus the timing of customer receipts.