McKesson Corporation — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2010. The filing also presents unaudited fourth-quarter results; fiscal 2009 is the principal annual comparison. McKesson operates Distribution Solutions, primarily pharmaceutical distribution, and Technology Solutions, healthcare software and services.
Financial performance and position
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $108.702 billion | $106.632 billion |
| Gross profit / margin | $5.676 billion / 5.22% | $5.378 billion / 5.04% |
| Operating income | $2.008 billion | $1.196 billion |
| Income before tax | $1.864 billion | $1.064 billion |
| Net income | $1.263 billion | $823 million |
| Diluted EPS | $4.62 | $2.95 |
| Operating cash flow | $2.316 billion | $1.351 billion |
| Cash and cash equivalents at year-end | $3.731 billion | $2.109 billion |
| Total debt, including capital leases | $2.297 billion | $2.512 billion |
| Working capital | $4.492 billion | $3.065 billion |
- Revenue grew 1.9%; Distribution Solutions generated $105.578 billion, about 97% of total revenue, while Technology Solutions generated $3.124 billion.
- Distribution Solutions gross margin increased to 4.00% from 3.82%; Technology Solutions gross margin was 46.64% versus 46.44%. Consolidated gross margin rose 18 basis points.
- FY2010 fourth-quarter revenue was $26.643 billion, gross profit $1.583 billion, net income $348 million and diluted EPS $1.26. The comparable FY2009 quarter reported revenue of $26.224 billion, gross profit of $1.465 billion, net income of $281 million and diluted EPS of $1.01.
- Net cash exceeded debt by $1.434 billion at year-end, compared with net debt of $403 million a year earlier. The debt-to-capital ratio was 23.4%, below the 56.5% covenant limit.
Material changes and notable items
- Net income increased 53% and diluted EPS increased from $2.95 to $4.62. The comparison was substantially affected by FY2009’s $493 million pretax AWP litigation charge ($311 million after tax); FY2010 included a net $20 million litigation credit.
- Management attributed improved FY2010 results to higher gross profit and lower operating expenses than the prior year, including the absence of the AWP charge. Higher-margin revenue mix and H1N1-related demand supported margins. Several customer losses in late 2009 partly offset revenue growth.
- Operating cash flow increased to $2.316 billion, supported chiefly by improved management of drafts and accounts payable; inventory growth and $350 million of private-payor AWP settlement payments were offsets.
- Cash generation and working capital improved, while debt declined following repayment of $215 million of 9.13% notes at maturity. The company repurchased $299 million of shares in FY2010 and paid $131 million in dividends.
- FY2009 results also included $63 million of investment impairment charges and a $24 million gain on sale of an investment. FY2010 included a $17 million gain on sale of its 50% interest in McKesson Logistics Solutions.
Outlook, risks and contingencies
- The filing refers investors to a May 3, 2010 Form 8-K for FY2011 outlook; it does not provide a clear numerical guidance value in the supplied text. Management expected operating cash flow, cash and available credit facilities to fund foreseeable requirements.
- The $1.1 billion accounts-receivable sales facility was due to expire in mid-May 2010; renewal was anticipated but not assured. New accounting rules could cause future facility activity to be reported as secured borrowing rather than a sale.
- Unresolved public-payor AWP litigation and related investigations remain significant uncertainties. The company had accrued $143 million for pending and expected public-payor claims, but stated it could not estimate remaining possible losses in unresolved proceedings. Private-payor settlement claims were concluded and the $350 million settlement paid.
- Other risks include substantial customer and receivable concentration (the ten largest customers accounted for 53% of revenue and 45% of receivables; CVS and Rite Aid accounted for 15% and 12% of revenue), pricing and reimbursement changes, generic-drug deflation, intense competition, healthcare regulation, technology integration and cybersecurity or system failures, and access to credit markets.
- Contractual obligations totaled $7.256 billion, including $2.296 billion of long-term debt, $3.272 billion of purchase obligations, and $363 million of operating leases. Uncertain tax positions of about $514 million, excluding interest and penalties, were not included in that total.
- Auditor Deloitte & Touche gave an unqualified opinion on the financial statements and internal controls; management and the auditor reported effective internal control over financial reporting at March 31, 2010.
Important facts for investors to verify
- Review the referenced May 3, 2010 Form 8-K for the actual FY2011 guidance and assumptions.
- Track the status, adequacy of reserves and potential outcomes of public-payor AWP claims and other legal proceedings.
- Assess customer concentration, the impact of customer losses, and changes in supplier compensation, drug pricing and reimbursement.
- Confirm renewal and accounting treatment of the receivables facility, and monitor working-capital movements, cash conversion and debt maturities.
- Evaluate whether FY2010 margin and earnings improvements are sustainable apart from flu-related demand, mix changes, litigation comparisons and asset-sale gains.