McKesson Corporation — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2011 (fiscal Q1 2012); compared with the quarter ended June 30, 2010. Unaudited results. McKesson operates Distribution Solutions and Technology Solutions.
Key financial results
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $29.980 billion | $27.450 billion | +9% |
| Gross profit | $1.509 billion | $1.392 billion | +8% |
| Gross margin | 5.03% | 5.07% | -4 basis points |
| Operating income | $472 million | $474 million | - |
| Income before taxes | $416 million | $440 million | -5% |
| Net income | $286 million | $298 million | -4% |
| Diluted EPS | $1.13 | $1.10 | +3% |
| Operating cash flow | $326 million | $528 million | Lower |
Distribution Solutions generated $29.178 billion in revenue and $475 million in segment operating profit; revenue rose 9%, while segment profit fell 6%. Technology Solutions revenue was $802 million, up 6%, and segment operating profit increased to $100 million from $64 million. Consolidated operating expenses rose 13% to $1.037 billion. The reported effective tax rate was 31.3%, versus 32.3%.
Financial position, liquidity and capital allocation
- At June 30, cash and cash equivalents were $3.116 billion, down from $3.612 billion at March 31; working capital was $3.232 billion, down from $3.631 billion.
- Total debt was approximately $3.989 billion ($414 million current and $3.575 billion long-term); debt net of cash was $873 million. The debt-to-capital ratio was 36.6%, compared with a 56.5% covenant maximum. The company reported compliance with covenants.
- Cash decreased by $496 million during the quarter. Investing activities used $154 million, including $105 million for a small acquisition; financing activities used $668 million, including $672 million for share repurchases and $47 million of dividends paid.
- Available credit included a $1.35 billion accounts-receivable facility, renewed through May 2012, and a $1.3 billion revolving credit facility expiring June 2012; neither had borrowings outstanding at quarter-end. Approximately $1.9 billion of cash was held outside the United States, with potential tax costs if repatriated.
- The quarterly dividend was raised from $0.18 to $0.20 per share. A $650 million accelerated share-repurchase program was underway; 6.7 million shares had been received by June 30, and final shares and settlement price remained undetermined. The board’s authorization had $850 million remaining.
Changes, outlook and material risks
- Revenue growth reflected market growth in Distribution Solutions and the US Oncology acquisition, completed December 2010. The acquisition expanded specialty drug distribution and added oncology practice-management services; its results were included in Distribution Solutions.
- Profit comparisons were affected by a $51 million antitrust settlement benefit recorded in the prior-year quarter as a reduction of cost of sales. Distribution gross margin also faced lower sell margins; higher-margin generics and US Oncology partly offset the pressure. Technology Solutions margins improved.
- Interest expense increased to $64 million from $43 million, primarily because of $1.7 billion of debt issued in February 2011 in connection with the US Oncology acquisition. Share repurchases reduced diluted weighted-average shares to 254 million from 272 million, supporting EPS despite lower net income.
- Management said operating cash flow, cash, credit facilities and access to capital markets were expected to be sufficient for foreseeable funding needs. It also cautioned that credit-market volatility could impair liquidity or raise borrowing costs. No specific earnings or revenue guidance was provided.
- Significant contingencies include ongoing Average Wholesale Price litigation, with multiple state and public-payer claims; the company generally could not estimate reasonably possible losses. The filing warns adverse outcomes or settlements could materially affect financial position or results. Certain AWP case trials were scheduled for late 2011 and 2012.
- Tax matters include $642 million of unrecognized tax benefits and IRS assessments of $98 million, disputed by the company; Canadian transfer-pricing assessments totaled $169 million, most of which had been paid to stop interest accrual. The company believed its tax positions were supportable but said final resolution could change tax expense.
- Other risks identified include healthcare regulation, competition, customer concentration and defaults, technology implementation and cybersecurity/service continuity, acquisition integration, foreign currency, tax challenges, litigation, and access to credit. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Distribution Solutions can sustain revenue growth while restoring gross and operating margins, particularly after the prior-year $51 million settlement benefit.
- US Oncology’s ongoing contribution, integration costs, acquired-asset valuations, and the finalization of purchase accounting expected by the third quarter of fiscal 2012.
- Cash conversion and working-capital movements, including the effects of receivables, inventory and supplier payables on operating cash flow.
- Completion and final pricing of the $650 million share-repurchase program, remaining authorization, and the effect of repurchases and dividends on cash and leverage.
- Developments in AWP litigation and tax examinations, including any change in estimated exposure, provisions or potential financial impact.
- Renewal or replacement of credit facilities approaching expiry, covenant headroom, and any material changes in liquidity or borrowing costs.