MCKESSON CORP annual report, FY2011

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McKesson Corporation — FY2011 Form 10-K Summary

Reporting period: Fiscal year ended March 31, 2011 (fiscal Q4 ended that date), compared primarily with the year ended March 31, 2010. The filing is not a 2010 calendar-year or 2010 Q4 report.

Business context

McKesson operates two segments: Distribution Solutions, which distributes pharmaceuticals and medical-surgical products and provides related services, and Technology Solutions, which sells healthcare software, automation, connectivity and services. Distribution Solutions generated 97% of FY2011 revenue.

Financial performance and liquidity

  • Revenue: $112.084 billion, up 3.1% from $108.702 billion. Distribution Solutions revenue was $108.889 billion; Technology Solutions revenue was $3.195 billion.
  • Profit and margins: Gross profit was $5.970 billion, up 5.2%; gross margin was 5.33%, versus 5.22%. Operating income was $1.821 billion, down from $2.008 billion. Continuing-operations income was $1.130 billion, versus $1.263 billion; net income was $1.202 billion, versus $1.263 billion.
  • EPS: Diluted EPS was $4.57, including $0.28 from the MAP divestiture gain; continuing-operations diluted EPS was $4.29, compared with $4.62 in FY2010. Repurchases reduced weighted-average diluted shares to 263 million from 273 million.
  • Cash flow: Operating cash flow was $2.338 billion, compared with $2.316 billion. Investing cash use was $624 million and financing cash use was $1.841 billion. Cash declined to $3.612 billion from $3.731 billion.
  • Debt and liquidity: Total debt, including capital leases, was $4.004 billion versus $2.297 billion; debt net of cash was $392 million, versus net cash of $1.434 billion. Working capital was $3.631 billion versus $4.492 billion. Debt-to-capital was 35.7%, below the 56.5% covenant ceiling; the company reported covenant compliance.
  • Fiscal Q4: Revenue was $28.853 billion versus $26.643 billion; gross profit was $1.751 billion versus $1.583 billion; net income was $422 million versus $348 million; diluted EPS was $1.62 versus $1.26.

Material changes and notable items

  • Revenue growth primarily reflected market growth in Distribution Solutions, including price and volume effects, a shift toward direct-store delivery and the December 2010 acquisition of US Oncology. US Oncology results were included from fiscal Q4.
  • US Oncology was acquired for approximately $2.1 billion, including $1.9 billion of assumed liabilities. The acquisition added oncology distribution and practice-management services. McKesson reported $52 million of net acquisition-related expenses and expected additional integration costs in FY2012.
  • FY2011 operating results included a $213 million pretax AWP-litigation charge ($149 million after tax) and a $72 million non-cash software impairment. A $51 million antitrust-settlement credit reduced cost of sales. The MAP sale produced a $72 million after-tax gain.
  • Distribution Solutions gross margin improved, reflecting higher buy margins and generic-drug sales, while Technology Solutions margin declined, including the software impairment. Consolidated operating income fell despite revenue and gross-profit growth, in part because of litigation and acquisition-related costs.
  • McKesson issued $1.7 billion of long-term notes in February 2011 and used proceeds primarily to refinance acquisition-related borrowing. It repurchased $2.050 billion of shares and paid $171 million of dividends during FY2011. The quarterly dividend was raised to $0.20 per share in April 2011.

Outlook, risks and contingencies

  • The filing refers investors to a May 3, 2011 Form 8-K for the FY2012 outlook; numerical guidance is not provided in this 10-K text. Management stated it expected cash from operations and existing liquidity sources to meet foreseeable funding needs, while cautioning that credit-market disruption could affect liquidity or borrowing costs.
  • AWP litigation remains a major uncertainty. The reserve for public-entity claims was $330 million at March 31, 2011; the company said ultimate costs could be higher or lower. Claims include governmental actions and class proceedings, and the filing says reasonably possible losses generally cannot be estimated clearly.
  • Other disclosed risks include dependence on large customers (the ten largest represented about 51% of revenue), manufacturer pricing and compensation terms, competition, healthcare reimbursement and regulation, technology execution and cybersecurity, acquisition integration, and foreign-exchange exposure.
  • The company disclosed $169 million of Canadian tax assessments relating to transfer pricing for 2003–2007 and ongoing IRS examinations. It reported a $485 million liability for uncertain tax positions, excluding interest and penalties. Final resolutions could change tax expense.
  • After year-end, an Arizona court enjoined the state health agency from pursuing a reported penalty proceeding; the state had sought $101 million in penalties and a $112 million assessment. This is a subsequent event, not a March 31 balance-sheet amount.
  • Management and Deloitte & Touche reported effective internal control over financial reporting as of March 31, 2011; the auditor issued an unqualified opinion on the financial statements.

Most important facts for investors to verify

  • Review the May 3, 2011 Form 8-K for actual FY2012 guidance and assumptions.
  • Track AWP litigation developments, reserve adequacy, settlement progress and any subsequent cash payments.
  • Assess US Oncology integration, acquisition-related costs, debt impact and contribution to segment growth.
  • Reconcile continuing-operations earnings with reported net income, including the AWP charge, software impairment, antitrust credit and MAP gain.
  • Monitor customer concentration, working-capital movements, debt maturities and renewal of the $1.35 billion receivables facility, which was due to expire in May 2011.