Business Context and Reporting Period
Company: McKesson Corporation
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended March 31, 2009
Business Overview: McKesson is a Fortune 15 corporation providing supply, information, and care management products and services to the healthcare industry. Operations are conducted through two primary segments: Distribution Solutions (pharmaceutical and medical-surgical distribution) and Technology Solutions (healthcare software, automation, and services).
Key Financial Metrics
| Metric (in millions, except per share) | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Revenues | $106,632 | $101,703 |
| Gross Profit | $5,378 | $5,009 |
| Gross Margin | 5.04% | 4.93% |
| Operating Expenses | $4,182 | $3,531 |
| Net Income | $823 | $990 |
| Diluted EPS | $2.95 | $3.32 |
| Operating Cash Flow | $1,351 | $869 |
| Total Debt | $2,509 | $1,797 |
| Cash and Cash Equivalents | $2,109 | $1,362 |
| Working Capital | $3,065 | $2,438 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 4.8% to $106.6 billion, driven primarily by market growth in the Distribution Solutions segment (97% of total revenue) and acquisitions (OTN and McQueary Brothers).
- Profitability Decline: Net income decreased 17% to $823 million. This decline was primarily due to a $493 million pre-tax charge related to the settlement of Average Wholesale Price (AWP) litigation and a $63 million impairment charge on equity investments.
- Operating Expenses: Increased 18% to $4.2 billion. Excluding the AWP litigation charge, the increase was driven by costs supporting sales growth, acquisitions, and higher employee compensation.
- Segment Performance:
- Distribution Solutions: Operating profit decreased to $1.158 billion (from $1.483 billion) largely due to the AWP charge and investment impairments.
- Technology Solutions: Operating profit increased to $334 million (from $319 million) due to cost containment efforts.
- Liquidity: Cash and cash equivalents increased to $2.1 billion. The company issued $700 million in long-term debt in Q4 2009.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- AWP Litigation: Recorded a $493 million pre-tax charge ($311 million after-tax) to settle private party claims ($350 million) and reserve for public payor claims ($143 million).
- Investment Impairments: Recorded a $63 million pre-tax impairment on two equity-held investments (Parata and another entity).
- Gain on Sale: Recognized a $24 million pre-tax gain from the sale of a 42% interest in Verispan.
- Outlook: Specific 2010 guidance is referenced in a separate Form 8-K dated May 4, 2009. Management expects operating cash flow and existing credit facilities to be sufficient to fund capital requirements.
- Key Risks:
- Customer Concentration: Sales to the ten largest customers accounted for 52% of total revenues; the two largest (CVS Caremark and Rite Aid) accounted for 26%.
- Regulatory Environment: Risks related to healthcare reform, reimbursement rate changes (Medicaid/Medicare), and pedigree tracking regulations.
- Legal Proceedings: Ongoing public payor AWP litigation and other government investigations.
- Market Conditions: Volatility in global capital markets affecting liquidity and borrowing costs.
Investor Verification Checklist
- AWP Litigation Status: Verify the final court approval status of the $350 million private payor settlement and the potential for additional costs from public payor claims.
- Customer Concentration: Monitor the financial health and purchasing volumes of CVS Caremark and Rite Aid, which represent a significant portion of revenue and receivables.
- Investment Valuation: Review the fair value assessment of the Parata Systems investment following the $58 million impairment charge.
- Debt Covenants: Confirm continued compliance with the debt-to-capital ratio covenant (limit 56.5%; current ratio 28.9%).
- Dividend Policy: Note the increase in quarterly dividends to $0.12 per share and assess sustainability given the litigation charges.