McKesson Corporation — Form 10-Q Summary
Business context and reporting period. This filing covers the quarter and nine months ended December 31, 2012, McKesson’s fiscal 2013 third quarter. The company operates through Distribution Solutions and Technology Solutions. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Quarter ended Dec. 31, 2012 | Quarter ended Dec. 31, 2011 | Nine months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Revenue | $31,187 | $30,839 | $91,835 | $91,035 |
| Gross profit | $1,668 | $1,566 | $4,988 | $4,722 |
| Gross margin | 5.35% | 5.08% | 5.43% | 5.19% |
| Operating income | $485 | $492 | $1,675 | $1,442 |
| Income before taxes | $436 | $426 | $1,533 | $1,262 |
| Net income | $298 | $300 | $1,079 | $882 |
| Diluted EPS | $1.24 | $1.20 | $4.49 | $3.51 |
- Quarterly revenue increased 1%; nine-month revenue also increased 1%. Distribution Solutions generated about 97% of revenue. Quarterly segment revenue was $30.4 billion for Distribution Solutions and $826 million for Technology Solutions.
- Quarterly net income declined 1% despite a 3% increase in diluted EPS; the lower diluted share count, principally reflecting repurchases, supported EPS. Nine-month net income rose 22% and diluted EPS rose 28%.
- Distribution Solutions’ nine-month operating profit increased 13% to $1.646 billion. Technology Solutions’ operating profit declined 3% to $269 million.
- Operating cash flow was $276 million for the first nine months, versus $1.716 billion a year earlier. The period included $470 million of AWP litigation settlement payments and working-capital movements, including a $1.081 billion cash outflow from accounts payable.
- Investing cash outflow was $784 million, including $577 million for acquisitions. Financing provided $82 million, including $892 million of long-term debt proceeds, $1.125 billion of short-term borrowing proceeds and $1.525 billion of short-term borrowing repayments.
Financial position and liquidity
- At December 31, 2012, cash and equivalents were $2.726 billion, down from $3.149 billion at March 31, 2012. Working capital was $3.231 billion, up from $1.917 billion.
- Total debt was approximately $4.479 billion: $506 million current and $3.973 billion long-term. Net debt was $1.753 billion, compared with $831 million at March 31. Debt-to-capital was 36.9%; net debt-to-net capital employed was 18.6%, versus 10.8%.
- The company issued $500 million of 0.95% notes due 2015 and $400 million of 2.70% notes due 2022. It also had a $1.3 billion revolving credit facility with no balance outstanding and a $1.35 billion receivables facility that expires in May 2013.
- A $2.1 billion unsecured bridge loan arranged for the proposed PSS World Medical acquisition had not been drawn at quarter-end. The company said it expected to refinance all or part of any draw with longer-term debt before the bridge loan’s one-year term ends.
- Management said available cash, operating cash flow and credit sources were expected to be sufficient for anticipated requirements. It cautioned that capital-market disruption could impair liquidity or raise borrowing costs. The company was in compliance with its debt covenants.
Material changes, outlook and risks
- Management attributed Distribution Solutions growth and improved gross margin primarily to market growth, greater generic-drug sales, improved buy margins and the Katz Assets acquisition; these factors were partly offset by brand-to-generic price deflation, customer losses and reduced sell margins. Antitrust settlements contributed $27 million to nine-month gross profit.
- The nine-month results included an $81 million non-cash, pre-tax gain from acquiring the remaining 50% interest in the corporate headquarters building. They also included a $40 million charge for potential legal claims arising from a Quebec government investigation. The prior-year period included $42 million of Technology Solutions product-alignment charges.
- AWP litigation charges were $60 million for the first nine months, compared with $145 million a year earlier. After $470 million of payments, the AWP reserve was $43 million at December 31. The company noted ultimate costs could be higher or lower than the reserve and generally could not estimate losses for unresolved proceedings.
- Tax matters include IRS assessments of $98 million and Canadian transfer-pricing assessments totaling $169 million, which the company is contesting. Unrecognized tax benefits were $541 million; audit outcomes and statute expirations could reduce them by up to $170 million over the next 12 months, subject to change.
- The proposed $2.1 billion PSS World Medical acquisition remained subject to shareholder approval, scheduled for February 19, 2013. A putative shareholder suit sought to block the transaction. The company also disclosed a Department of Justice investigation concerning distribution procedures for the Vaccines for Children Program.
- No specific earnings or revenue guidance was provided in the filing. Management identified risks including litigation outcomes, healthcare regulation, customer concentration and defaults, technology execution and cybersecurity, acquisition integration, tax disputes, foreign exchange, and access to credit.
Important facts for investors to verify
- Whether the PSS World Medical acquisition closed as planned, its final financing mix, and the resulting debt and integration costs.
- Subsequent developments and cash payments in AWP litigation, the Quebec matter, tax assessments and the federal investigation.
- Whether operating cash flow recovered after the unusually large litigation payments and working-capital outflows.
- The renewal or replacement of the receivables facility, which was scheduled to expire in May 2013.
- Whether Distribution Solutions’ margin gains persisted and whether Technology Solutions improved after product realignment and changes in business mix.