McKesson Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended December 31, 2011 (fiscal 2012). Dollar amounts are in millions unless stated otherwise.
Business context and results
McKesson operates Distribution Solutions and Technology Solutions. Distribution Solutions generated approximately 97% of quarterly revenue. The company attributed growth primarily to market growth in distribution and the inclusion of US Oncology, acquired in December 2010.
| Metric | Quarter ended Dec. 31, 2011 | Year-over-year | Nine months ended Dec. 31, 2011 | Year-over-year |
|---|---|---|---|---|
| Revenue | $30,839 | +9% | $91,035 | +9% |
| Gross profit | $1,566 | +7% | $4,722 | +12% |
| Gross margin | 5.08% | 5.17% prior year | 5.19% | 5.07% prior year |
| Operating income | $492 | $307 prior year | $1,442 | $1,198 prior year |
| Income from continuing operations | $300 | $155 prior year | $882 | $708 prior year |
| Net income | $300 | $155 prior year | $882 | $780 prior year |
| Diluted EPS, continuing operations | $1.20 | $0.60 prior year | $3.51 | $2.69 prior year |
Quarterly Distribution Solutions revenue increased 9% to $30,016; Technology Solutions revenue rose 4% to $823. Distribution Solutions operating profit was $510, up 76%, while Technology Solutions operating profit was $69, down 35%. Quarterly results included lower AWP litigation charges than in the prior year; Technology Solutions also recorded product-alignment costs.
Cash flow, financial position and capital resources
- Cash flow: Nine-month operating cash flow was $1,716, compared with $1,338 in the prior year. Investing activities used $430; financing activities used $697. Cash increased $579 to $4,191.
- Working capital and debt: Working capital was $3,854 at December 31, 2011. Current and long-term debt totaled approximately $3,987; cash exceeded debt by $204. The debt-to-capital ratio was 34.9%, versus 35.7% at March 31, 2011.
- Liquidity: The company reported a $1.3 billion revolving credit facility maturing in September 2016, with no borrowings outstanding, and a $1.35 billion receivables facility expiring in May 2012, also unused at period-end. A $400 million debt maturity was due in February 2012; management expected to repay it with cash or other borrowings.
- Capital returns: Nine-month share repurchases used $672, and dividends paid were $146. The quarterly dividend had increased to $0.20 per share. The board authorized an additional $650 million in repurchases in January 2012.
Material changes, outlook and risks
- Year-to-date growth in continuing-operations income and diluted EPS reflects operating growth, fewer AWP litigation charges, acquisition effects, and fewer shares outstanding. Prior-year comparisons also included a $72 million after-tax gain on the sale of McKesson Asia Pacific; nine-month net income growth was 13%, versus 25% growth in continuing-operations income.
- Cash from operations benefited from increased accounts payable, while receivables and inventories used cash. Management cautioned that operating cash flow can vary with the timing of customer receipts and vendor payments.
- Technology Solutions began aligning hospital clinical and revenue-cycle products, with plans to converge Horizon and Paragon onto the Paragon platform; development of the HzERM product stopped. The plan generated a $42 million charge, including $22 million of non-cash impairment.
- AWP litigation: The company recorded $145 million of AWP charges in the nine-month period and reported a $449 million reserve at December 31. It reached agreements in principle for approximately $187 million to resolve the federal Medicaid share and up to approximately $173 million for participating states; agreements remained subject to final written settlements and state participation. The company warned ultimate costs could exceed or fall below the reserve.
- Other exposures include Canadian and U.S. tax assessments and pending litigation, including a U.S. False Claims Act matter in which the government stated it would seek damages, fines and penalties. The company disputed liability and said it could not estimate a loss range for many unresolved proceedings.
- Management said operating cash, existing liquidity sources and access to credit were expected to meet cash requirements. It cautioned that disruption in capital and credit markets could impair liquidity or raise borrowing costs. No specific earnings guidance was provided in the supplied filing text.
- After quarter-end, McKesson announced a proposed acquisition of Canadian banner and franchise businesses for approximately CAD $920 million, expected to be funded with available cash and subject to customary conditions, including Canadian regulatory clearances.
Important facts for investors to verify
- Final execution and participation terms for the AWP settlements, and whether the $449 million reserve ultimately covers the claims.
- Resolution and potential financial impact of tax assessments and other material legal proceedings.
- Completion, financing and integration effects of the proposed Canadian acquisition.
- Performance of the Technology Solutions product transition and any further impairments, customer impacts or restructuring costs.
- Cash conversion and working-capital trends, especially inventory, receivables and payable timing, alongside upcoming debt and receivables-facility maturities.