01—Abstract
Summary
Summary of the 10-K filed May 7, 2008. Cited figures are marked; the original filing is the authoritative source.
McKesson Corporation's fiscal 2008 10-K (fiscal year ended March 31, 2008) shows a company growing revenue faster than in prior years while profitability improved modestly.
Revenues rose 9.4% to $101.7 billiona, driven mainly by the Distribution Solutions segment (97% of revenue), with Canada, specialty pharmaceuticals (OTN acquisition) and Technology Solutions (Per-Se acquisition) contributing. Gross profit grew 16% to $5.0 billion, lifting gross margin to 4.93% from 4.66%, helped by a richer mix of higher-margin Technology Solutions revenue. Diluted EPS rose to $3.32 from $2.99, with net income of $990 million; excluding Securities Litigation items, EPS was $3.31 versus $2.71 a year earlier, a stronger underlying improvement than the headline figure suggests.
Capital allocation and balance sheet were the other major themes. Management repurchased 28 million shares for $1.686 billionb, approved a new $1.0 billion buyback in April 2008, and announced a doubling of the quarterly dividend from six to twelve cents. Operating cash flow fell to $869 million, but this was depressed by a $962 million release of restricted cash tied to the Securities Litigation settlement; excluding that, operating cash flow was about $1.83 billion.
Total debt was $1.8 billionc with a debt-to-capital ratio of 22.7%, well below the 56.5% covenant. Investors should note the concentration risk: the two largest customers, CVS Caremark and Rite Aid, account for 14% and 13% of revenue, and the ten largest customers account for about 53%.
Litigation remains significant, including a pending average wholesale price (AWP) class action with class certification granted in March 2008 and a $1.6 billiond secondary-wholesaler antitrust suit. Most Securities Litigation matters have now been resolved.
02—Key points
Key Highlights
- Revenue grew 9.4% to $101.7 billion, with Distribution Solutions contributing $98.7 billion (97% of total).
- Gross margin expanded 27 basis points to 4.93%, aided by higher-margin Technology Solutions revenue and better Distribution Solutions margins.
- Diluted EPS of $3.32 (up from $2.99); excluding Securities Litigation items, EPS rose to $3.31 from $2.71.
- Operating cash flow fell to $869 million, but excluding a $962 million restricted-cash release tied to the Securities Litigation settlement, it was about $1.83 billion.
- Shareholder returns increased: $1.686 billion of buybacks in fiscal 2008, a new $1.0 billion repurchase authorization, and a quarterly dividend increase from $0.06 to $0.12 per share.
- Customer concentration is high: the top two customers (CVS Caremark and Rite Aid) represent 14% and 13% of revenue; the top ten represent about 53%.
- Key litigation risk remains in the AWP class action, where a March 2008 class certification order raises potential exposure, plus a $1.6 billion secondary-wholesaler antitrust suit.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, McKesson Corp kept $0.01.
- Revenue$101.70B100.0%
- Cost of revenue−$96.69B95.1%
- Gross profit$5.01B4.9%
- Operating costs−$3.53B3.5%
- Operating income$1.48B1.5%
- Interest, other & tax−$488.0M0.5%
- Net income$990.0M1.0%
Where FY2008 revenue went
$101.70B- Cost of revenue: $96.69B, 95% of revenue
- Net income: $990.0M, 1.0% of revenue
- R&D: $347.0M, 0.3% of revenue
- Other operating costs: $3.18B, 3.1% of revenue
Kept 1.0% as net incomeNet income $990.0M · 1.0%R&D $347.0M · 0.3%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed May 7, 2008Financial Statements
| Revenue | $101.70B |
| Cost of Revenue | $96.69B |
| Gross Profit | $5.01B |
| R&D Expenses | $347.00M |
| Operating Expenses | $3.53B |
| Operating Income | $1.48B |
| Net Income | $990.00M |
| EPS (Basic) | $3.40 |
| EPS (Diluted) | $3.32 |
| Shares Outstanding (Basic) | 291.00M |
| Shares Outstanding (Diluted) | 298.00M |
05—Questions
Frequently Asked Questions
How did McKesson perform financially in fiscal 2008?
Revenue rose 9% to $101.7 billion and gross profit rose 16% to $5.0 billion. Net income was $990 million, or $3.32 per diluted share, compared with $2.99 the prior year. Excluding Securities Litigation charges and credits, EPS was $3.31 versus $2.71, reflecting stronger underlying earnings growth.
Why did operating cash flow decline significantly?
Operating cash flow fell to $869 million from $1.54 billion in fiscal 2007. The main cause was a $962 million use of cash from releasing restricted cash held for the Consolidated Securities Litigation settlement. Excluding that item, operating cash flow would have been about $1.83 billion.
How is McKesson returning capital to shareholders?
In fiscal 2008 McKesson repurchased 28 million shares for $1.686 billion and approved a new $1.0 billion buyback in April 2008. The board also raised the quarterly dividend from six cents to twelve cents per share, effective for future declarations.
What are the main risks for investors?
Customer concentration is the largest commercial risk, since CVS Caremark and Rite Aid together represent about 27% of revenue and the top ten customers about 53%. Other risks include pending antitrust and AWP pricing litigation, exposure to changes in branded drug inflation and generic deflation, healthcare reimbursement changes such as the DRA's AMP-based Medicaid rules, and regulatory pressure on pharmaceutical distribution.
Is McKesson's balance sheet leveraged?
Leverage is moderate. Total debt was $1.8 billion at March 31, 2008, a debt-to-capital ratio of 22.7%, well below the 56.5% covenant limit. Cash was $1.36 billion. Net debt rose to 6.6% of net capital employed, up from 0.1% a year earlier, mainly because of the Per-Se acquisition financing and buybacks.
06—Continue