01—Abstract
Summary
Summary of the 10-K filed May 5, 2009. Cited figures are marked; the original filing is the authoritative source.
McKesson Corporation's fiscal 2009 Form 10-K (fiscal year ended March 31, 2009) reports revenues of $106.6 billiona, up 4.8% from $101.7 billion in fiscal 2008, driven almost entirely by its Distribution Solutions segment (97% of revenue).
Gross margin improved to 5.04% from 4.93%, but reported profitability fell sharply: diluted EPS was $2.95b versus $3.32 a year earlier, and net income declined to $823 million from $990 million. The decline is largely explained by a pre-tax, non-cash $493 million charge ($311 million after-tax) for Average Wholesale Price (AWP) litigation, comprising a $350 million settlement of private payor claims and a $143 million reserve for public payor claims. Excluding that charge, the company's operating performance was steadier, though operating expenses rose 18% and Distribution Solutions segment operating margin compressed to 1.12% from 1.50%.
Balance sheet and cash flow metrics show moderate leverage and shareholder returns. Total debt rose to $2.5 billionc, the debt-to-capital ratio increased to 28.9% from 22.7%, and cash rose to $2.1 billion. Operating cash flow was $1.35 billion, and the company repurchased $484 million of stock while paying $116 million in dividends, which had been raised to $0.12 per quarter in April 2008.
Share repurchase authorization of $830 milliond remained available as of March 31, 2009. The stock price performance graph shows MCK's total return fell to $120.18 by March 2009 from $177.74 a year earlier, lagging the S&P 500.
Investors should weigh the concentration risk in the business: its two largest customers, CVS Caremark and Rite Aid, accounted for 14% and 12% of revenue, and the ten largest customers accounted for about 52%. Ongoing litigation, including the AWP matters, the Roby employment case, and the RxUSA antitrust suit seeking roughly $1.6 billion, remains a material uncertainty, and the company noted it could not estimate remaining possible losses in several pending matters.
02—Key points
Key Highlights
- Revenue grew 4.8% to $106.6 billion, with the Distribution Solutions segment contributing $103.6 billion (97% of total).
- Diluted EPS fell to $2.95 from $3.32, and net income declined to $823 million from $990 million, primarily due to the $493 million pre-tax AWP litigation charge.
- Gross profit rose 7% to $5.4 billion, with gross margin improving to 5.04% from 4.93%, helped by generic drug mix and buy-side margins.
- Operating expenses increased 18% to $4.2 billion, including the AWP charge, while Distribution Solutions operating margin fell to 1.12% from 1.50%.
- Total debt rose to $2.5 billion after a $700 million notes issuance in February 2009; debt-to-capital increased to 28.9% from 22.7%, well below the 56.5% covenant limit.
- The company returned capital through $484 million of share repurchases and $116 million of dividends, with the quarterly dividend raised to $0.12 from $0.06 and $830 million remaining on the buyback authorization.
- Customer concentration remains high, with CVS Caremark (14%) and Rite Aid (12%) representing over a quarter of consolidated revenue.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, McKesson Corp kept $0.01.
- Revenue$106.63B100.0%
- Cost of revenue−$101.25B95.0%
- Gross profit$5.38B5.0%
- Operating costs−$4.18B3.9%
- Operating income$1.20B1.1%
- Interest, other & tax−$373.0M0.3%
- Net income$823.0M0.8%
Where FY2009 revenue went
$106.63B- Cost of revenue: $101.25B, 95% of revenue
- Net income: $823.0M, 0.8% of revenue
- R&D: $364.0M, 0.3% of revenue
- Other operating costs: $3.82B, 3.6% of revenue
Kept 0.8% as net incomeNet income $823.0M · 0.8%R&D $364.0M · 0.3%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed May 5, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $106.63B$101.70B | +4.8% |
| Cost of Revenue | $101.25B$96.69B | +4.7% |
| Gross Profit | $5.38B$5.01B | +7.4% |
| R&D Expenses | $364.00M$347.00M | +4.9% |
| Operating Expenses | $4.18B$3.53B | +18.4% |
| Operating Income | $1.20B$1.48B | −19.1% |
| Net Income | $823.00M$990.00M | −16.9% |
| EPS (Basic) | $2.99$3.40 | −12.1% |
| EPS (Diluted) | $2.95$3.32 | −11.1% |
| Shares Outstanding (Basic) | 275.00M291.00M | −5.5% |
| Shares Outstanding (Diluted) | 279.00M298.00M | −6.4% |
05—Questions
Frequently Asked Questions
What caused the decline in McKesson's earnings in fiscal 2009?
The main driver was a pre-tax, non-cash $493 million charge ($311 million after-tax) related to Average Wholesale Price (AWP) litigation. This included a $350 million agreement to settle private payor claims and a $143 million reserve for public payor claims. Diluted EPS fell to $2.95 from $3.32, and net income dropped to $823 million from $990 million.
How much of McKesson's revenue depends on a small number of customers?
Concentration is significant. The two largest customers, CVS Caremark and Rite Aid, accounted for 14% and 12% of consolidated revenues in fiscal 2009, and the ten largest customers accounted for about 52%. Substantially all of this revenue sits in the Distribution Solutions segment, and the company notes that loss of or payment defaults by a large customer could materially affect results.
Is McKesson's balance sheet under pressure from its debt?
Leverage increased but remains manageable. Total debt rose to $2.5 billion from $1.8 billion, and the debt-to-capital ratio reached 28.9%, compared with a covenant maximum of 56.5%. Cash and equivalents also increased to $2.1 billion, and the company stated it was in compliance with all other covenants.
What are the main legal risks disclosed in the filing?
Key matters include the AWP litigation, where the private payor settlement awaits final court approval with a fairness hearing set for July 23, 2009, and public payor suits are ongoing; the RxUSA antitrust suit seeking about $1.6 billion in damages; a qui tam False Claims Act action; a Vioxx product liability matter (about 571 cases, indemnified by Merck); and asbestos claims (about 475 cases) in arbitration with Univar. Management stated it could not estimate remaining possible losses for several of these matters.
How did McKesson's stock perform and how is it returning capital to shareholders?
The stock underperformed over the period, with a $100 investment on March 31, 2004 growing to $120.18 by March 31, 2009, compared with $78.34 for the S&P 500 and $91.93 for the Value Line Healthcare Sector Index. Year-end market value per share fell to $35.04 from $52.37. The company repurchased $484 million of stock during fiscal 2009 at an average of $50.52 and raised its quarterly dividend to $0.12 per share, with $830 million left on its repurchase authorization.
06—Continue