01—Abstract
Summary
Summary of the 10-K filed May 4, 2010. Cited figures are marked; the original filing is the authoritative source.
McKesson Corporation's fiscal 2010 10-K (fiscal year ended March 31, 2010) shows a company whose core pharmaceutical distribution business drove steady top-line growth and a meaningful rebound in profitability.
Revenues rose 2% to $108.7 billiona, with the Distribution Solutions segment accounting for roughly 97% of the total. Gross profit increased 6% to $5.7 billion, and gross margin improved 18 basis points to 5.22%, helped by flu-season demand, higher-margin generics, and better branded-manufacturer buy-side compensation. Diluted EPS rose to $4.62 from $2.95, but the comparison is flattered by the prior year's $493 million pre-tax AWP litigation charge.
Income from continuing operations before taxes increased 75% to $1.9 billionb, and return on stockholders' equity improved to 18.7% from 13.2%. The balance sheet strengthened as well. Cash rose to $3.7 billion, the company repaid $215 million of maturing notes, and net debt turned negative (net debt to net capital employed of -23.5%).
Operating cash flow more than doubled to $2.3 billionc, aided by better management of drafts and accounts payable. Management also authorized an additional $1.0 billion share repurchase in April 2010 and kept the quarterly dividend at $0.12 per share. Investors should weigh the concentration risk that underpins this model.
The ten largest customers generated about 53%d of revenues, and CVS Caremark and Rite Aid alone accounted for roughly 15% and 12%. The company also faces ongoing litigation, including public-payor AWP suits and a qui tam action with potential damages described as several billion dollars, and it notes pending changes from the April 2010 adoption of new accounting rules that may treat its receivables sales facility as secured borrowing.
02—Key points
Key Highlights
- Revenue grew 2% to $108.7 billion, driven by Distribution Solutions (about 97% of revenue), partly offset by the loss of several customers in late 2009.
- Gross profit rose 6% to $5.7 billion, with gross margin up 18 bp to 5.22% on improved mix, flu-related demand, and higher-margin generics.
- Diluted EPS of $4.62 versus $2.95 in fiscal 2009, which included a $493 million pre-tax AWP litigation charge; net income was $1.26 billion.
- Return on stockholders' equity increased to 18.7% from 13.2%, and stockholders' equity rose to $7.5 billion.
- Operating cash flow improved to $2.3 billion from $1.4 billion, and cash and equivalents grew to $3.7 billion, leaving net debt negative.
- Customer concentration is high: the top ten customers were about 53% of revenue, with CVS Caremark (15%) and Rite Aid (12%) the largest.
- The Board authorized a new $1.0 billion share repurchase in April 2010, with $531 million remaining under the prior program; dividends stayed at $0.48 per share annually.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, McKesson Corp kept $0.01.
- Revenue$108.70B100.0%
- Cost of revenue−$103.03B94.8%
- Gross profit$5.68B5.2%
- Operating costs−$3.67B3.4%
- Operating income$2.01B1.8%
- Interest, other & tax−$745.0M0.7%
- Net income$1.26B1.2%
Where FY2010 revenue went
$108.70B- Cost of revenue: $103.03B, 95% of revenue
- Net income: $1.26B, 1.2% of revenue
- R&D: $376.0M, 0.3% of revenue
- Other operating costs: $3.29B, 3.0% of revenue
- Interest, other & tax: $745.0M, 0.7% of revenue
Kept 1.2% as net incomeNet income $1.26B · 1.2%R&D $376.0M · 0.3%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed May 4, 2010Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $108.70B$106.63B | +1.9% |
| Cost of Revenue | $103.03B$101.25B | +1.8% |
| Gross Profit | $5.68B$5.38B | +5.5% |
| R&D Expenses | $376.00M$364.00M | +3.3% |
| Operating Expenses | $3.67B$4.18B | −12.3% |
| Operating Income | $2.01B$1.20B | +67.9% |
| Net Income | $1.26B$823.00M | +53.5% |
| EPS (Basic) | $4.70$2.99 | +57.2% |
| EPS (Diluted) | $4.62$2.95 | +56.6% |
| Shares Outstanding (Basic) | 269.00M275.00M | −2.2% |
| Shares Outstanding (Diluted) | 273.00M279.00M | −2.2% |
05—Questions
Frequently Asked Questions
What drove the large increase in pre-tax income and EPS for fiscal 2010?
Fiscal 2009 included a $493 million pre-tax AWP litigation charge, so the prior-year base was depressed. Fiscal 2010 benefited from improved gross profit, lower operating expenses excluding that charge (including lower PSIP expense and cost containment), and a $17 million gain on the sale of McKesson Logistics Solutions. Pre-tax income rose 75% to $1.86 billion, and diluted EPS rose to $4.62 from $2.95.
How concentrated is McKesson's customer base, and why does it matter?
Concentration is significant. The ten largest customers accounted for about 53% of consolidated revenues and 45% of receivables, and CVS Caremark and Rite Aid represented roughly 15% and 12% of revenues. A default, a sharp reduction in purchases, or the loss of one of these customers could materially affect revenue, profitability, and liquidity.
What are the main legal and regulatory risks disclosed?
The most prominent items are the public-payor AWP cases (including the Connecticut trial set for July 2010), a New Jersey qui tam action under the False Claims Act alleging damages potentially in the billions, a $1.6 billion antitrust suit by a secondary wholesaler (RxUSA, dismissed and under appeal), and various pedigree-tracking, healthcare-fraud, and Canadian reimbursement changes. Management believes it has valid defenses but says it cannot estimate remaining possible losses for several matters.
How strong is the company's liquidity and balance sheet position?
Liquidity is solid. Cash and equivalents reached $3.7 billion, total debt was $2.3 billion, and net debt was negative. The debt-to-capital ratio was 23.4% against a 56.5% covenant limit. The company had a $1.3 billion undrawn revolving credit facility and a $1.1 billion receivables sales facility. However, the April 2010 accounting change may require treating the receivables facility as secured borrowing, which would bring it into covenant calculations.
What is management's capital return policy going forward?
The company paid $0.12 per share quarterly ($0.48 annually) in both fiscal 2010 and 2009 and expects to continue quarterly dividends, subject to Board discretion. It repurchased about 8 million shares for $299 million in fiscal 2010, and in April 2010 the Board authorized up to an additional $1.0 billion in repurchases, on top of the $531 million remaining under the prior program.
06—Continue