01—Abstract
Summary
Summary of the 10-K filed May 5, 2011. Cited figures are marked; the original filing is the authoritative source.
McKesson Corporation's fiscal 2011 10-K (fiscal year ended March 31, 2011) shows a company whose revenue grew 3% to $112.1 billiona, driven mainly by its Distribution Solutions segment, which accounts for about 97% of consolidated revenue.
Gross profit rose 5% to $6.0 billionb and gross margin widened 11 basis points to 5.33%, helped by higher buy margin, more generic drug sales, and a $51 million antitrust settlement credit, partly offset by a $72 million impairment on the Technology Solutions software product HzERM. Operating expenses rose to $4.1 billion, including $213 million of AWP litigation charges. Net income was $1.202 billion and diluted EPS was $4.57, versus $4.62 in fiscal 2010; continuing-operations EPS fell to $4.29 from $4.62, so the headline earnings decline comes from continuing operations rather than the one-time gain on the MAP sale.
The balance sheet changed meaningfully in the year. The $2.1 billionc acquisition of US Oncology, closed December 30, 2010, lifted total debt to $4.0 billion from $2.3 billion, and the debt-to-capital ratio rose to 35.7% from 23.4%. Management also returned substantial capital: $2.05 billion of share repurchases and $171 million of dividends, with the quarterly dividend raised to $0.18 and then to $0.20 in April 2011, and a new $1.0 billion repurchase authorization approved in April 2011.
Operating cash flow was steady at $2.34 billiond, and return on equity was 16.9%. Key risks for investors include heavy customer concentration (the top ten customers were about 51% of revenue, with CVS and Rite Aid at 14% and 11%), pending AWP litigation with public payers whose reserve stood at $330 million, thin distribution margins, and a $169 million Canadian transfer-pricing assessment. Management indicated that the Affordable Care Act is not expected to have a material impact.
02—Key points
Key Highlights
- Revenue rose 3% to $112.1 billion, with Distribution Solutions at $108.9 billion (about 97% of total), and Technology Solutions at $3.2 billion
- Gross profit increased 5% to $6.0 billion, and gross margin expanded 11 bp to 5.33%, driven by higher buy margin and generic drug sales
- Diluted EPS was $4.57 (net income $1.202 billion), down from $4.62, while continuing-operations EPS fell to $4.29 from $4.62; the result includes a $0.28 one-time gain from the MAP sale and $213 million of pre-tax AWP litigation charges
- The $2.1 billion US Oncology acquisition pushed total debt to $4.0 billion (debt-to-capital ratio 35.7% vs. 23.4%), with a $1.7 billion long-term note issuance in February 2011 to refinance assumed and bridge debt
- Shareholder returns were significant: $2.05 billion of buybacks in FY2011, a new $1.0 billion authorization in April 2011, and the quarterly dividend raised to $0.18 and then to $0.20
- Customer concentration remains high: the ten largest customers were about 51% of revenue, and CVS and Rite Aid together represented roughly 25%
- Operating cash flow was $2.34 billion, and return on equity was 16.9%; the company has an unresolved AWP litigation reserve of $330 million for public-entity claims
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, McKesson Corp kept $0.01.
- Revenue$112.08B100.0%
- Cost of revenue−$106.11B94.7%
- Gross profit$5.97B5.3%
- Operating costs−$4.15B3.7%
- Operating income$1.82B1.6%
- Interest, other & tax−$619.0M0.6%
- Net income$1.20B1.1%
Where FY2011 revenue went
$112.08B- Cost of revenue: $106.11B, 95% of revenue
- Net income: $1.20B, 1.1% of revenue
- R&D: $407.0M, 0.4% of revenue
- Other operating costs: $3.74B, 3.3% of revenue
- Interest, other & tax: $619.0M, 0.6% of revenue
Kept 1.1% as net incomeNet income $1.20B · 1.1%R&D $407.0M · 0.4%Interest, other & tax $619.0M · 0.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed May 5, 2011Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $112.08B$108.70B | +3.1% |
| Cost of Revenue | $106.11B$103.03B | +3.0% |
| Gross Profit | $5.97B$5.68B | +5.2% |
| R&D Expenses | $407.00M$376.00M | +8.2% |
| Operating Expenses | $4.15B$3.67B | +13.1% |
| Operating Income | $1.82B$2.01B | −9.3% |
| Net Income | $1.20B$1.26B | −4.8% |
| EPS (Basic) | $4.65$4.70 | −1.1% |
| EPS (Diluted) | $4.57$4.62 | −1.1% |
| Shares Outstanding (Basic) | 258.00M269.00M | −4.1% |
| Shares Outstanding (Diluted) | 263.00M273.00M | −3.7% |
05—Questions
Frequently Asked Questions
What drove McKesson's revenue growth in fiscal 2011?
Revenue grew 3% to $112.1 billion. Most of the increase came from market growth in Distribution Solutions, including price increases and volume gains, plus the December 2010 US Oncology acquisition. These gains were partly offset by lower flu-season demand, brand-to-generic price deflation, and the wind-down of the warehouse-to-direct-store-delivery shift.
Why did diluted EPS decline even though net income was reported as relatively strong?
Diluted EPS fell to $4.57 from $4.62, and continuing-operations EPS fell more sharply to $4.29 from $4.62. Results included $213 million of pre-tax AWP litigation charges, a $72 million impairment on the HzERM software product, and higher interest expense from the acquisition financing. The MAP divestiture added $0.28 per share, which partly offset these items, but it was non-recurring.
How did the US Oncology acquisition change McKesson's financial position?
The company paid about $2.1 billion, roughly $0.2 billion in cash and $1.9 billion in assumed liabilities, mainly debt. Total debt rose to $4.0 billion from $2.3 billion, and the debt-to-capital ratio increased to 35.7%, still below the 56.5% covenant limit. Management expects further acquisition-related expenses in 2012 as integration continues.
What are the biggest risks for McKesson investors disclosed in this filing?
The main risks are customer concentration (ten customers at about 51% of revenue, with CVS and Rite Aid at 14% and 11%), pending AWP drug-pricing litigation with state and federal Medicaid claims (a $330 million public-entity reserve, with outcomes uncertain), reduced reimbursement rates and generic pricing pressure, Canadian pricing reform, and a $169 million Canadian transfer-pricing assessment. The company also highlights regulatory risks such as pedigree tracking and HIPAA compliance.
What is McKesson's capital return policy after fiscal 2011?
In FY2011 the company repurchased $2.05 billion of stock and paid $171 million in dividends. In April 2011 the board authorized up to $1.0 billion of additional buybacks, and it raised the quarterly dividend from $0.18 to $0.20 per share. The company says future dividends and buybacks will depend on earnings, financial condition, and capital needs.
06—Continue