10-QPeriod: Q2 FY2009

MCKESSON CORP Quarterly Report for Q2 Ended Sep 30, 2008

Filed October 29, 2008For Securities:MCK

Summary

McKesson Corporation's 10-Q filing for the period ending September 30, 2008, reveals a solid quarter driven by strong revenue growth, particularly in its Distribution Solutions segment. The company reported a significant increase in net income and diluted earnings per share, partly attributable to a substantial tax benefit from the resolution of uncertain tax positions. This operational improvement, coupled with a gain from the sale of an equity interest and disciplined share repurchases, contributed to a positive financial performance. Despite the positive quarterly results, investors should note the ongoing legal proceedings, particularly the Average Wholesale Price litigation, which could potentially lead to substantial damages. The company also continues to manage its restructuring activities related to recent acquisitions. McKesson's financial condition remains robust, supported by strong operating cash flows and a well-established credit facility, providing confidence in its ability to meet financial obligations and pursue future growth opportunities.

Financial Highlights

27 data points
Beta

Revenue

$26.57B

4.9% Gross Margin

Net Income

$327.00M

1.2% Net Margin

EPS (Diluted)

$1.17

Cash & Equivalents

$1.12B

Free Cash Flow

$194.00M

Financial Statements
Beta
Revenue$26.57B
Cost of Revenue$25.27B
Gross Profit$1.30B
Operating Expenses$921.00M
Operating Income$381.00M
Net Income$327.00M
EPS (Basic)$1.19
EPS (Diluted)$1.17
Shares Outstanding (Basic)275.00M
Shares Outstanding (Diluted)280.00M

Key Highlights

  • 1Revenue increased by 9% to $26.6 billion for the quarter ended September 30, 2008, compared to the prior year period, driven by the Distribution Solutions segment.
  • 2Net income grew by 32% to $327 million, and diluted EPS increased by 41% to $1.17, benefiting from a $76 million tax benefit related to the settlement of uncertain tax positions.
  • 3The company completed the acquisition of McQueary Brothers Drug Company for approximately $191 million in May 2008, expanding its U.S. pharmaceutical distribution business.
  • 4Gross profit margin improved slightly, with the Distribution Solutions segment showing an increase due to higher generic drug sales and a favorable shift in revenue mix.
  • 5Operating expenses increased 12% to $921 million, largely due to business acquisitions and costs supporting sales volume growth.
  • 6McKesson repurchased 4 million shares for $204 million in the second quarter of 2009, continuing its share repurchase program.
  • 7The company's financial condition is supported by $1.123 billion in cash and cash equivalents and a $1.3 billion revolving credit facility.

Frequently Asked Questions

McKesson's revenue growth was primarily driven by its Distribution Solutions segment, which experienced a 9% increase in revenues. This growth was fueled by U.S. pharmaceutical direct distribution and services, partly due to market growth rates, price increases, and the acquisition of Oncology Therapeutics Network (OTN).

McKesson reported a significant increase in net income, which was boosted by $76 million in net income tax benefits. These benefits stemmed from previously unrecognized tax benefits and related accrued interest, primarily due to the lapsing of statutes of limitations on certain tax positions.

The AWP litigation remains a significant concern. While one class certification motion was denied without prejudice, the trial for other certified class claims is scheduled to commence. Plaintiffs claim substantial damages, which could be trebled under RICO. McKesson is defending these actions vigorously, but acknowledges that an unfavorable outcome could have a material adverse impact on its financial position or results of operations.

McKesson maintains strong liquidity through cash flows from operations, existing cash balances, and its $1.3 billion revolving credit facility. The company also utilizes a $1.0 billion accounts receivable sales facility to generate cash. Despite a decrease in working capital due to AR sales and lower cash balances, the company's debt-to-capital ratio remains healthy at 22.1%.